Eagle Ford Rate of Return Higher than Other U.S. Shale Plays

Eagle Ford Shale Well Map
Eagle Ford Shale Well Map

At the annual Benposium Conference in Houston, TX, in early June of 2014, the Eagle Ford ranked highest for internal rate of return* (IRR) among all other U.S. Shale plays. According to Bentek Energy Senior Analyst Catherine Bernardo, the Eagle Ford is sitting at just over 70% IRR. Compare that to a 20% IRR, which Bernardo said is generally the rate at which producers move rigs into plays.

As development in the Eagle Ford continues, drilling efficiency is a primary goal for producers. According to Bernardo, the average number of drilling days has decreased 34% from 23 days to 15 days between 2010 - 13.

Small Eagle Ford Producers May Feel the Pinch by End of the Decade

The Eagle Ford is a very oily play, and with the price of oil over the $100/bbl mark, drilling is very active in the area. EagleFordShale.com tracks activity in the Eagle Ford, and currently, there are 269 rigs running across our coverage area. In the years to come however, small producers in the Eagle Ford Shale may feel the pinch as the price of oil begins to fall.

Read moreEagle Ford Shale Rig Count Increases by Seven to 269

Bentek predicts the price of crude oil will fall to $82 by 2018 - 19... That will have some cash flow impact on the smaller producers from being as low as that.
— Catherine Bernardo

Bernardo continued, saying that its not until oil falls between $80 and $60 dollars does it become uneconomic for some producers.

Tight Oil vs. Shale Gas

While the Eagle Ford Shale is proving to be very lucrative for producers, unconventional gas plays like the Haynesville Shale in Louisiana, are not seeing as much activity, with an IRR of just over 20%. The primary reason is attributable to the price of natural gas, which is around $4.50/mmbtu.

Producers will need to see gas prices go up and stabilize in order to have confidence in re-entering U.S. shale gas plays. Between 2010 - 11, the rig count in the Haynesville Shale was close to 140; however, the price of natural gas at that time was around $12/mmbtu.

Bentek’s annual Benposium conference is held in Houston each Spring.

internal rate of return (IRR)* - IRR calculations are used to evaluate the desirability of investments or projects. The higher a project's IRR, the more desirable it is to undertake the project.

Comstock Directs 3 Rigs to the Eagle Ford - Sets Capital Budget

Comstock Resources Eagle Ford Map
Comstock Resources Eagle Ford Map

Comstock Resources' Eagle Ford assets will account for almost half of the company's activity in 2013. Three of six rigs planned to work throughout the year will be active in South Texas. The other three will be working in West Texas as the company works to shift its production mix to higher valued liquids.

Comstock has set its capital budget at $430 million in 2013. Roughly 27 wells will be drilled in the Eagle Ford, 20 vertical wells targeting the Wolfbone in West Texas, 7 horizontal wells targeting the Wolfcamp in West Texas, and less than 4 net wells in the Haynesville & Bossier shales. The Haynesville wells are being drilled to hold acreage. That's a total of a little more than 58 net wells planned in 2013.

The company's 35,000 gross (28,000 net) Eagle Ford acres are largely spread across Atascosa, La Salle, and McMullen counties. The company estimates wells will produce over 500,000 boe and that its acreage has net resource potential of 78 million boe. CRK's partner KKR has the right to participate in 1/3 of the company's 28,000 net acres.

Goodrich Petroleum Allocates ~65% of 2013 Budget to the Eagle Ford

Goodrich Petroleum Eagle Ford Map
Goodrich Petroleum Eagle Ford Map

Goodrich Petroleum has planned for a capital budget of $175-$200 million in 2013. Of that, $115-137 million will be spent to drill 24-28 gross (16-19 net) wells targeting the Eagle Ford. The rest of the company's budget will be spent between the Haynesville Shale and Tuscaloosa Marine Shale plays.

