The Eagle Ford Is Booming, Here Are Three Ways To Participate
Casey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The landscape of a swath of southern Texas has seen some radical change lately. Oil derricks are popping up all over the bushy ranch land. Storage facilities, terminals and oil equipment sheds are all dotting along Interstate 37 and US 281. Never has it been as busy as it is now.
A major oil unconventional oil discovery in the Eagle Ford shale formation has caused all this. For the last three years, oil and gas companies have been rushing in to buy up mineral rights and get in on this apparent bonanza. Nobody is exactly sure how long it will last, but most believe it will be between 20 and 30 years. In fact, it may prove to be the biggest unconventional oil play in North America, already rivaling the Bakken in North Dakota.
EOG Resources June 2013 Investor Presentation
Let's take a look at three ways to participate in this boom, all of them upstream oil and gas, all with differing market caps, different risk levels and different exposures to the Eagle Ford. I believe these three companies represent the best way to be in this play.
A focused mid-cap play
Carrizo Oil & Gas (NASDAQ: CRZO) is a mid-cap energy company operating in a few premier resource oil locations in the lower 48 states. The majority of its operations, however, are in the Eagle Ford. It is the smallest company of the three and has the most relative Eagle Ford exposure: Of Carrizo's 95 net wells, 68 of them are in the Eagle Ford. Its market cap is the smallest of my three picks at $1.2 billion.
In 2010, management began a dramatic shift from dry natural gas to oil, and it is now paying off. In the first quarter of 2013, oil production increased by 57% year over year off the back of Eagle Ford operations. Production from the Eagle Ford has jumped to 8,700 barrels of oil per day. Carrizo's realized price was a very high $105.36 per barrel because it was able to get it to Latin American diesel markets.
Carrizo's internal rate of return in the Eagle Ford is an amazing 90%. Will it be able to keep growing Eagle Ford production at this rate? Possibly. It did add acreage in the adjacent Pearsall Shale as early as last quarter.
Despite this dramatic growth, Carrizo does have a few downsides. First is the $870 million in debt it holds on its balance sheet – quite a bit considering its $1.2 billion market cap. Perhaps more importantly is its funding gap: Capital expenditure is much higher than cash flow. Although it does have ways to fund that gap for now, it is something that must be taken into account.
A large-cap, diversified dividend payer
ConocoPhillips (NYSE: COP) is a former "supermajor" oil and gas company. After spinning off its refining division in 2012, it became an independent oil and gas company. If Carrizo is the small, focused yet risky play, then ConocoPhillips is the large, diversified and safer way to be in the Eagle Ford. Conoco also pays a nice dividend of 4.4%.
On a path to higher margins and higher growth through 2017, the company has been pouring significant capital into "development projects" in North American resource plays to meet this goal. Eagle Ford is an important lynchpin in this effort: It is perhaps Conoco's most prolific growth project in North America. ConocoPhillips is now one of the biggest producers in the Eagle Ford.
Source for graphics: ConocoPhillips Investor Update
The Eagle Ford has a tight window of oil. The rest is liquid gas and dry gas, the latter of which is out of favor. So, not all Eagle Ford acreage is equal. Fortunately, ConocoPhillips was an early entrant and seems to have some of the better land here, its wells outlasting and outproducing Eagle Ford averages.
A large-cap production grower
EOG Resources (NYSE: EOG) is the largest oil producer in the Eagle Ford. And although it was not the first to this play, it is generally regarded as having the best and oiliest acreage. As a company, EOG is a big player in the best US resource plays: the Bakken, Permian and Eagle Ford. Its market cap is over $46 billion, in the middle of Conoco and Carrizo.
Looking at its drilling results, it's not hard to see: Crude oil production is growing at 28% annually. Returns on equity and capital employed have both increased and are in the double digits. Margins have continuously improved and now sit at over $39 per barrel. Well efficiency continues increasing, too. In describing its Eagle Ford operations, EOG says it has "captured the biggest US crude oil discovery net to one company in the past 40 years." It really is that good. For all these reasons, I believe EOG is the best play in the Eagle Ford.
The Eagle Ford shale has been a major discovery, now rivaling even the Bakken. Any of these three would be a good way to participate. In addition, all three stocks have dipped in this pullback, with ConocoPhillips being down the most, by about 8%. If oil exposure is what you're looking for, this is a premier play and these three companies are perhaps the best way to be in it.
Casey Hoerth is long ConocoPhillips. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!