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Eagle Ford dry gas lives. As the condensate core grabs headlines and investors' attention, Swift Energy in July quietly entered a small joint venture with Indonesia’s PT Saka Energi to develop a parcel of the Eagle Ford Shale within the largely forgotten lean gas window.
The deal might be a catalyst portending a shift in activity back toward the once-heralded Eagle Ford gas play.
The deal involves just 8,300 acres on Fasken Ranch in Webb County, Texas. Yet Saka paid $175 million cash and carry, equating to an undiscounted $56,000 per acre inclusive of production, “one of the highest prices seen in the Eagle Ford,” said SunTrust Robinson Humphrey analyst Neal Dingmann. Dry gas has not transacted for this kind of premium since the price collapse.
Most analysts were unimpressed, however, and lukewarm on the deal’s ability to move the Street in spite of projected production growth (ie. no liquids production). The real motivation behind the partnership might be more prescient.
“We have a longer-term view on gas,” said Swift Energy president Bruce Vincent. “We think South Texas is best-positioned of any resource play in the country to participate in LNG export, and we want to carve out a position in that.”
Some 90% of planned liquefaction plants are along the Gulf Coast, oh so close to the prolific Eagle Ford. Too, the bulk of end users will be Asian buyers, which like to build relationships years ahead of entering a transaction. Add to that, events in Ukraine have amped the urgency for European nations to source gas elsewhere.
“You’ve got to stake a position early on,” Vincent said. “You can’t wait until it has actually happened.”
Vincent also believes Swift Energy’s strategy will benefit from increased Mexican gas demand. In August, Bentek Energy reported expanded export capacity of 3.5 billion cubic feet per day (Bcf/d) cross-border, and Mexico’s power demand alone will ramp from 2.5 Bcf/d to 6 Bcf/d by 2015, according to the energy market analyst.
But no one wants to drill dry gas now, right? Other operators are on record defecting from the Eagle Ford dry gas window, letting acreage expire without looking back.
“People think gas is a bad word because prices are low, but it just goes back to economics,” Vincent explained. “We’ve significantly enhanced our drilling and completion technique to where we’re delivering superior returns in the dry gas window.”
How superior? Over 100% internal rate of return on Fasken, measured at $4.25/Mcf. The breakeven? $2.78, per KeyBanc Capital Markets research.
“That’s better than the Utica condensate, the Wolfcamp Midland Basin, Eagle Ford oil, the Middle Bakken and the Wattenberg Niobrara,” said Vincent. “It’s the lowest breakeven price of virtually every gas play in the U.S., including the southwest Marcellus dry and northeast Marcellus dry cores. Fasken is very economic.”
Vincent first credits great rock, identified through 3-D seismic, to deliver such economics in a challenged gas tape. Contrary to popular belief, the Eagle Ford’s rock quality varies substantially. Hitting the sweet spot of the zone is also crucial, and the company aims for a 30-foot to 40-foot vertical section of the lower Eagle Ford where porosity and total organic content are highest.
Rather than “geometric” completions, in which stages are evenly distributed along the wellbore, Swift Energy logs the openhole lateral, which allows the company to group similar quality rock as determined by frack gradient in each stage. “We call it engineered completions—the rock quality varies more than originally anticipated.” The company is also deploying “a lot more sand” to boost its completions.
With Marcellus-esque results, Swift Energy’s last seven wells have debuted above 20 MMcf/d, with 60-day averages holding from 13 MMcf/d to 20 MMcf/d.
“We’re getting dramatically improved results” with the new techniques, he said. Such results are transferring to its liquids-rich Eagle Ford acreage as well.
But Fasken Ranch has limited running room, with 58 locations remaining at 114-acre spacing as of year-end 2013. Is the Houston-based operator looking to expand?
“Our focus on the Eagle Ford Shale gives us a competitive advantage, particularly when it comes to evaluating dry-gas acreage,” Vincent said. “We are actively sourcing opportunities to lease outright, farm in and partner into positions that we believe have not been fully evaluated using leading technology.”
At roughly $500 per dry gas acre, other operators will soon recognize the vast economic potential of the Eagle Ford gas phase, but not before Swift Energy stakes its claim.
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