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Marathon Entering Eagle Ford Play

Marathon Oil Corp. is dipping its toes into the liquids-rich Eagle Ford Shale play in South Texas through a deal with Houston-based Denali Oil & Gas, the company said Monday.

The Houston-based major has completed an agreement with Denali for entry into the Eagle Ford in Wilson and Atascosa counties.

"Since acquiring our first shale assets in the onshore U.S. market in 2006, Marathon has developed substantial expertise that we can apply to emerging plays like the Eagle Ford and create more opportunities for mid- and long-term profitable production growth," said Dave Roberts, the company's executive vice president for its upstream business. "This new entry reinforces a key element of our upstream strategy of targeting unconventional, primarily liquids-rich resource plays providing low-risk, scalable growth."

Marathon is to pay Denali $10 million as well as drill and complete four wells to earn approximately 17,000 net acres. The company also has the option to purchase Denali's remaining 58,000 net acres in the two counties. If Marathon executes the option, the full 75,000 net acres, including the initial payment, carried well interest and lease extensions, will cost approximately $2,800 per acre, or a total of about $209 million, according to Marathon. The deadline to exercise the option is Oct. 31, 2011.

If Marathon does not exercise the purchase option, Denali has the option to sell the remaining 58,000 acres to Marathon. The total cost under this option, including the initial payment, carried well interest and lease extensions, would be $92 million, or about $1,225 per acre. Denali has until the later of Nov. 15, 2011, or 15 days after the completion of the final well, to exercise its option. The agreement covers all of Denali's acreage in Wilson and Atascosa counties but excludes its 25,000 acres in Gonzales and Fayette counties.

Denali was formed in February 2003 with an initial goal of becoming "the most cost-effective and efficient operator of deep tight gas in the prolific South Texas region," according to the company's website. In seven years Denali has discovered or acquired interest in 33 oil and gas fields and has drilled 73 wells.

Marathon has been active in the Haynesville and Bossier shale plays in Texas and Louisiana as well as the Marcellus Shale in West Virginia.

In recent months producers have been increasingly targeting liquids-rich and oily plays, like the Eagle Ford, as they rely on oil-linked liquids prices to make up for sagging prices for dry gas. Swift Energy Co. (see Shale Daily, Nov. 15) and SM Energy Co. (see Shale Daily, Nov. 5) are two examples.

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