Full disclosure, I’m not a finance guy, I’m an engineer. But I have been continuously baffled as to why EOG stock has lowered from $114 after the Analyst Day, to the current price of $88. This is an Eagle Ford blog, so I’ll stick to Eagle Ford operations as I go on a pro-EOG, Eagle Ford rant.
a) Could it be they have brought on more debt than people have expected? It costs a lot of upfront money to develop the Eagle Ford oil window in the manner they are developing it. Simulfracs by nature require upfront capital expenditures for multiple wells before production really begins. As an example, let’s look at the Gonzales county graphic below. In this frame, there are 25 horizontal wells (in various stages of drilling and completion). 25 horizontal wells at about $5.5 MM a pop = $137MM. They took on I believe $500MM of unplanned 2010 CAPEX so this may have frightened some and I can understand that. I think EOG may have underestimated the degree of difficulty to get frac crews out to the site to perform operations and this may be delaying Eagle Ford production but that is pure speculation. My take on this is that extra upfront CAPEX is worth it to deliver even a one or two percent greater recovery factor.
b) Could it be people are wondering where the Eagle Ford oil production is? They have been VERY open and upfront that they are in the evaluation phase. They have said many times that production will come on in steps. This is the nature of the type of operation they are running. In other words, to maximize production, they are waiting until all wells in the vicinity are ready to be produced before opening the flood gates. They shut-in wells offset to frac operations, and according to the recent Barclay’s conference they are experimenting with fracturing only parts of laterals at a time. RRC data is not a good indicator of the quality of their Eagle Ford program because of this. From the 25 or so wells in the earlier graphic, 142,589 BO and 187,802 Mcf have been produced. Only the Marshall lease here has RRC production data and it is only from a couple wells (one is a vertical monitor well).
c) Could it be people do not believe in shale matrix production? This I can understand as well. When I was in engineering school we were taught to drill through shales, period. They do not produce, they do not flow, they only get in the way. I personally believe that with today’s multi-stage frac technology, and the additional use of simulfrac and accordion laterals etc., that shale oil production is not only possible, but will be economic if it is done right (the way EOG is doing it is one good example). I wrote about this in various articles and presentations and will hopefully be glorified by incredible 2011 EOG Eagle Ford oil production. Another thing here, it isn’t like EOG is claiming incredible recovery factors defying engineering logic. They claimed up to 5% at the Analyst Day.
In conclusion, this has been and will continue to be a waiting game, waiting until 2011 for the program to switch into a more development mode. I have a feeling that when all is said and done, the EOG Eagle Ford oil window program will be impressive, yield nice rates of return and continue to change the way people view shale production.
On another note, Enterprise entered into a contract to develop Eagle Ford midstream services for EOG. Mark Papa threw out a figure of $1 billion. It seems like Enterprise is on the same side of the fence as me.
We at DI-ESP are putting in a lot of work on this and would love to hear comments, quips or concerns. Email me or comment.
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