Eagle Ford Shale Regional Rig Count up to 278 - June 29, 2012

Anadarko Eagle Ford Shale Map

The Eagle Ford Shale drilling rig count rose to 278 this past week. That is an increase of seven rigs from last week's count of 271 and is on par with the rig count two weeks ago. We talked about future rig activity in last week's note and we covered an announcement that Pioneer Drilling is Slowing Down in follow up. It is worth noting: Pioneer Drilling has experienced a slow down, but the overall rig count grew during that time period.

Anadarko Petroleum is the operator up for review this week. The company had operations in the Maverick Basin before the Eagle Ford boom took root and expanded its holdings as exploration proved the potential of the play. The company's most publicized development was when it received $1.55 billion ($12,000+/acre) in a joint venture agreement with Korean National Oil Company (KNOC). KNOC received a 33% interest in the company's Eagle Ford acreage in exchange. Anadarko now estimates resource potential across its acreage is greater than 1 billion boe (600 mmboe net to Anadarko). Anadarko has nine rigs running as of June 29, 2012, and has averaged more 10 rigs running over the past twelve months.

Eagle Ford Oil & Gas Rigs

The natural gas directed rig count (Smithbits) this past week fell to 73. Karnes and Webb counties are the only counties with more than ten rigs targeting natural gas. Henry Hub futures prices were up to more than $2.90/mmbtu and had held twenty cents higher last week at $2.82/mmbtu on Friday afternoon. WTI was trading around $84/bbl Friday afternoon, and looks to end the week up. Oil directed activity increased to 204 rigs this week. That's back up from last week when it fell below 200 for the first time since the beginning of April.

259 horizontal rigs are running in the region up from last week's count of 248. One water well is being drilled in McMullen County. Karnes County continues to lead development with 41 rigs and La Salle is up to 36 rigs this week. McMullen (31), Webb (28), Dimmit (26), Gonzales (23), DeWitt (20), Atascosa (13), and Live Oak (12) make up the top Eagle Ford counties.

News items this week included:

• Pioneer Drilling Reports a Slow Down in Eagle Ford Rig Contracts
• Forest Oil Eagle Ford JV Coming Soon
• South Texas School Districts Become Robinhood Targets
• Cabot – Osaka Pearsall Shale JV Agreed – $250 Million

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Drilling Rig Count by Operator

What is the Rig Count?

The Eagle Ford Shale Rig Count is an index of the total number of oil & gas drilling rigs running across a 30 county area in South Texas. The South Texas rigs referred to in this article are for ALL drilling reported by SmithBits and not solely wells targeting the Eagle Ford formation. All land rigs and onshore rig data shown here are based upon industry estimates provided by the Baker Hughes Rig Count and/or Smith Service Co's (Schlumberger) Smith Rig Count.

Drilling Rigs by County

Pioneer Drilling Reports Slow Down in Eagle Ford Rig Contracts

Drilling Rig 7

Pioneer Drilling is forecasting thinner margins and lower utilization of its rig fleet due to falling natural gas and oil prices. Eagle Ford drilling rig utilization is a direct contributor to the suppressed numbers. The company ran an average of more than 13 rigs/week in the Eagle Ford during the second half of 2011, but only 10 rigs were running as of June 22, 2012.

“With the recent declines in oil and natural gas liquids prices, we are seeing some softening of demand in certain markets,” including in the Eagle Ford Shale, said Pioneer CEO William Stacy Locke in a statement.

This shouldn’t set off alarms. Not many (if any) companies planned for $2 natural gas and those that did were hoping for $100/bbl oil. Lower commodity prices mean less cash flow to use in developing plays like the Eagle Ford. The overall U.S. rig count is expected to fall under pressure in the second half of the year if commodity prices don’t recover.

Chesapeake energy is one example of a company planning to drop rigs. CHK has 32 rigs running now, but plans call for the company to average 30 in 2012. We’re half-way through the year and the company has averaged 33 rigs running to date (not counting spudder rigs). If they stick to the plan, they’ll need to drop 5-7 rigs in the second half of the year.

A Lower Rig Count Does Not Automatically Mean Fewer Wells

Operators are improving drill times and operational efficiencies across the play. That means they can drill the same number of wells with fewer rigs. If Chesapeake improves drill times by 20%, it can drop 6-7 rigs and drill the same number of wells. Expect to hear more about efficiency improvements during Q2 earnings calls.

Read more from Vicki Vaughn regarding Pioneer Drilling’s announcment at fuelfix.com

Forest Oil Eagle Ford JV Coming Soon

Forest Oil Eagle Ford Acreage Map

Forest Oil's Eagle Ford JV should be announced in short order. The company opened its data room early in 2012 and plans to increase drilling activity after a partner is brought in.

Low natural gas prices are straining the company's capital plans. Capital raised through a jv partner will ensure the company can successfully develop its core acreage in the play. If a partner isn't found reasonably soon, the company will likely sacrifice leases in other areas of the country in favor of the Eagle Ford.

2012 has been a struggle for the company. Two executives have left, with the CEO being the most recent, and the company's stock has dropped approximately 50% since the beginning of the year.

South Texas School Districts Become Robinhood Targets

It's a nice problem to have. Tax appraised values are rising by hundreds of millions of dollars across South Texas. Our schools will be getting better, but the state's "Robinhood" provision means they'll also be sending money elsewhere.

Robstown ISD saw an almost 20 percent increase in values from 2011, from $375.4 million to about $450 million, and London ISD's preliminary estimate came in 23 percent above 2011, rising from about $233 million to about $287 million.

Those numbers pale in comparison to districts in the heart of the Eagle Ford Shale. Karnes City ISD has seen valuations increase nearly sixfold in the past two years.

Read more at Caller.com

Cabot - Osaka Pearsall Shale JV Agreed - $250 Million

Maverick Basin Pearsall Shale Map

Cabot Oil & Gas and Osaka Gas have announced a joint venture (JV) agreement in the Pearsall Shale. Cabot is selling a 35% interest in 50,000 acres prospective for shale across Atascosa, Frio, La Salle and Zavala counties. Osaka will pay $125 million at closing and will carry 85% of Cabot's drilling cost until the remaining $125 million is paid. Cabot plans to run two rigs in the play through 2012, three in 2013, and four in 2014. At that rate, the drilling carry will be fulfilled by year-end 2013. Cabot keeps full rights to the Eagle Ford.

The deal follows successful exploration wells proving the Pearsall Shale has better liquids yields east of the Maverick basin.  The JV is beneficial for both parties. Cabot secures the capital needed to begin development sooner than would be possible on its own and Osaka gains natural gas assets in the U.S.  Osaka has been in negotiations to take LNG from the U.S. Owning supply is a natural hedge.

Cabot's CEO commented:

"We believe the Pearsall Shale could prove to be an additional liquids-rich catalyst in our portfolio and are pleased with the results we have seen to date--both internally and from neighboring peers. This transaction will provide the capital necessary to accelerate drilling of this formation, while still maintaining Cabot's 100 percent interest in our Eagle Ford leasehold."

Osaka Gas is a Japanese energy supplier with a focus on natural gas. Natural gas is more important than ever after Fukushima accident.