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Why It's Smart to Focus on Eagle Ford Oil Producers

Nilanjan Choudhury

For several years now, the Permian basin has been considered the most significant shale field in the United States. As the prolific region soaks up the spotlight, another unconventional play – the Eagle Ford in Texas – is slowly eyeing a comeback post the oil bust. In particular, over the past twelve months, the basin has seen steady output growth and a flurry of M&A activity.

Make no mistake, the Permian Basin still remains the most sought-after unconventional basin and continues to post the biggest production gains in the United States. However, massive growth in oil and gas output is expected to challenge the pipeline network out of the region.

The Eagle Ford Shale is already a well-known domestic oil play that churns out around 16% of America’s daily crude. But the producing basin is likely to experience heightened activity in the near-to-medium term with a portion of Permian capital landing in this rich oil and gas-producing formation.

Eagle Ford Shale: Enormous Resource Potential

A sedimentary rock formation spread over 400 miles across Texas, the Eagle Ford Shale stretches from the Mexican border in the west to the Texas-Louisiana border in the east. It’s roughly 50 miles wide with massive recoverable oil and natural gas resources. Per the U.S. Geological Survey, Eagle Ford has an estimated average of 8.5 billion barrels of oil, 66 trillion cubic feet of natural gas, and 1.9 billion barrels of natural gas liquids there for the taking.

Apart from the abundant resources, the Eagle Ford shale’s strengths include shorter cycle times, attractive economics and high oil ratio. The low-cost basin also enjoys premium pricing, based on the Louisiana Light Sweet benchmark. This allows upstream Eagle Ford operators to generate positive free cash flow.    

Opportunity to Profit Off Permian’s Transportation Growth Issues

By now, it is well documented that serious logistical constraints in West Texas’ Permian ‘super basin’ forced operators in the region – especially those without committed pipeline capacity – to sell their produce at hefty discounts last year, which went up to $20 per barrel at one point. EIA’s latest Drilling Productivity Report puts Permian oil production at around 4.5 million barrels per day, ahead of the current pipeline capacity of about 3.9 million barrels per day.    

Agreed, the situation has eased a lot following start of the EPIC pipeline, Cactus II pipeline, the expansion of the Sunrise Pipeline and partial conversion of the natural gas liquids carrier Midland-to-ECHO 2 to a crude conduit but infrastructure to take oil out of the Permian Basin to U.S.Gulf Coast still remains inadequate. But Permian production is booming and volumes from this low-cost, premier unconventional play will continue to increase and break new record for many years to come. The sheer increase in output will create excess demand for pipeline capacity. Consequently, producers in the fastest-growing shale in America will need to take minor cutbacks until the next phase of additional capacity buildouts come online.  

The Permian bottleneck issue has also made some companies shift drilling capital out of the area to other shale basins in the United States and the Eagle Ford has received a boost as a result.

Eagle Ford Attracts Investors

Oil production from the Eagle Ford shale play is expected to revolve around 1.4 million barrels a day, according to the most recent figures available. One must also note that the formation has strongly rebounded from the low of 1.1 million barrels of a day in August 2017. Meanwhile, some 62 drilling rigs are currently active in the region.   

Investment in Eagle Ford is picking up as well. According to consulting firm Deloitte, M&As in the field hit a whopping $10 billion last year – second only to Permian’s $25.7 billion. While not as ‘hot’ as the Permian, the region’s cheap acreage, coupled with proximity to the pipelines and refineries in the Gulf Coast, keeps the assets very relevant indeed. Finally, with oil prices likely to head higher, output in this shale play is expected to stay strong.

Eagle Ford Shale Oil Stocks in Focus

With the hectic pace of drilling activity set to continue in the Eagle Ford play and investors' strong appetite for stocks focused in that region, we present four companies – one with a Zacks Rank #2 (Buy) and three carrying a Zacks Rank #3 (Hold) – that investors should watch out for.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lonestar Resources US Inc. LONE controls more than 57,000 net acres in the Eagle Ford. A focused player in the region, the #2 Ranked company’s latest quarterly production in the unconventional play was around 13.6 thousand barrels of oil equivalent per day — 78% liquids. The company expects to grow production by 34% year over year in 2019.

EOG Resources, Inc. EOG is the largest crude producer and acreage holder in the Eagle Ford shale, boasting more than 500,000 net acres. The company, with a Zacks Rank of 3, has identified 7,200 locations — both drilled and undrilled — with resource potential of around 3.2 billion barrels of oil equivalent.

Marathon Oil Corporation MRO has roughly 145,000 net acres in the Eagle Ford. In the second quarter, Marathon Oil churned out an average of 109 thousand barrels of oil equivalent per day (56% oil) from the play. The Zacks Rank #3 company’s holdings in the area is a significant contributor to its free cash flow on the back of strong of well performance.

Penn Virginia Corporation PVAC is a pure play Eagle Ford shale operator, having more than 84,000 net acres (92% held by production). The company expects to grow production by 25-30% year over year in 2019. Moreover, Zacks #3 Ranked Penn Virginia’s acreage contains 123 million oil equivalent barrels in proved reserves.

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