How's the Eagle Ford Shale Shaping Up?

When Petrohawk (NYSE: HK) announced the discovery of a new shale gas field back in October 2008, I think it's fairly safe to say that no one really cared. For one, the financial crisis was in full swing, with Petrohawk's discovery coming just a week after the creation of TARP. Second, natural gas prices had plunged from their mid-year highs. Third, following huge discoveries in the Haynesville, Marcellus, and Horn River Basin, it was hard to get excited about yet another North American shale gas play.

More than two years later, gas prices are still in a rut, but investors and the industry alike are extremely excited about the Eagle Ford. The reason is that this play has turned out to be quite different than it first appeared.

Liquids-rich? We're rich!
Petrohawk's initial discovery, the STS No. 241-1H well in La Salle County, Texas, actually hinted at the Eagle Ford's potential as something more than just another shale gas play. In addition to producing gas at an initial rate of 7.6 million cubic feet per day, the well also kicked out 250 barrels per day of condensate. Condensate pricing is tightly linked with oil prices, making these liquids-rich, so-called "wet gas" wells highly economic even at low gas prices.

In time it became clear that there are actually three distinct plays within the Eagle Ford -- a dry gas window, a wet gas window, and an oil window. It was also established that the liquids aspect of this play is massive, after EOG Resources (NYSE: EOG) pegged its estimated reserve potential in the oil window at 900 million barrels of oil equivalent. Within days of that announcement, companies including Goodrich Petroleum (NYSE: GDP) and Carrizo Oil & Gas (Nasdaq: CRZO) announced leasehold acquisitions in the play. The Eagle Ford pile-on has continued unabated, with over 100 rigs now running in the play.

Breaking it down
This month, EOG released an updated slide presentation on its Eagle Ford asset, which is what prompted me to take another look at the play. The company continues to peg its reserve potential (not proved reserves) at 900 million barrels equivalent, with 77% of that figure represented by crude oil. The company has also broken its acreage position into an Eastern and Western province, with the Eastern area showing higher reserves per well and better initial production rates. This is supported by Petrohawk's characterization of its Black Hawk prospect in Gonzales County as the most economic asset in the company's portfolio at current prices. To the west, it appears that longer laterals are required to compensate for thinner sections of reservoir rock.

In terms of drilling costs and per-well ultimate oil recoveries (EURs), company estimates vary widely -- even within the same company! Crimson Exploration's (Nasdaq: CXPO) expected well costs range from $4 million to $10 million, depending on what area of the play they're modeling. Petrohawk pegs its Red Hawk EURs as low as 150,000 barrels of oil equivalent and its Black Hawk EURs as high as 750,000 boe.

All Eagle Ford acreage is not created equal
Not even close. By EOG's count, the play spans no fewer than 15 different counties. There are sweet spots, and there are not-so-sweet spots. The economics of these prospects will vary dramatically. Just because acreage lies in the oil window, doesn't mean all of the other requisite conditions are in place for commercial production. An asset in the condensate window, such as Rosetta Resources' (Nasdaq: ROSE) Gates Ranch project, can be just as economic, or even moreso, than something in the oil window. Dry gas wells, meanwhile, are almost certainly going to be relatively unattractive as long as gas continues to trade at such a huge discount to oil.

So if you haven't yet taken the plunge into an Eagle Ford producer, but are thinking of doing so, make sure you study up on the specific areas within the greater play that your E&P is targeting. Rosetta looks like it has a winner with Gates Ranch and is spending 90% of its 2011 budget in the Eagle Ford. You can't get a much more concentrated bet than that. The valuation is currently on the rich side, in part due to speculation surrounding Rosetta's emerging Southern Alberta Basin play in Montana, but this could make for a strong portfolio addition on a pullback.