by Aaron Levitt | May 24, 2012 6:30 am
Over the last few weeks in InvestorPlace’s continuing series on America’s newfound energy independence, we’ve showed how the technology revolution in advanced drilling techniques have redrawn the energy landscape.
From giving old dogs such as the Gulf of Mexico or Alaska’s North Slope fresh life to the new vast network of pipelines that need to be built, innovations in fracking and horizontal drilling have transformed the U.S. from a net energy importer into an energy exporter.
Horizontal drilling and hydraulic fracturing (fracking) success stories include the Marcellus field in Pennsylvania and the Bakken in North Dakota, which have been the prime drivers of this energy revolution.
But while the Marcellus remains the king of the natural-gas hill and the Bakken is still the reigning shale-oil champ, another section of America’s geology could give them both a run for their money.
Offering access to both natural-gas liquids (NGLs) as well as an abundance of dry gas, the Eagle Ford in South Texas could be the new model of success. The formation’s plentiful reserves continue to support job growth, tax revenues and a host of other economic benefits aside from energy production.
For investors, betting on this new source of supply could be a portfolio-changing event.
Petro Hawk Energy, which was recently bought out by resource conglomerate BHP Billiton (NYSE:BHP), drilled the first advanced-technology well in the Eagle Ford back in 2008. Featuring a vast ocean of hydrocarbons located 4,000 to 14,000 feet below ground, Texas’ Eagle Ford field is quickly becoming one of the most active shale plays in the country.
Rig counts for the region continue to climb as E&P companies move in to take advantage of the field’s rich resources, which are estimated to be as high as 10 billion barrels of oil equivalent (BOE).
According to data and reports from the Texas Railroad Commission, the chief energy regulator in the state, an amazing story is unfolding in the Eagle Ford. Production across the field increased nearly sevenfold from 2010 to 2011. That’s an average of just under 12,000 barrels a day to nearly 83,400 barrels. Overall, the Eagle Ford produced 30.5 million barrels of oil and 243 billion cubic feet worth of natural gas in 2011.
And that’s just a drop in the bucket of the field’s potential. Analysts estimate that production in the region will explode to nearly 500,000 barrels a day by the end of 2012 and hit a staggering 1 million barrels a day by 2016. That would make the Eagle Ford the nation’s second-largest energy-producing region, behind North Dakota’s Bakken. Much of the field’s appeal stems from the fact that it’s rich in dry natural gas as well as various natural-gas liquids and shale oil. The glut of dry gas coming from sister fields such as the Marcellus and Utica has sent prices for the fuel plummeting towards historic lows. The Eagle Ford’s dual appeal, along with sustained higher oil prices, have helped spur development as prices for condensate and NGLs such as ethane are tied to Brent crude metrics.
This rising energy production also highlights how the drilling revolution can impact our economy. A study by the University of Texas at San Antonio shows that the Eagle Ford generated more than $25 billion in economic growth and development in 2011 and supported around 47,000 local jobs. Wells producing $100,000 a week in income for royalty holders are not uncommon across the shale field.
This has prompted the university to update its economic projections for the field. Overall, the Eagle Ford will support nearly 117,000 workers and pump more than $62.3 billion into the local economy by 2021. This data show just how powerful the shale revolution is on the economy and how it plays into our dream of energy independence.
NuStar Energy (NYSE:NS) CEO Curt Anastasio believes that several projects in the Eagle Ford could “literally double our company’s earnings over the next few years.” If he’s right, now could be a great time for investors to add exposure to the field.
BHP’s $12 billion purchase of Petro Hawk gave it prime acreage across the region. Likewise, the recent refining split and asset divesture at ConocoPhillips (NYSE:COP) makes the formerly integrated major more reliant on North America’s energy bounty. That includes its nearly 220,000 NGL-rich acres in the Eagle Ford. Both companies represent good plays on the field’s potential, though the Eagle is just one piece of these diversified natural-resource companies’ pies.
Perhaps, the best way to frack the Ford is through an independent E&P, EOG Resources (NYSE:EOG). The company focused on the shale-oil side of the field before many other E&P operators thought it would yield any economic results. That first-mover status has allowed EOG to amass nearly 650,000 acres across the Eagle’s oil reserves. The company remains active in drilling the Ford, and the field remains a significant contributor to the company’s reserves and earnings.
Share’s of EOG aren’t cheap, but they have fallen about 20% from their $120 peak. The stock’s current price has a P-E of around 21. Given the company’s leadership position and acreage in the Eagle Ford, Marcellus, and other shale basins across North America, EOG generally trades at a premium to some of its peers, such as Apache (NYSE:APA). That premium is supported by the hunch that EOG is the next takeout in the energy sector — despite its $27 billion market cap.
That slight price premium could be worth it to investors with a long-term timeline as the Eagle Ford continues to see production gains.
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