Monday, July 4, 2011

Repost: The Eagle Ford Overpressure "Goldilocks" Oil Window: $30,000 IS TOO CHEAP

NOTE: The following analysis was originally published here on November 3, 2010. It was truly a prophetic analysis rooted in a deep understanding of the Eagle Ford shale. I urge everyone to take a fresh look at this old post I published 8 months ago. Nostradamas? Eagle Ford is even more valuable than I originally thought. Land prices are currently in flux and seeking what is fair value. We are no where near a top in where land values will ultimately go.

Through the process of observation and analysis, it has now become abundantly clear, and it's safe to say, that a "Goldilocks" zone runs through the Eagle Ford oil window. The Eagle Ford itself is a complicated play with a gradual transition from crude oil to NGL to dry gas, in shale of varying thickness. However, there exists a narrow overpressure oil window that is quite simply a marvelous golden zone, and it is coveted by operators due to it's extreme economics. Those owning the minerals to this strip of land are sitting on a untapped Elephant Field bonanza that is a veritable black gold mine.

Operators have been disclosing, actually downright bragging, about just how valuable that this “Goldilocks” acreage is while presenting at their numerous dog and pony shows at recent investor energy conferences across the country these past few months. These operators have provided their investors with virtually full operational transparency in their hopes of driving up their stock price. By way of these energy conference presentations, streamed over the internet, those of us with the curiosity to learn, have been able to drill into a gusher of technical data giving us the equivalent of a 3D seismic view of what they know, how they operate, and how they have cheated some landowners who signed leases early. By providing their investors this information we have learned there exists what they themselves describe as a "sweet spot" that runs through the play. This "sweet spot" contains the most valuable acreage imaginable. This “Goldilocks” zone is rich in high quality light sweet crude oil that is under pressure and it lays where the shale is at it thickest. Operators are hinting that there may be well in excess of 750,000 recoverable barrels of this high quality crude oil per well. Let's merely use their figure of 750,000 boe and multiply that by today's NYMEX price of $84.40 and you get a whopping $63,300,000 net pay from a “Goldilocks” well. When you are talking about acreage that will produce earnings near $800,000+ per acre you quickly come to the realization this particular acreage is extremely valuable. It's not just leasehold acreage getting much more expensive either, everything is far more expensive for operators today. By their own admission frac jobs have gone from $600,000 per well in the summer of 2009 to a blistering $3.5 million today. Lease bonuses and royalty will follow suit. You like apples? How do you like them apples?

With NYMEX crude oil on the rise, I am going to go out on a limb and predict that historic new highs in both lease bonuses and royalty percentage will be established prior to the Eagle Ford being fully developed. I am willing to go even farther out on a limb and predict the strong likelihood of lease bonuses of $100,000 per acre and royalty of at least 30% at some point in select areas of the sweet spot. Right now, the terms you negotiate for your oil and gas lease are far more important than the actual timing of doing a deal. Time is definitely on your side. We are merely in start up mode at the present time.

The process whereby you can fairly value what lease acreage is worth is rather straight forward. The value is directly related to how much and what kind of hydrocarbons are under your land. Both of these questions can be answered within relative broad parameters by simply plugging in operator provided EUR's and the API grade of crude oil. Goldilocks generally runs in a line from Karnes County, following the general direction of Cheapside and then to the Shiner area where the oil window veers somewhat to the north east. You simply have to get it in your head and think of you land as being a container of crude oil and you own this valuable commodity. You own it, it belongs to you and if somebody wants it from you they have to pay you for it. Good business people don't have to cheat, lie, and steal to make a profit. You own many birds in the hand and the tired cliché of a bird in the hand being worth two in the bush is nonsense. Don't become a landman victim, demand a fair price for the minerals "YOU OWN."

For what it is worth, I come to this discussion with a background in finance, having been a stockbroker for a national securities firm.  My resume includes successfully passing the Series 7 exam, the most comprehensive financial securities exam offered by the FINRA. My bold predictions about future huge lease bonuses and royalty are grounded in my financial background. I am as serious as a heart attack.

IS A HONEYCOMB FRAC DESIGN BEING EMPLOYED IN UPPPER & LOWER EFS FRAC'S? I don't know for certain, but the suggestion certainly is there, that at least one operator is using a frac design similar to a honeycomb to efficiently drill, frac and produce the thicker part of the "Goldilocks" zone.  This design might ultimately result by order of magnitudes in greater recovery of the light sweet crude from the reservoir. I believe chief geologist for EOG Loren Leiker calls this Matrix Flow. 11/5/10 Perhaps this is what EOG Resources CEO Mark Papa was alluding to when he said "This is the nature of the development of these horizontal assets for maximum reserve recovery, whereby we drill and complete a group of five to 15 wells together before bringing any of them to sales."