Production growth will be mute as the company goes full force into its liquids producing plays. Natural gas volumes will decline and oil volumes are expected to roughly offset the decrease.

The top of guidance at $200 million is $50 million less than the company spent in 2012. Natural gas prices are taking a toll on budget in natural gas focused companies.

GDP Eagle Ford Operations Update

Average drilling days per well deceased by 40 percent sequentially in the quarter to 11 days for an average 6,000 foot lateral. Gross well costs for 2013 are projected to average $7.0 – $7.5 million for an average 6,000 foot lateral, which incorporates the lower well costs due to the faster drilling and cycle times achieved in the second half of 2012, as well as the reduced pressure pumping agreements in place for 2013. The Company currently plans to spud its initial Pearsall Shale test well in the first quarter.


Matador Resources' Capital Budget is Focused in the Eagle Ford Shale

Matador Resources will spend almost 85% of its capital budget developing properties and acquiring new properties in the Eagle Ford Shale in 2012. The company wil drill no Haynesville Shale operated wells in 2012 and will keep two rigs active in the Eagle ford throughout the next 12-months.

As set forth in its initial public offering prospectus dated February 1, 2012, Matador's 2012 capital budget is estimated to be approximately $313 million. The Company plans to direct approximately 94% or $295 million of its 2012 capital budget to opportunities prospective for oil and liquids opportunities, including the allocation of approximately 84% or $264 million specifically to the exploration, development and acquisition of additional interests in the Eagle Ford shale play in South Texas. Matador is running two rigs in South Texas currently and expects to run two rigs in that area throughout 2012. The Company plans to allocate the remaining 6% or approximately $18 million of its 2012 budget to natural gas related activities, primarily in the Haynesville shale in North Louisiana. The Company does not plan to drill any operated Haynesville wells in 2012.

While natural gas production will be in decline from the lack of activity in the Haynesville, the company expects volumes will be offset by higher value wet-gas in the Eagle Ford.

Matador anticipates that some of the decline in the Company's Haynesville dry gas production will be offset by natural gas production associated with its Eagle Ford drilling activities which should enjoy higher effective pricing as compared to the Haynesville dry gas production due to its natural gas liquids ("NGL") content.

Read the entire press release at matadorresources.com

Apollo Buys El Paso's E&P Unit Before Kinder Morgan Closes on the Pipeline Segment

El Paso Corp Eagle Ford Shale Map
El Paso Corp Eagle Ford Shale Map

Apollo and El Paso reached a $7.15 billion agreement for El Paso's E&P segment. The deal is subject to the closing of the El Paso-Kinder Morgan pipeline merger.

El Paso's exploration and production segment has been on the sales block since the Kinder Morgan deal was announced, but the question remained whether the assets would be sold in pieces or all together.

While Apollo has been rumored to be considering the deal, it comes as a bit of a surprise that the private equity group acquire El Paso E&P. Most industry experts thought El Paso would be a great fit for an international company looking to expand its footprint in the U.S. (e.g. Statoil-Brigham). Low natural gas prices that are limiting many companies' upstream budgets might have opened a window for the Apollo group to step in.

Apollo Global Management is leading a group that includes Riverstone Holdings, Access Industries, as well as others in buying the E&P unit. The deal will have almost no tax consequences for Kinder Morgan and the company will use the proceeds to pay down debt taken on to finance the purchase El Paso Corp.

El Paso's assets are attractive even at low natural gas prices because the company has significant oil/liquids producing acreage positions in the Uinta Basin in Utah, the Niobrara in the Rockies, the Wolfcamp in West Texas, and the Eagle Ford Shale of La Salle and Dimmit counties.

Apollo will likely increase the pace of development in the oil & gas areas of the company's portfolio. Private equity firms do not practice a long-term buy and hold strategy. El Paso will be held for a period and later re-offered to the market. Typically, private equity firms hold investments for a 3-7 year period and target a return of 2-3 times their investment.