A figure in EOG’s latest slide deck makes that point pretty clearly (see Figure 1). The figure charts the average API gravity of oil produced by all producers with greater than 5 million barrels of cumulative Eagle Ford production.
API gravity is inversely proportional to density. Heavy crude is low API; light crude is in the 38 to 45 range. Condensate is essentially very light oil, with an API above 45. Looking at the chart, it becomes clear that much of the liquid produced in the Eagle Ford is actually condensate, not light oil.
That could become significant for companies like Chesapeake Energy Corporation (NYSE:CHK) if condensate prices were to weaken. Chesapeake’s built a strong acreage portfolio in emergent oil shales, and its Eagle Ford acreage position (#2 in the industry) is its best oil-bearing asset.
Look at that figure again. While it’s difficult to figure out exactly who’s who, it’s clear that every large producer except EOG is producing predominantly condensate. So it’s tough to escape the conclusion that much of Chesapeake’s Eagle Ford liquids production must really be condensate.
If condensate pricing weakens, some of the significant Eagle Ford gains could be erased. The impact of that could be very damaging for the industry. Simultaneously low gas, NGL, and condensate prices are sure to have an impact on anyone not moving black oil through their pipes.
It points out one problem that investors always face when comparing companies: transparency in reporting and a lack of industry standards for some of that reporting. Many companies don’t provide enough granularity in their production stats to figure out what mix of products exists in their product stream.
Up until natural gas prices plunged, many companies reported NGLs as liquids. Now most break liquids out and report oil and NGL production independently. Likely that’s because analysts bugged them enough that they complied.
That “oil” is not all the same. Some may be heavy, some may be light, and some may be condensate. These are really different products that price independently, and that impacts revenue. Investors are left to puzzle it all out until analysts successfully pressure producers into providing more information.
If Papa’s side comment on condensate pricing becomes reality, investors in some of the Independents producing condensate in the Eagle Ford could be in for a rude replay of the NGL crash, but this time in condensate. Investors should be wary of the trend, especially if it crops up in other basins.
The article Could Condensate Pricing in the Eagle Ford Slip? originally appeared on Fool.com and is written by Peter Horn.
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