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Eagle Ford Gains: Fast But Not Spurious, Say Analysts

The pace of development in the Eagle Ford Shale in South Texas is fast and steady, yet "the [stock] market continues to not appreciate the statistical and predictable nature of the learning curve" in the play, said analysts at FBR Capital Markets. They noted that in other shale plays, more wells have equaled greater knowledge, which has yielded predictable productivity gains.

In other shales, every doubling of cumulative wells drilled has made for a 15-23% gain in productivity as measured by increases in 30-day production rates, they said. "At the current pace of drilling, the industry is set to double its Eagle Ford well count every 12-15 months," analysts Rehan Rashid and Saurabh Lele said in a note Wednesday. "A 15% improvement in productivity increases single-well NPV [net present value] by 25% and has revaluation implications for the broader asset and underlying equities."

Looking to other plays, as well counts doubled, 30-day production rates improved 17.5% in the Barnett Shale, 23% in the Fayetteville Shale, 16% in the Bakken and 15% in the Haynesville Shale, the analysts said.

According to NGI's Shale DailyUnconventional Rig Count, the Eagle Ford has the highest rig count (195) of the 13 plays followed and has posted the second highest percentage gain from a year ago (105%), following only the Niobrara/Denver-Julesburg (200%). FBR said it expects the industry to add about 10 rigs per quarter in the Eagle Ford "for the foreseeable future."

Based on the industry's past shale experience and current activity in the play, the Eagle Ford could be worth $90 billion in the analysts' base case or as much as $200 billion in their "upside case," which is driven by future productivity improvements.

Looking at industry activity, the analysts suggested that 7.5 million Eagle Ford acres could be in play. "Of this, we count that 3 million acres lie in the black oil section, 1.5 million acres in the volatile oil or high-condensate window, 1.5 million in the low-condensate/NGL [natural gas liquids] window, and the remaining 1.5 million acres in the gas window."

Generally, development will not be impeded by above-ground considerations as the play lies under mostly privately held ranch land, the analysts said. Below-ground, the Railroad Commission of Texas so far has been amenable to increasing lateral lengths, which have grown to 5,500-6,000 feet across the play, the analysts said. Water access and disposal is not seen as a significant issue either.

"In Texas, the ranch owner has right of capture. As such, the industry has a willing seller of water who can capture water from aquifers under his acreage," they said. "Frack water disposal is also manageable due to the availability of saltwater disposal wells."

For the time being, though, takeaway infrastructure and frack crew availability will present constraints to Eagle Ford producers, the analysts said. Takeaway capacity will be tight through the end of 1Q 2012. "Subsequently, we see 1.4 million b/d of condensate and crude oil takeaway capacity addition and 0.9 Bcf/d of natural gas capacity by 2013."

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