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Drillers crowded out of Permian Basin find room for returns in Eagle Ford Shale

In April, the law firm Haynes and Boone LLP asked a group of oil and gas executives to pick the next big play in the U.S. The Eagle Ford Shale was the most popular choice on the belief that it would be best-suited for producers looking for future alternatives to the Permian Basin.

That future may already be in sight.

One of the first unconventional oil plays in the world, the Eagle Ford in south Texas was a hot property in the early part of the decade, before the West Texas Permian eclipsed it. Now, with nearly all of the quality acreage in the Permian Basin off the market, service costs creeping upward and transportation shortfalls gnawing into profit margins, the Eagle Ford is again an opportunistic play.

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One of the first companies to put the Eagle Ford higher on its priority list than the Permian was ConocoPhillips in 2017. The company cited its strong data warehouse and improved drilling techniques but also pointed to lower service costs as a reason that the Eagle Ford would be a better moneymaker than the more popular Permian.

"We get great margins out of the Eagle Ford. It's not just a matter of the volumes; we've had improving margins. And while everyone else has been banging away in the Permian … there's just been less competition for goods and services in the Eagle Ford and better netbacks because there've been less people trying to jam their barrels down the same takeaway capacity," Executive Vice President Alan Hirshberg said on the company's first-quarter earnings call. "So everything about the Eagle Ford is really hitting on all cylinders for us."

The play is starting to hit on all cylinders for some independent drillers, as well. The U.S. Energy Information Administration predicted June production of 1.39 million barrels of oil per day, a level not seen since February 2016.

The 88 rigs operating in the play in April were well short of the record 268 posted in October 2014, but the figure is up nine since the start of the year. With Permian service costs rising and transportation issues becoming a serious problem in the play, observers believe the Eagle Ford rig count will probably continue to go up.

"Conoco, like any other producer with assets located in multiple basins, is allocating capital to where it can get the most bang for its buck. At the current time, that increasingly means basins other than the Permian for many producers," Raymond James analyst Muhammed Ghulam said in an interview.

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In a note discussing where independents suffering from "Permi-phobia" should look, Guggenheim analyst Subash Chandra said the Eagle Ford is the best option.

With the Midcontinent suffering from lower oil ratios and the upper Midwest's Bakken Shale faced with tougher gas capture rules, Chandra said, the Eagle Ford stands out from the competition. "We believe the Eagle Ford should get more credit. The play is closer to the refining and export markets. [Louisiana light sweet crude] pricing is strong in spot and futures markets. It is a few years younger than the Bakken in terms of development," he said.

Investors have rewarded drillers that have made the shift to the Eagle Ford and increased liquids production while containing costs. Shares in Conoco, which has also focused on debt reduction over the past year, rose 49% in the past year. Two other major Eagle Ford players, EOG Resources Inc. and Marathon Oil Corp., saw stock gains of 33% and 49%, respectively.

"Investors still are still focused on the Permian but are now beginning to realize that other plays are also important, particularly as returns in the Permian come down," Raymond James' Ghulam said.

With oil prices continuing to go up and Permian issues increasing with it, major players in the Eagle Ford are telling investors second-best is not all that bad.

"No North American basin compares with the Eagle Ford for low transportation cost and access to Gulf Coast pricing," EOG Executive Vice President Ezra Yacob said on the first-quarter earnings call.