Over the last year, the Eagle Ford Shale play has seen a lot of renewed interest in investment as well as M&A activity. Just this November, Marathon Oil Company, (NYSE:MRO) announced in their quarterly earnings call they had acquired the Eagle Ford assets of privately held Ensign Natural Resources. For a sales price of ~$3.0 bn in a combination of cash and debt instruments, MRO got 67,000 BOEPD of production, 130,000 bolt-on acres, and 600 new derisked drilling locations. Not a bad deal at ~$23,000 per acre on its face, but what drove the deal in the Eagle Ford as opposed to other shale plays? Clearly, as you look at the deal slide from MRO below, the synergies become apparent. The legacy MRO acreage lies in the Volatile Oil and Condensate region of the play. The Ensign acreage continues in the Condensate region and dips down into the Wet Gas region, bringing a new horizon to MRO. The Ensign deal brings a double-down focus on the condensate and new horizons in Wet Gas to Marathon. This focus gives us a clue to the question posed in the paragraph above, and we will expand on this thinking as we go forward in this piece.
In this article, we will review some of the recent Eagle Ford M&A activity over the last year or so. The deals have been coming fast and furious in this play recently, and we think some common threads between them are being driven somewhat by takeoff realities coming out of the Permian presently, and the lure of the ease of access to Corpus Christie export and LNG facilities.
The rediscovery of the Eagle Ford
The Eagle Ford was one of the early shale breakout plays, as companies like EOG Resources, (NYSE: EOG) began to ramp up drilling and production from 2010 on. Crude oil and gas production rose rapidly from less than 50K BOEPD in 2008 to over 1.7 mm BOEPD in 2015. A function of a rocketing rig count and cracking the code of shale with fracturing. Things tapered off in the late teens and average production in the Eagle Ford gradually dropped toward 1.0 mm BOEPD, a level which it sustained until earlier this year when it rebounded toward 1.2 mm BOEPD.
The Eagle Ford began to shake off its sleepy, “end of life” reputation with Penn Virginia and Lonestar Resources merger that gave the combined company — an Eagle Ford pure-play that rebranded as Ranger Oil, (NYSE:ROCC) — 140,000 net acres in South Texas, production averaging more than 40K BOEPD, and almost 20 years of inventory.
This was closely followed by Devon Energy’s, (NYSE:DVN) acquisition of Validus Energy last year for $1.9 bn. This followed on the heels of spate of smaller deals that included SilverBow Resources’ April 2022 announcement deal to acquire Sundance Energy’s Eagle Ford holdings for $354 million and SandPoint Operating’s holdings in the play for $71 million.
So, we can say the Eagle Ford is back, but we need to understand the core drivers to know the rest of the story.
EOG and the Dorado discovery
First announced in 2018, low gas prices muted the impact of the massive Dorado find in the Eagle Ford. As noted in an article carried on RBN Energy’s blog, in 2021 market conditions shifted in Dorado’s favor.
“EOG Resources’ plan to significantly expand its production of natural gas at its Dorado gas play in the Eagle Ford. EOG, which controls about 516,000 net acres in the Eagle Ford’s oily areas and another 160,000 net acres in the basin’s dry gas window in Webb County, has estimated that its Dorado discovery has about 21 trillion cubic feet (Tcf) of gas and a breakeven cost of less than $1.25/MMBtu. In February 2022, the company reached an agreement to supply another 420 MMcf/d of gas to Cheniere Energy’s Corpus Christi Liquefaction Stage III project — a seven-train, 10-Mtpa expansion of Cheniere’s LNG export terminal in Corpus on top of the 300 MMcf/d EOG had already agreed to provide to the project as its new trains come online.”
EOG does a good job of spelling out the market dynamics in play for Eagle Ford in its November Investor Presentation slide below. Among other things noting the proximity of Dorado to the Corpus Christie export hub pictorially.
Wrapping it up
It looks like the far-sighted producers we have discussed in this article, frustrated with the takeaway difficulties in the Permian due to the rising GOR’s made a sound strategic move into the Eagle Ford.
When you combine the significant volumes of Rich Condensate, NGL’s and Wet Gas with the proximity to the processing and export market in nearby Corpus Christie, the Eagle Ford competes for capital on a par with top-tier acreage in other plays.
Investors wishing to take advantage of the continued growth in the Eagle Ford might do well to have a look at Marathon. The company is trading at 5.5X cash flow or a bit less, given the commodity-led sell-off now underway. This is very competitive with other shale players. The current price per flowing barrel is $63K per barrel, also very competitive on that metric with some of the big operators going for nearly $100 per barrel.
The adjusted cash flow from Ensign’s 67K boe will add a $1.5 bn of OCF to MRO on an annual basis. Let's say OCF goes to ~$6 bn. In that scenario, the OCF multiple drops down to 3.5X and a P/FB basis of $53K per barrel.
To get back to a 5.5X, MRO shares need to adjust toward $51-$53 per share. Analysts still need to adjust for this acreage pickup, as their top estimate is $42, so I may be out over my skis a hair here. I don't think so, though. The math is straightforward.
Bottom-line MRO shares should continue higher from the Ensign acreage pickup. It should also be noted there are other shareholder-friendly actions being taken by the company to dramatically reduce it share count over the next several years.
By David Messler for Oilprice.com
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