Could This Company Soon Rival EOG Resources Inc?

These days, the market is looking for oil and gas producers that can achieve double-digit growth from multiple high-margin plays. Such success has driven the fortunes of companies such as EOG Resources, but a new wave of shale plays could afford a new set of opportunities.

May 27, 2014 at 8:48AM

These days, the market is pretty clear on what it likes from companies engaged in horizontal drilling: core positions and high margins. Perhaps more importantly, the market prefers companies with eggs in several baskets. Upstream unconventional drillers with these three components usually get higher valuations and lower costs of capital than those of their peers. 

Which companies fit this bill? Think about Whiting Petroleum (NYSE:WLL), which has not only one of the biggest core positions in the Bakken but also a nice 70,000-plus acre position in some of the better parts of the Niobrara. Even more so, EOG Resources (NYSE:EOG) has large core positions in both the Wolfcamp shale and the Bakken and is easily the biggest producer in the Eagle Ford shale. These multiple shale names have safety in diversity that the 'one-shale wonders' are missing.

One company that seems to have caught on is EnCana (NYSE:ECA). A Canadian-based company, EnCana is refocusing itself on North America's newest shale plays in a bid to become a sort of EOG in the newer shales. 

Tms Rig

A rig in the Tuscaloosa Marine Shale, one of EnCana's five focus shale plays.
Source: 
TMS Facebook page. 

The big five
This year, EnCana launched an ambitious, $2.5 billion capital plan to harness the potential of what management believes to be the five highest quality new shale plays in North America. The first two plays are right in the Canadian company's backyard: the Montney and Duvernay shales of Northern Alberta and British Columbia. These two plays have been dubbed 'megashales' because both rival, and perhaps exceed, the tremendous gas reserves in the Marcellus shale.

Unfortunately, those gas reserves have yet to be harnessed. However, EnCana will allocate between six and eight rigs on each of these two plays in order to develop the considerable liquids reserves both shales provide. EnCana has a large, contiguous acreage position in the Montney. Both plays should provide an internal rate of return, or IRR, of between 60%-100%. 

Further south along the Rockies, EnCana will deploy two to four rigs in both the San Juan basin in New Mexico and the Niobrara in Colorado. The San Juan basin is a new shale actually discovered by EnCana, and it is very oily. Well costs are quite low: $4 million-$5 million. EnCana's Niobrara acreage is in the core Wattenburg field, and returns should be an impressive 55%-85% here. With proven profitability and in-place infrastructure, the Niobrara is the safer bet, but the San Juan has interesting potential.

The fifth shale play is the Tuscaloosa Marine Shale, or TMS, in Louisiana and Mississippi. With more than 300,000 acres, EnCana is one of the three big players in this brand new shale play. Encana will employ one to three rigs here in 2014. Currently, management estimates returns of between 40%-50%, but that number has big upside if well costs continue to decline. Unlike the other shale plays listed here, the TMS has a 100% oil cut. The TMS could easily become EnCana's most profitable shale. 

Eca Transformation

Source: Investor Relations

The big picture
EnCana has been reorganizing itself in an attempt to be more capital efficient, and movement into the shale is a big part of that effort. As you can see from the chart above, management is letting its less profitable base assets decline and is replacing those lower-margin assets with production from the 'big five.' Even with the steep base decline, management expects compounded production growth of 10% until 2017.

Bottom line
EnCana is reorganizing itself into a multiple-shale heavyweight. Currently the company trades at about 3.2 times book value. That's certainly not cheap, but it's not too expensive, either. This is just a $17 billion company, so there is plenty of opportunity for needle-moving growth. Development of the TMS as well as successful liquids production and price realization in the Montney and Duvernay plays are the real keys to EnCana's future success. If all three of those plays work out, EnCana could be a much larger company by 2017 and beyond.

There's still plenty of money to be made from the shale revolution
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Casey Hoerth has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers