Can Texas Take On OPEC?
The surge in Texas crude oil production over the past few years has been truly phenomenal.
According to U.S. Energy Information Administration data, the state's oil production surged to 2.7 million barrels of oil per day in the month of September, representing a 30% year-over-year gain and the highest average output since the agency began tracking data in January 1981.
If Texas were a country, that level of output would place it squarely among the top 15 top oil-producing nations in the world. Indeed, the Lone Star state accounts for more than a third of total U.S. crude oil production, thanks to surging output from the Eagle Ford shale of South Texas and the Permian Basin of West Texas.
While the Permian Basin is still producing more oil on an absolute basis, the growth in Eagle Ford production has been the most impressive. In March of this year, production surged 77% year over year to surpass 500,000 barrels a day. Since then, production has already more than doubled, topping 1 million barrels per day in August.
Three companies dominate production in this prolific Texas shale play: EOG Resources , ConocoPhillips , and Chesapeake Energy . Let's take a closer look at each.
EOG Resources is arguably the most dominant player here, having amassed a whopping 639,000 net acres in the Eagle Ford, most of it located in the play's crude oil window. Not only is EOG the play's largest producer, but it's also one of the most profitable. As of the third quarter, the company was generating a more than 100% direct after-tax reinvestment rate of return in the Eagle Ford.
After recently boosting its Eagle Ford reserve estimate from 1.6 billion barrels of oil equivalent, or BBOE, to 2.2 billion barrels of oil equivalent, the company continues to slash drilling days and completion costs in the play, while boosting initial production rates, which have risen more than 20% year to date. With a 12-year inventory of nearly 5,000 remaining drilling locations in the Eagle Ford, EOG has a truly exceptional runway for growth in this lucrative play.
ConocoPhillips is another dominant player in the Eagle Ford, commanding 227,000 net acres with an estimated resource of 1.8 BBOE. During the third quarter, the company's Eagle Ford output surged 66% year over year to 126 million barrels of oil equivalent per day, accounting for a quarter of the company's total production from its Lower 48 program.
Over the next five years, Conoco plans to allocate the majority of its capital to its North American operations, with $8 billion set aside for the Eagle Ford. As the company continues to drive down well costs and drilling days through a transition toward multiwell pad drilling, it expects to grow production from the play by more than 130,000 barrels per day by 2017. And with roughly 1,800 remaining drilling locations in the play, this ambitious target appears quite achievable.
Last but not least is Chesapeake Energy, which views the Eagle Ford as its primary driver of oil production growth over the next few years, as it aims to reduce the share of natural gas in its commodity mix. During the third quarter, the company delivered Eagle Ford net production of roughly 95,000 barrels of oil equivalent per day, representing a staggering 82% year-over-year increase.
With roughly 75% of the company's Eagle Ford acreage now held by production, Chesapeake expects to significantly ramp up activity over the next several quarters, with plans to operate more than 15 rigs in the play next year, up from 10 currently. Going forward, the Eagle Ford should continue to be the largest single driver of Chesapeake's oil production growth, as the company transitions toward increased multiwell pad drilling; 85% of next year's Eagle Ford wells are to be drilled on existing pads, up from roughly 70% during the second half of this year.
As these companies' operational success highlights, the rapid growth in Eagle Ford production has propelled Texas to become one of the largest crude oil-producing regions in the world, on par with several OPEC countries. Not only has the surge in Texas output benefited the companies operating there, but it has also helped the U.S. drastically reduce its dependence on foreign oil: the nation's crude oil production in October exceeded imports for the first time in nearly two decades.
OPEC's worst nightmare?
While EOG Resources, ConocoPhillips, and Chesapeake Energy are doing a commendable job in helping reduce US dependence on OPEC oil, one energy company has got the cartel shivering in its boots. Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!
The article Can Texas Take On OPEC? originally appeared on Fool.com.Fool contributor Arjun Sreekumar owns shares of Chesapeake Energy. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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