Could Condensate Pricing in the Eagle Ford Slip? – EOG Resources Inc (EOG), Devon Energy Corp (DVN)

Page 1 of 2

EOG Resources Inc (NYSE:EOG)’s latest slide deck has an interesting scrap of information. Its significance was highlighted by a late question buried at the end of its quarterly conference call. Mark Papa revealed that EOG is seeing signs of weakness in Eagle Ford condensate pricing. If condensate prices weaken significantly, the impact on Eagle Ford producers could be significant, providing double trouble in this period of weak natural gas pricing.

Some good information can be found on the internet, if you’re willing to dig for it. Message boards and investment sites allow retail investors to share information, digging up scuttlebutt on the companies they follow. A grain of salt is sometimes required, but a remarkably wide array of information is available to those that look for it.

EOG Resources Inc (NYSE:EOG)

A recent exchange on the Motley Fool’s message boards called attention to EOG Resources Inc (NYSE:EOG)’s most recent slide deck and its quarterly conference call. One particularly well-informed poster questioned if condensate pricing might be ready for a drop based on comments made by EOG Chairman and CEO, Mark Papa, on EOG’s earnings call.

EOG Resources Inc (NYSE:EOG) led the current move by Independent E&Ps into the oil shale, and Papa is a big oil bull and natural gas bear. In fact, EOG is bearish very long term on natural gas. However, some feel that gas is due for a correction as supplies diminish as a result of the industry reducing rig counts on the major gas producing shales.

Papa thinks that’s wrong. Dead wrong.

As natural gas prices fell, independents shifted drilling to ‘wet’ gas acreage that produced natural gas liquids (NGLs) to supplement falling gas revenue. NGL pricing subsequently collapsed under the weight of the resulting NGL oversupply, particularly in the ethane market. Papa’s quick to point out that the NGL crunch has simply led to more and more combined production.

A ‘combo’ play refers to acreage that produces both oil and gas, typically in the realm of a 50:50 mix. The oil off the wells boost returns enough, raising return on investment and making the wells economic.

The Barnett combo play’s been particularly important for large cap independents with predominantly gas-oriented acreage portfolios, most notably Devon Energy Corp (NYSE:DVN). Everyone has some stake in the Barnett, but Devon’s still valuable Barnett acreage is huge, and the combo acreage provides some all-important oil to offset weakening gas revenue.

That allows companies like Devon Energy Corp (NYSE:DVN) to keep drilling their Barnett acreage, preventing the draw down in supply some predict and keeping a roof on gas prices for the foreseeable future.

Condensate too?

More interesting was a question by a Morgan Stanley analyst about condensate.  When asked for some color on condensate pricing, Papa replied that there was “definitely a difficulty in marketing the condensate in the Eagle Ford area.” That’s a scary data point.

Condensate is usually booked as oil when companies report production. It also usually prices close to oil. These are larger hydrocarbons, with a composition similar to gasoline. It still needs refining, of course, and the difficulty is that Texas refinery capacity for the stuff is low.

That’s apparently leading to a build-up of condensate in Texas, if Papa’s comment is any indication. That could be significant for some of the Eagle Ford producers. The trend is a major oil production source that EOG’s predicting could surpass the Bakken in a couple of years.

That makes it a very hot trend that everyone’s chasing, but the Eagle Ford is not homogeneous. There’s a lot of variation in oil content in different regions. The northern regions are rich in oil, while the southern edges of the formation are gas rich. Intervening regions are condensate rich.

If you’re in the wrong neighborhood, you’re not getting light oil, the most valuable product. You’re producing condensate, or worse yet, gas. If condensate prices soften that could squeeze some operators’ margins.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Bloodiest UFC Fights Ever Fought

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!