Amazing Proof of Shale’s Seismic Shift
Last December the Energy Information Administration (EIA) updated its estimate of U.S. Crude Oil and Natural Gas Proved Reserves. Both natural gas and oil reserves rose, with the EIA reporting that U.S. proved reserves of crude oil and lease condensate had increased for the fifth year in a row, exceeding 36 billion barrels for the first time since 1975:
Increases to proved reserves can occur either through new discoveries, or because higher oil prices have pushed previously uneconomic-to-produce oil resources into the reserves category. The latter is the primary reason why over the past decade Venezuela’s proved oil reserves jumped from 77 billion barrels in 2003 to a world-beating 289 billion barrels in 2013 — more even than Saudi Arabia at 266 billion barrels and more than six times the volume of proved U.S. reserves. Venezuela’s heavy crude resource in the Orinoco region of the country became economically viable as oil prices rose dramatically over the past decade and oil resources became classified as proved reserves. (Such additions can also be declassified as proved reserves should oil prices fall and remain low.)
In the same way, higher prices are partially responsible for the increase in U.S. reserves. Higher oil and gas prices enabled economical production from the combination of horizontal drilling and hydraulic fracturing (“fracking”) for the first time, pushing shale oil and gas resources in North Dakota, Texas, and Pennsylvania into the proved reserves category.
But the role of new discoveries in adding to new reserves can also be significant. In March 2015 the EIA released its update to the Top 100 U.S. Oil and Gas Fields as a supplement to the December report. This was the EIA’s first update on the Top 100 fields since 2009. The map has changed substantially since 2009, because there were no significant oil fields in South Texas at that time. With the new update, the largest field in the U.S. is now in South Texas:
Top 100 U.S. oil fields by reserves in 2013. Source: EIA
The EIA defines a field as “an area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious strata or laterally by local geologic barriers, or by both.” Within a formation such as the Eagle Ford Shale in South Texas, there are a number of distinct fields.
The Eagleville field (in the Eagle Ford Shale) was only discovered in 2009 but is now the #1 field in the U.S. based on its reserves (denoted by the large circle shown on the map in South Texas). Not only that, in 2013 — a mere four years after discovery — it was also the top producing oil field in the U.S. with 238 million barrels produced that year. This was more than twice the production of the second largest-producing field. In addition to the Eagleville, four other new Eagle Ford fields have joined the top 100 for the first time.
Who is producing all of this new oil? The top oil producers in the Eagle Ford include EOG Resources (NYSE: EOG), BHP Billiton (NYSE: BHP), ConocoPhillips (NYSE: COP), Chesapeake Energy (NYSE: CHK) and Marathon Oil (NYSE: MRO).
Hydraulic fracturing has also dramatically shaken up the rankings of the top 100 gas fields. The top gas field by both production and reserves — the Marcellus Shale underneath Pennsylvania, West Virginia, southern New York, eastern Ohio, and extreme western Maryland — was only discovered in 2008 and thus did not even appear on the map in the 2009 update:
Top 100 U.S. gas fields by reserves in 2013. Source: EIA
The top five producers in the Marcellus are Chesapeake Energy (NYSE: CHK), Cabot Oil and Gas (NYSE: COG), Range Resources (NYSE: RRC), Southwestern Energy (NYSE: SWN) and EQT (NYSE: EQT). However, because there had been no significant gas production in that region in the modern era, the rapidly expanding drillers have faced logistical constraints that weren’t a big hurdle in ramping up oil production in Texas.
Most people would probably be surprised to know that the top producing oil and gas fields in the U.S. were not even ranked in 2009. It just goes to show that after 150 years of searching for and producing oil and gas in the U.S., there could still be significant untapped reservoirs out there.
(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)
Portfolio Update
Enterprise Strikes Again
Enterprise Products Partners (NYSE: EPD) likes to talk up its organic growth, and executives almost always disclaim having much, if any, interest in acquisition opportunities on quarterly conference calls.
EPD’s recent deals reveal its more aggressive nature, After concluding a buyout of key logistics partner Oiltanking for nearly $6 billion in February, Enterprise has now outbid all comers with a $2,15 billion deal for EFS Midstream, a gas gathering and processing complex in the Eagle Ford shale.
For that price it gets 460 miles of gathering lines, 10 gas processing plants and some condensate stabilization towers,
In addition to the stated purchase price, the sellers — a joint venture between Pioneer Natural Resources (NYSE: PXD) and India’s Reliance Industries — secured downstream shipping discounts valued at $200 million from Enterprise, according to Pioneer’s press release. In return, the joint venture signed gathering and processing agreements with Enterprise covering all of its Eagle Ford acreage for the next 20 years, with minimum volume commitments spanning seven years.
Pioneer said its 50% share of EFS was expected to generate more than $100 million in EBITDA this year. That implies Enterprise paid a multiple of 11 times EBITDA, significantly less than the 15x-plus EBITDA multiple paid by Kinder Morgan (NYSE: KMI) in its buyout of Hiland Partners, a gathering and processing venture in the Bakken.
Enterprise said the “bolt-on” EFS acquisition would complement its already significant midstream presence in the Eagle Ford, translate into increased downstream volumes and be immediately accretive to distributable cash flow. It will pay just over half the purchase price upon the deal’s expected close in the third quarter, and the rest a year later.
This is another strategic deal building up the partnership’s downstream gas volumes and its inventory of condensate and other liquids for export. Down the line, it should help Enterprise lift its distribution growth rate, which has begun to noticeably lag behind its main rivals. Buy EPD below $42.50.
— Igor Greenwald
Stock Talk
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