Forest Oil (NYSE: FST) Taps Eagle Ford Shale

Brian Hicks

Written By Brian Hicks

Posted April 15, 2013

Forest Oil (NYSE: FST) will get some relief in the form of Schlumberger Ltd (NYSE: SLB).

After facing heavy debt and decreasing cash flow from the depreciation of natural gas, Forest Oil has accepted Schlumberger as its drilling partner in Eagle Ford Shale.

The company has raised $600 million since last year in divestment funds to offset costs after natural gas prices dropped due to rampant production across the country.

As a result of the price drop, many companies are shifting to oil to maintain costs. And that’s what Forest is doing in its deal with Schlumberger.

Schlumberger will pay $90 million in carrying costs until the end of 2014 in exchange for a 50 percent interest in Forest’s Eagle Shale projects. This also includes reservoir management and completion and lifting technology, as reported by Reuters. Both companies will then share drilling costs equally.

This partnership comes at just the right moment for Forest, since the company plans an accelerated development plan for 2013 and 2014 at a cost of $125 million for the first year and $220 million for the second. There will be 10 net additional wells underway in 2013 and 20 in 2014.

The acceleration will also include 55,000 gross acres in Gonzales County, according to 4-Traders. Within the new acreage, there will be 688 gross wells with an anticipated 80 new wells per year beginning in 2014.

Sales are expected to surge from 1,600 bpd in 2012 to 6,500 bpd in 2014.

An agreement like this one between Forest Oil/Schlumberger is a good way for companies to work together in lowering the burden of higher costs. It is certainly a trend that could continue as more companies want to throw their hats into the Eagle Ford Shale.

Eagle Ford Shale

The Eagle Ford Shale is part of the Texas oil boom, and some of the world’s largest expenditure capital is concentrated in the region. The area begins at the South Texas and Mexican border and stretches to East Texas.

Eagle Ford map 4-15Source: Railroad Commission of Texas

At the beginning of 2013, the region yielded 374,231 bpd in oil production, 1,223 million cubic feet per day (MMCF) of natural gas, and 52,734 bpd of condensate, according to the Railroad Commission of Texas. Eagle Ford has contributed over $60 billion to the Texas economy, with over 116,000 jobs across 20 counties.

The Seattle Times reports that oil from the Eagle Ford could reach 900,000 bpd by 2016.

An estimated 3 billion barrels of oil is said to be in Eagle Ford that can be reached by way of fracking and horizontal drilling. The first well in Eagle Ford was drilled in 2008, with only 352 barrels in the first year. The current production volume of over 300,000 shows how big of a role technology played in the Eagle Ford successes.

Eagle Ford Investment

For oil companies and investors, oil is the place to be, and Eagle Ford is one of the hottest places to invest in Texas.

There has been far too much production of natural gas for companies to make a decent profit on the market. Unless prices rise or companies are able to export natural gas abroad, many companies are sticking with the safest bet, which happens to be oil.

Major players in Eagle Ford include Anadarko Petroleum Corporation (NYSE: APC), Magellan Midstream Partners LP (NYSE: MMP), and ConocoPhillips (NYSE: COP), all of which are not only heavy drillers in the region, but have also contributed pipeline and other infrastructure projects in the area.

The region also makes use of a refinery owned by Valero Energy Corporation (NYSE: VLO), which refines 100,000 bpd of crude, and Lazarus Energy LLC’s Nixon Refinery, which refines 15,000 bpd.

Texas oil is one of the most lucrative areas of energy investment in the U.S. outside of the Bakken oil. According to the Seattle Times, Texas is catching up to North Dakota in regards to county growth, with housing shortages in West Texas and other areas.

Southern Texas is one of the fast growing economies in the United States.

With the Permian Basin in West Texas, the Eagle Ford Shale in the south, and the Haynesville Shale in the east, Texas is a positive front for shale oil investment.

If economic conditions permit, oil production could reach over 3 million bpd in Texas by 2020.

According to the Federal Reserve Bank of Dallas, one of out every 50 jobs originates from the Eagle Ford.

Teenagers graduating from high school can make $75,000 a year driving trucks, as reported by Fuel Fix, and typical low-wage entry jobs like dish washing can pay up to $15 an hour. Compensation packages for landowner mineral rights go for $1,500 per acre.

As an investor, these are the things you want to hear when considering investment in any region. A bustling economy with fewer regulations and high worker demand is just icing on the cake for Texas oil.


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