The Eagle Ford Continues To Pay Benefits

By Aaron Levitt | June 04, 2013 AAA

As horizontal drilling, hydraulic fracturing and other advanced drilling techniques continue to sweep across the nation, energy production in North America continues to surge. Perhaps, none as dramatically as in Texas’ Eagle Ford Shale. Offering access to natural-gas liquids (NGLs), shale oil as well as an abundance of dry gas, the Eagle Ford continues to be the model of success for its operators.

And it keeps getting better.

Recent production volumes and reserve estimates for the prolific field continue to rise- along with share prices of the regions E&P firms. For investors, betting on the field could lead to big portfolio gains over the long haul.

SEE: A Primer On Offshore Drilling

Over 500,000 Barrels Per Day

When Petrohawk Energy- now BHP Billiton (NYSE:BHP) -first drilled into the region back in 2008, even they had no idea just how big the Eagle Ford would become. The latest production numbers have even dwarfed analyst’s best case predictions.

According to new preliminary data released by the Texas Railroad Commission, the nine geographic fields that make up the majority of Eagle Ford produced a record amount of crude oil in March. The region saw production jump a huge 77% to yield roughly 529,874 barrels of crude a day. The fields produced “only” 298,266 barrels per day (B/D) in March of 2012. Additionally, the commission revised February’s output upwards to 511,434 barrels a day from the preliminary report of 471,258. This huge amount of daily production is helping fuel an energy renaissance in Texas and U.S. crude. The state produced 2.3 million barrels a day this February. That’s the highest monthly level since April 1986.

Given the high level of production growth, analysts estimate that the Eagle Ford will be America’s second largest producing region after North Dakota’s Bakken soon enough. However, it could overtake the Bakken as well.

While the true total number of recoverable reserves for the Eagle Ford shale is still unknown, the U.S. Geological Survey (USGS) estimates the field holds between 7 billion and 10 billion barrels worth of recoverable reserves. The USGS predicts the Bakken Shale could hold as much as 4.3 billion barrels of recoverable oil. If these estimations come true, the Eagle Ford would be the largest on-shore oil reserve ever discovered in the Lower 48 states.

SEE: Guide To Oil And Gas Plays In North America: Introduction

Ways To Play

Given the regions vast long term potential, investors still have time to cash in on the Eagle Ford. The First Trust ISE-Revere Natural Gas Index ETF (NYSE:FCG) can be seen a general play on the fracking revolution. However, for those investors who strictly want South Texas Shale, individual picks are best.

Perhaps none is as good as EOG Resources (NYSE:EOG). The company is the largest lease holder in the region- at 639,000 net acres. That’s about 200,000 more than next biggest land holder Chesapeake. That first mover and size advantage has provided EOG with access to the shale’s liquids-rich window. That focus on oil and NGLs continues to drive profits and upwards earnings revisions. While it may seem at expensive- with a P/E ratio of 48- price targets for the company are still about $20 to $30 higher than the current selling price. For investors, EOG still represents the premier Eagle Ford play.

Perhaps some of biggest plays in the Eagle Ford could be some of the smallest. As larger energy firms continue to add to their resource bases, these smaller firms could be M&A targets due to their size. For example, Forest Oil (NYSE:FST) owns about 100,000 acres in the area across the liquids-rich gas condensate and oil window. Likewise, Swift Energy (NYSE:SFY) continues to drill additional wells and add acreage in the region. Both firms feature sub-$700 million market caps and would easily digested by a larger integrated energy firm looking for Eagle Ford production.

SEE: Trademarks Of A Takeover Target

Finally, the business of moving all of that production is growing by leaps and bounds as well. Energy logistics and pipeline firm Plains All American Pipeline (NYSE:PAA) recently completed construction on has a 130-mile crude oil and condensate pipeline as well as 1.5 MMbbls of storage facility to service growing production from the Eagle Ford. This extra capacity should help boost Plains cash flows and its current 4.1% dividend. At the same time, both Kinder Morgan Energy (NYSE:KMP) and Magellan Midstream Partners (NYSE:MMP) have also completed new projects in the region.

The Bottom Line

The Eagle Ford shale in South Texas continues to be “where it’s at” in terms of energy production in the United States. Recent rig data shows that production is growing even faster than first imagined. At the same time, reserve estimates continue to grow. For investors, betting on the Eagle Ford’s continued success is almost a sure thing for longer term portfolios.

At the time of writing, Aaron Levitt did not own shares in any of the funds or companies mentioned in this article.

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