Declining oil prices and stringent regulations aren't the only threats to the Texas oil boom. Another problem is taking center stage.
Drillers in the Eagle Ford shale are facing the worst drought in more than a century, a major concern considering drilling a well in the region can require as much as 13 million gallons of water.
Exploring for solutions
At this point, explorers are keeping the problem in check. ExxonMobil (NYSE: XOM) is conserving water by recycling fracking fluid. Other companies, such as Anadarko Petroleum (NYSE: APC) and Swift Energy (NYSE: SFY), are buying water from distant suppliers. But that supply line might dry up (literally), as some expect the drought to persist, resulting in government rationing of the water supply.
Rationing the water supply could put the brakes on oil production in the Eagle Ford shale. Companies heavily exposed to the area will likely suffer the most.
Counting on the Eagle Ford
SM Energy (NYSE: SM) is the most leveraged public company to the Eagle Ford based on acreage-to-enterprise value. Magnum Hunter Resources (NYSE: MHR) has significant exposure to the region as well. One estimate has nearly 32% of the company's stock price tied to acreage in the Eagle Ford shale.
Goodrich Petroleum (NYSE: GDP) is another company heavily relying on production in the oil field for profitability. One analyst places the company's nonproven value per share at $12.74 or nearly 68% of its current stock price.
The bottom line
The Eagle Ford drought will drag down stocks with high exposure to the region if the situation worsens. But this could create a great buying opportunity if panic begins to dominate the trade.
Keep an eye on the Eagle Ford stocks and patiently wait for a good entry point.
- Add ExxonMobil to My Watchlist.
- Add Anadarko Petroleum to My Watchlist.
- Add Swift Energy to My Watchlist.
- Add SM Energy to My Watchlist.
- Add Magnum Hunter Resources to My Watchlist.
- Add Goodrich Petroleum to My Watchlist.
