Land Rush in Texas
Research for Online Investors

by John Dalt

10/13/10

There is a land rush going on in Texas.  This isn’t chuck wagons and kids on ponies.  It is oil men with briefcases stuffed with cash.  The Eagle Ford shale formation starts at the Mexican border and runs 400 miles northeast, almost to Houston.

Petrohawk Energy (HK) made the first discovery in the Eagle Ford back in 2009.  They drilled their first well to 11,300 feet then laterally 3200 feet.  Initial production was reported at 7.6 million cubic feet of natural gas and 250 barrels of condensate per day.  The pay zone was measured at 250 feet thick!

Since then, other companies have come in to exploit the pool that caused EOG Resources Chairman Mark G. Pappa to say “ We believe the South Texas Eagle Ford horizontal crude oil play will prove to be one of the most significant United States oil discoveries in the past 40 years . "

The Eagle Ford Shale prospect is named after Eagle Ford, Texas.  Eagle Ford was the alma mater of Bonnie Parker, Clyde Burrows partner in crime of Bonnie & Clyde fame.  Eagle Ford is south of Dallas and marks the North outcropping of the formation.

The north half of the Eagle Ford formation pool is low pressure with oil at depths as little as 2500 feet.  The south side of the field is higher pressure and produces dry natural gas as deep as 15,000 feet.  Shale is a sedimentary rock that contains organic remains called kerogen.  As the kerogen deteriorates over time (thousands of years) oil and natural gas are formed.  The shale is under the Austin Chalk formation that lies above other older large oil fields in east Texas.  The formation was formed approximately 65 to 145 million years ago.

CNOOC, the Chinese oil company paid $1.08 billion for a one-third interest in Chesapeake Energy's (CHK) Eagle Ford leases.  They will also pay 75% of all exploration costs up to another $1.08 billion.  Chesapeake’s leases are predominately on the north side of the area and should produce oil.

Geologists knew about the Eagle Ford formation since the 1970’s.  They knew there was natural gas there, because drilling through it would produce high pressure.  They discounted it because the shale would not allow the oil and gas to flow to the well and it would deplete quickly.  Horizontal drilling changed everything.  In the 1990’s Halliburton, Weatherford, Baker Hughes and Schlumberger worked to perfect horizontal drilling.  When horizontal drilling was applied to the Barnett shale near Ft. Worth, it was proven that shale gas could be produced without the feared quick depletion.

Estimates are that the Eagle Ford formation contains 25 billion barrels of recoverable oil and natural gas.  This makes it 2.5 times bigger than the Bakken Shale discovery in North Dakota.  This would make the Eagle Ford formation the sixth largest oilfield ever discovered in the United States.

Petrohawk Energy (HK) had over 350,000 acres leased at the end of 2009.  This acreage gives them more than 2,700 potential well locations over the Eagle Ford formation.  The Chinese investment in Chesapeake’s leases values the formation at more than $11,500 per acre, wholesale.  This would place the value on HK’s Eagle Ford leases at $4.03 billion.  HK’s market cap, at today’s stock price, is $5.4 billion.  The additional $1.37 billion buys you 122,000 acres in the Bossier Shale play in Louisiana, 360,000 acres in the Haynesville Shale, and 157,000 acres in the Fayetteville Shale area in Arkansas and 2.7 billion cubic feet of proven natural gas reserves.

HK is a leveraged company that has not shown an operating profit since 2007.  This is because they have plowed ahead leasing land and developing their resources.  They are fiercely independent.  With the low cost of debt today, there may be a good opportunity in Petrohawk Energy (HK).

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top