Tuesday, October 12, 2010

The Eagle Ford Road To Riches: History of Big Deals & Lease Flipping & Why Your Oil Window Acreage is worth $30,000

The Eagle Ford has been a road to riches for the operators who got in early and leased acreage on the cheap. The huge deals being done today in the Eagle Ford is nothing short of stunning and breathtaking. Earlier shale gas deals in the Barnett and Haynesville were hot, but with low gas prices today, attention has now focused like a laser on the oil-rich shale of the Eagle Ford because of firm crude oil prices. The oil window of the Eagle Ford is being developed on a grand scale and accelerated pace. Multi-lateral well systems is a relative new innovation in drilling and production that will reduce costs and increase reservoir contact virtually doubling and trebling EUR per well.  Operators have been updating their rig fleet to a new generation of technology to drill the Eagle Ford more economically. There continues to be a great deal of experimentation in frac techniques, but this much is know, that well productivity is climbing rapidly along with extended frac intervals. Operators are currently making laterals that average in the 5,000 feet zip code. Eagle Ford has superior economics to all other shale plays with crude oil trading steady above $80 giving it a big cushion. Even at $70 oil and $3.50 gas, the internal rate of return (IRR) of a $5.5-million oil window Eagle Ford well is 20%, even if the reservoir comes in on the low side of 300,000 barrels of oil. Most analyst see near term $90 oil and $4.50 gas, which moves the IRR to more than 70% if total content is higher in the 400,000 barrel range. The oil window fairway along DeWitt and Gonzales Counties have operator projected EUR's of up to 750,000 barrel's of crude oil. Even these numbers may be sandbagged and the actual EUR could come in much higher. With natural gas prices depressed, the rush into the oil window will accelerate as infrastructure comes online and is in place. The geology of the Eagle Ford is now well understood by all the operator's and they drill 100% successful wells with no dry holes. Little mentioned is the fact that huge improvements have been made in drilling days, completion's and subsurface modeling. Little noted, many operator's have also made numerous conventional horizontal stacked pay wells in stratas above and below the Eagle Ford in the Olmos and Buda & Pearsall formations. In particular, the Pearsall horizon may ultimately prove to be a high value gas formation like Haynesville and Barnett. Operators are looking at the Pearsall ultimately becoming economic across the trend and it too may be developed when natural gas prices recover. The Pearsall would benefit from infrastructure already being in place from Eagle Ford development. A premium report that was recently published directly points to the eastern part of the Eagle Ford oil window as having the highest quality crude oil and the best economics of the entire trend and is head and shoulders more attractive than the western oil window, the NGL window and leaves the dry gas window virtually uneconomical today. The bottom line is that the oil window along the DeWitt and Gonzales County fairway has the best economics of the entire trend and by definition is the most valuable acreage. Reliance paid around $14,000 per net acre for dry gas acreage, thus by default making the oil window worth significantly more. The oil-to-gas price ratio changed dramatically in the middle of 2009. As crude oil climbed to over $80 per barrel, natural gas NYMEX prices fell to $4 per MMBtu, taking the oil-to-gas price ratio to 20:1.This seismic shift is what is driving the mad rush to the oil window of the Eagle Ford and explains why virtually any acreage there should fetch upwards of $30,000 per net acre. The actual value of your oil window acreage will differ according to specific location and the thickness of your shale, but all the shale 100' thick or more should command at least $30,000 per net acre and carry a 27 1/2% royalty because wells in that zone should produce 1,000+ barrels of oil per day. The thicker part of the shale should be valued at even more than $30,000 per net acre. Just because the operators are being stingy right now doesn't mean your acreage isn't worth far more than they are offering. Do your due diligence and figure out the value of your land using well established metrics and not some Ouija board or taking the operator's word for it. Two year's ago during the land rush of the Barnett and the Haynesville, when natural gas was $12, operators bid up acreage there to $30,000 per net acre with 27 1/2% royalty. Haynesville and Barnett shale gas wells require substantially higher fracing pressure, which inherently makes them far more expensive to produce than Eagle Ford wells. Your Eagle Ford oil window acreage today is far more valuable than that dry gas acreage was a couple of years ago. It's simple arithmetic, when fairly valued. Don't allow any operator to tell you that your Eagle Ford oil window acreage in the DeWitt, Gonzales County fairway is not worth far more than $30,000 per acre and 27 1/2% royalty today.

Check out the list of major shale oil and gas deals driving up lease acreage prices since 2009 and the number of foreign companies flocking into the Eagle Ford:

 October 2010

Plains agreed to purchase 60K net acres in the Eagle Ford Shale for $578MM in cash.

The Chineese Government buys $2 billion of Eagle Ford acreage from Chesapeake. CNOOC, Ltd., a Chinese company, has agreed to purchase a 1/3 stake in the Eagle Ford Shale of southeastern Texas from Chesapeake Energy Corporation for $1.1 Billion. The Chinese company will spend another $1 billion to expand the number of oil rigs from 10 to 40 in order to push production up to 500,000 barrels a day within 10 years.

Canada's Talisman Energy Inc. and Norway's Statoil purchase acreage in Eagle Ford shale play for more than US$1.3-billion. As for the price tag, Statoil is paying a total of $843 million for 67,000 net acres, or over $12,500 per acre.
 September 2010

Gastar Exploration Ltd sold it's Marcellus shale to South Korean investment firm Atinum Partners Co for $70 million.

August 2010

Coming in just over $140 million, Rex Energy Corp  sold part of its Marcellus acreage to Japan's Sumitomo Corp.

July 2010

American Oil & Gas was sold their Bakken shale oil play to Hess Corp in a deal for $445 million.

June 2010

In "the" event that put Eagle Ford squarely on the map driving up lease bonuses and royalty per cent, Reliance announced it's deal to spend $1.36 billion to acquire Pioneer Natural Resources acreage for $14,000 per net acre.

April 2010

BG Group, a Great Britain company, paid $950 million for a 50 percent interest in Appalachia shale gas assets from EXCO Resource

February 2010:

Suncor sold to Progress Energy some of it's shale acreage for $366 million.
December 2009

In the first titanic shale sale, Exxon Mobil Corp buys XTO Energ for about $30 billion in stock. The primarily Barnett shale resource base has proven reserves of 45 trillion cubic feet of gas and substantial shale oil.

Ultra Petroleum Corp paid $400 million for 80,000 Marcellus shale gas acreage to a private company.

November 2009

Denbury Resources Inc bought Encore Acquisition for $3.2 billion, creating a company with 426 mmboe in proved reserves.

June 2009

BG Group paid EXCO $1.3 billion for a 50% interest in their shale gas resources in Texas and Louisiana.

May 2009

Talon Oil & Gas bought 60 percent of the natural gas assets of Denbrury for $270 million.

Quicksilver Resources did a joint venture with Italian energy giant Eni to develop its Barnett shale.

March 2009

TriStar Oil & Gas and Crescent Point Energy bought Talisman Energy Bakken shale for $567 million. Subsequently, Petrohawk acquired TriShar and formed a new company called PetroBakken Energy.


  1. Your observation and assessment of the Eagle Ford is powerfully accurate and informative. Please keep reporting and sharing your views. I very much appreciate what you are doing, thanks.

  2. This information is spot on, thanks. We appreciate what you are doing.

  3. Holy cow! I just read this again. This information has turned out be prophetic. It's uncanny how the Eagle Ford shale has developed almost exactly as predicted back in early October. Kudos to this blog.

  4. It makes me mad to find out I got took by slick talking landman.Hard to admit I was a sucker.It ought be illegal to do what happened.