The "4 Horsemen" of the Shale


In the US, domestic producers have turned around a three decade long decline in oil production and are now pumping out more each year. This is all thanks to technology such as hydraulic fracturing and horizontal drilling, methods of "unconventional" shale drilling.

Shale oil discoveries have opened up both the Eagle Ford and Bakken shales, and have been a huge tailwind for those who were earliest to the game. And although the shale has already made companies like Continental Resources and EOG Resources into big names, this thing is just getting started. This article will attempt to look at some other, smaller companies that I believe could be big names in the coming few years.

The small four
There won't be much more land changing hands in the Eagle Ford, but there is still lots of drilling and development to be done here. There are also some great companies using this shale as a base for skyrocketing production. Carrizo (NASDAQ: CRZO) is one of those names. Earlier this year the company expected oil production growth in the high 20% range -- not bad. However, blowout results have increased that estimate to about 45% growth this year.

That growth is very profitable. Consider this rough calculation: Carrizo's average future cost per well should be $8 million. Over the two year life of an average well, Carrizo estimates it can squeeze out 140,000 barrels of oil equivalent. The well can pay for itself with prices as low as $57 per barrel. Carrizo now has 15,500 net acres in the nascent Utica shale in Ohio, where management sees returns similar to the Eagle Ford. Carrizo stock has run up quite a bit, and now trades at 2.54 times book value. That is still reasonable in the long run, but this name might be due for a breather.

Carrizo isn't the only great small name in the Eagle Ford, either. Sanchez Energy (NYSE: SN) is smaller, younger and growing even faster. The majority of Sanchez's production comes from the very core of this play in San Jacinto County. Acreage here provides an amazing 110+% rate of return for Sanchez at this time. By the end of this year management expects to have grown production by triple digits. Earlier this year Sanchez acquired acreage in the western part of this play (near Laredo) from Hess, and is in the process of developing that acreage, too.

The company is also attempting to get a foothold elsewhere and has chosen the Tuscaloosa Marine Shale to do this. Management has successfully acquired a parcel of about 40,000 net acres here after some very encouraging test well results by Encana and Goodrich Petroleum (NYSE: GDP)showing 90+% of production in oil, and production levels similar to the Bakken. Sanchez now trades at a much lower 1.55 times book value, which makes the company the best deal out of the four right now by this measure.

Speaking of the Tuscaloosa shale, the biggest acreage holder there is easily Goodrich Petroleum. After acquiring from Devon earlier this year, Goodrich's position is a huge 320,000 net acres. Goodrich is sitting on some very oily acreage, and if other parts of this shale end up being even close to as good as the initial test wells, the Tuscaloosa is going to be a very big deal.

This year, Goodrich expects production to grow between 30% and 40%, most of that actually coming from its smaller Eagle Ford position. But next year will see a huge ramp up in the Tuscaloosa, as the company plans on shifting a big chunk of all capital expenditures there. Goodrich now trades at 8.61 times book, which is much more expensive than the other two names. Its Tuscaloosa position is truly dominant, yet it is only a $1 billion company. It could end up being much bigger over time.

The last name on the list has the most oil-heavy acreage in the Utica shale. Gulfport Energy (NASDAQ: GPOR) has used its mature, cash-generating south Louisiana operations to fund expansion up in Ohio where it believes there are 1 to 3 billion barrels of recoverable oil equivalent. The Utica is smaller than the Eagle Ford and Tuscaloosa, and thus far seems to have less oily acreage, but Gulfport's position is the most liquids-rich.

Rex Energy Corporate Presentation

Mostly in the southern part of this shale, Gulfport's Point Pleasant acreage should have returns rivaling the Eagle Ford. This table above, from Rex Energy, actually shows Gulfport with a leading position in liquids-rich wells. This year, overall production is expected to pole vault upwards by more than 200%. Gulfport trades at 3.28 times book value at the moment, a bit higher than either Eagle Ford name, but this $5 billion company is certainly worth keeping an eye on.

Bottom line
These four shale names all have leading, liquids-rich acreage and are all growing production rapidly. They are all worth owning, whether on a pullback or saddling up for the long-run. Shale has revolutionized oil production, and these smaller, more-levered plays stand to benefit the most.

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