This shale field is revealing itself to be much bigger than anyone thought, and these players find themselves swimming in black gold opportunities, writes David Zeiler of Money Morning.
The shale oil boom is turning out to be even bigger than anyone predicted.
Recently, Money Morning told you about the Bakken oil shale boom. The Eagle Ford shale oil formation in south Texas is nearly as large, and production there is ramping up rapidly.
Eagle Ford is among the largest US shale oil deposits, with recoverable reserves estimated as high as 7 to 10 billion barrels. But Eagle Ford is also "liquids-rich." That means it has a high concentration of oil versus gas—a major attraction at a time when oil prices are high and natural gas prices are at historic lows.
Many oil companies are eager to get in on the action at Eagle Ford, and expectations are running high. "We are evaluating a series of projects...that could literally double our company's earnings over the next few years," Curt Anastasio, CEO of NuStar Energy (NS), told Reuters.
Another oil-company CEO, Bill Klesse of Valero Energy (VLO), thinks Eagle Ford could have an impact even beyond bigger profits. "It's going to back out sweet crude imports into the United States, and that's going to happen by 2014," he predicted, speaking at Valero's annual meeting earlier this month.
Indeed, the statistics coming out surrounding the Eagle Ford shale oil operations are impressive. Data from the Texas Railroad Commission, which regulates energy in the state, tells an amazing story: Shale oil production increased nearly sevenfold from 2010 to 2011, from an average of just less than 12,000 barrels a day to about 83,400 barrels a day.
That could explode to 500,000 barrels a day by the end of 2012, Klesse said, with output expected to double to 1 million barrels a day "in the next few years."
Impact of Eagle Ford Underestimated
Eagle Ford has progressed so quickly that a forecast of its economic benefits became outdated almost as soon as it was issued last year.
A study by the Center for Community and Business Research at the University of Texas San Antonio's Institute for Economic Development in early 2011 projected the Eagle Ford formation would directly and indirectly contribute $21.5 billion and 68,000 full-time jobs to the 20-county South Texas region by 2020.
Last week, UTSA released a follow-up study. It found the Eagle Ford contributed $25 billion to the local economy in 2011—$3.5 billion more than the 2020 projection.
The new UTSA study says Eagle Ford will pump about $62.3 billion into the local economy by 2021. The job creation number has increased to nearly 117,000.
"We view the Eagle Ford activity as an economic opportunity of a lifetime," said Mario Hernandez, president of the San Antonio Economic Development Foundation. "The key goal is the increase in investment and jobs. And if the communities will partner with the private companies that are creating these jobs, it can be a win-win for everybody."
Growth that outruns forecasts is good news for investors. Money Morning has sorted through the many choices to zero in on five Eagle Ford shale oil stocks that could do particularly well:
NuStar Energy (NS)
Spun off from Valero, NuStar is an oil transportation company that currently operates two pipelines out of Eagle Ford. Analysts have concerns about declining earnings per share and a disappointing return on equity, although that is partly due to heavy investments made in drilling infrastructure.
On the other hand, cash flow is strong, and revenue growth in the most recent quarter was up 40.6% year over year. And recall what CEO Anastasio said about Eagle Ford doubling its earnings.
NuStar's P/E of 19.5 is lower than the industry average of 21.7. Though shares are down 6.1% so far this year, to $51.89, the one-year average price target is $58.50. But perhaps the best reason to look at NuStar—a master limited partnership—is the dividend. It pays an eye-popping yield of 8.2%.
Valero Energy (VLO)
Valero's refining operations are drawing great benefit from the rapidly rising Eagle Ford output. In fact, its Houston refinery, which once imported all of its crude from West Africa, now uses only US crude. Since Valero pays less for the domestic crude, the savings should drop to the bottom line.
Many analysts consider VLO undervalued with a P/E of just 7.77. They also see EPS growth of 15.1% in 2012 and 14.9% in 2013. VLO pays a dividend of 60 cents, for a yield of 2.8%.
Murphy Oil (MUR): Murphy already has 61 producing wells in the Eagle Ford. The company expects daily production to rise more than 50% this year over 2011 levels of 10,000 barrels per day. It expects to hit 48,000 barrels per day by 2015.
MUR has a low P/E of 10.06, and at $46.29 is also trading below its book value of $46.97. The stock is down 27.7% since late February, partly due to recent earnings disappointments. But estimates for the current quarter have been rising. Long-term, Murphy is a buy.
Boardwalk Pipeline Partners LP (BWP)
Boardwalk, a pipeline and storage company, is a play on Eagle Ford's shale gas deposits. The company announced two deals in February with Statoil (STO) and Talisman Energy (TLM) in connection with its latest Eagle Ford expansion project.
BWP had a good first quarter, with profits up 12% despite historically low natural gas prices. Boardwalk also raised its dividend for the sixth year in a row, and now pays $2.13 a share for an impressive yield of 7.8%. With a beta of just 0.51, BWP is significantly less volatile than most other energy stocks.
Forest Oil Corp (FST)
Forest is a smallish oil and gas producer in Eagle Ford. Its $1.8 billion in debt is a bit troubling, but those investments are on the verge of paying off as production accelerates.
With a market cap of just $1 billion, however, Forest Oil is a prime takeover target. Such a deal would deliver a big payoff to investors. Consider that just last week, Marathon Oil (MRO) bought privately held Paloma Partners for $767 million to get 17,000 acres in Eagle Ford. Forest owns 118,000 acres in Eagle Ford in addition to large holdings in other shale oil formations in Texas and Louisiana.
FST has a reasonable P/E of 9.48, but pays no dividend. The one-year target is $15.58.
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