Build Your Own Eagle Ford ETF
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Eagle Ford, once an obscure name only a few years ago, has the potential to become the number one shale play in the United States.
Unfortunately for investors, there are no exchange traded funds, or ETFs, heavily weighted toward the play. So I constructed my own basket of companies titled towards the emerging formation.
Eagle Ford is growing - fast. Based on a report by the Texas Railroad Commission, March output from the formation grew 77% year-over-year to 530,000 b/d.
In fact, Eagle Ford may prove to be the biggest unconventional oil play in North America, already rivaling the North Dakota Bakken. According to the U.S. Geological Survey, initial recoverable reserve estimates exceed seven billion to ten billion barrels. That's nearly twice the size of the Bakken.
But in addition to scale, Eagle Ford presents other advantages over the Bakken:
First - geology. Drilling costs in Eagle Ford are cheaper because the formation is shallow and brittle. A typical well costs $5.5 million versus $8 million in the Bakken.
Second - geography. Eagle Ford's proximity to Gulf coast refineries allow producers to save as much as $40 per barrel in transit costs over Bakken producers.
Third - pricing. Production in Texas region is priced near international benchmarks like London's Brent crude. In contrast, landlocked Bakken production is shipped by pipeline to congested terminals in Cushing, Oklahoma resulting in a big price discount.
Constructing the portfolio
In creating this fictional ETF, I narrowed the list of companies for my basket to six small and medium sized companies. Of course, this is not a exhaustive list of all stocks with Eagle Ford exposure, but only companies with best in class drilling programs or a high probability of being acquired.
First - EOG Resources (NYSE: EOG) which is the largest and best positioned producer in the basin. Most of the company's assets are in the 'oilest' window of the formation resulting in the most profitable operations
EOG's drilling program has been impressive. During the first quarter, 27 new wells that came online had initial production rates above 2,500 b/d. That's impressive for a shale play. In addition, the company boosted its estimated Eagle Ford reserves of recoverable oil from 900 billion barrels to 1.6 billion barrels by decreasing the space between each well.
EOG Resources is by far the industry's fastest growing independent producer with output projected to grow 28% in 2013. Management also has a track record of rewarding shareholders raising its dividend 760% over the last ten years.
Second - Sanchez Energy (NYSE: SN) is the best pure-play on the Eagle Ford formation after the company was spun out of privately held Sanchez Oil and Gas in 2011. Today, the company is focused almost entirely on the Eagle Ford with 95,000 net acres.
Production is growing rapidly. In 2011, the company produced less than 1,000 b/d. But that figure is expected to hit 8,000-10,000 b/d by the end of 2013. Because the management team has been doing business in the region for over 40 years, Sanchez's reputation has allowed it to acquire acreage more affordably than rivals.
While the company is focused on the Eagle Ford, it also holds a small position in the Haynesville play with approximately 82,000 net acres. But the company is taking a 'wait and see' approach before developing these assets. Management would prefer to sit on the sidelines until new rail capacity is added.
Third - Rosetta Resources (NASDAQ: ROSE) is a mid-size exploration and production company with a $1.3 billion market capitalization.
Rosetta has one of the most efficient drilling programs in the region with the second highest daily well production rates. A concentration of assets in a small geographical area also results in major cost savings. The company is expected to grow oil production 40% in 2013.
And while Rosetta use to be a pure play, management recently spent $800 million to pick up promising acreage in the nearby Permian Basin. However, Eagle Ford still accounts for 70% of production.
Fourth - Carrizo Oil and Gas is another attractive producer. Earlier this year the company sold its assets in the Barnett Shale to refocus its efforts of the Eagle Ford.
Finally, to round out this portfolio, I'll include Swift Energy and Forest Oil. With large companies like Conocophillips, Marathon Oil, Statoil and CNOOC joining in the land-rush to acquire acreage, these smaller players represent attractive buyout candidates.
Foolish bottom line
Rapid production growth and attractive economics means the Eagle Ford shale could continue to post big returns. Investors should keep these companies on their watch lists.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!