Devon Energy’s acquisition
Devon Energy acquired properties that it stated were in the “core” of the Eagle Ford play in South Texas. The properties were mainly located in DeWitt and Lavaca counties. It’s more economical to drill for oil in gas in some areas than in others. Areas identified as the “core” of certain plays are recognized to be more prolific.
According to Devon, the acquisition is located in the premier portion of the Eagle Ford play with some of the most attractive economics in the area. In a presentation by the company showing well results across the Eagle Ford play, the acquired acreage is situated in some of the Eagle Ford’s most prolific areas. The map shows the 30-day IP or Initial Production rate, using the industry standard 6:1 ratio for oil and gas (one barrel of oil roughly equivalent to 6 thousand cubic feet of natural gas on an energy equivalent basis). For example, if a well’s initial production rate were 800 barrels of oil per day and 1,200 mcf of natural gas per day, the IP rate in barrels of oil equivalent (or boe) would be 800 + 1,200 / 6, or 1,000 boe per day. In this map, Devon’s acreage looks to be situated in an area with some of the most prolific wells.
While on an energy equivalent basis, the 6:1 ratio applies, the economics are actually quite different. One barrel of oil is roughly 6 thousand cubic feet (or mcf) of gas in terms of energy value. But currently, WTI crude oil (the U.S. benchmark) trades at around $95 per barrel, whereas 1 mcf of natural gas trades at around $3.75—or roughly a 25:1 ratio in terms of price. To further adjust for this, Devon shows another map using a 20:1 ratio. (While current economics are ~25:1, Devon’s use of 20:1 is close enough to make the point.) This means that the same well that produced 800 barrels of oil per day and 1,200 thousand feet of gas that were equivalent to 900 boe per day using a 6:1 ratio would be 800 + 1,200 / 20 = 860 boe per day using a 20:1 ratio. As we’ve seen, using the 20:1 ratio more reflects the actual economics between oil and gas right now. In the map using the 20:1 ratio, it appears that Devon’s acreage is located in one of the best parts of the play.
Another chart Devon provided shows that initial production rates from its acquired acreage appear to top its Eagle Ford peers.