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Why the Most Valuable Land in Texas Is Soaring in Price

By Matt Badiali, editor, S&A Resource Report
Wednesday, October 13, 2010

The Eagle Ford shale just got a whole lot more valuable.
Shale drilling has been the most important trend in the U.S. energy sector over the last decade. New technology used to extract natural gas and oil from shale is singularly responsible for an explosion of U.S. natural gas reserves.
But only recently have energy companies applied those tools to the biggest shale formation in Texas, the Eagle Ford.
The Eagle Ford begins near the Mexican border and sweeps 400 miles northeast, almost to Houston. It's starting to boom like crazy. Early investors have already begun to reap their rewards. But the play is far from over...
The giant Chinese oil company known as CNOOC just paid $1.1 billion for 30% of Chesapeake Energy's Eagle Ford acreage. And it agreed to pony up another $1.1 billion to pay for all the drilling costs. That works out to about $12,000 per acre.
This isn't the first giant national oil company in the Eagle Ford. As I told readers of DailyWealth back in July, India's giant Reliance Energy bought into Pioneer's acreage there, too. That deal worked out to over $10,000 per acre.
Earlier this week, Canadian independent Talisman and Norwegian Major Statoil, agreed to pay $1.3 billion for 97,000 acres. That's about $10,900 per acre.
The Eagle Ford contains about 25 billion barrels of recoverable oil and gas reserves, 2.5 times the recoverable oil and gas from the enormous Bakken Shale in North Dakota. The wells produce a rich mixture of condensate and natural gas.
Independent explorer Petrohawk, which kicked off the discovery, is producing more than 63 million cubic feet of natural gas and 1,000 barrels of liquids (like butane and gasoline) per day. Results like that are what caused an explosion of interest in the Eagle Ford.
According to news reports, Chesapeake Energy plans to quadruple the number of rigs operating in the play, from 10 to 40 in the next 18 months or so. The company hopes to hit 500,000 barrels per day from the field by 2020.
I visited the Eagle Ford this summer. I was impressed with the scale and success of the companies early in the play. And I told my S&A Resource Report readers about three ways to invest here. We're up 17% and 27%, respectively, on two high-income plays. That's a good return on our three-month-old investment, and I think there's a long way to go...
The third, up "only" 24% in just three months, is Magnum Hunter (MHR). Magnum Hunter owns 17,285 acres in the Eagle Ford shale. At the current price per acre for Eagle Ford leases, its Eagle Ford acreage makes up about half its market value.
With huge deals going through in the Eagle Ford at about $10,000 per acre, the best way for a new investor to find a deal here is to do rough math. Figure out how many acres a company owns. Then multiply that by $10,000... If the final number is smaller than the company's market cap, you found a reasonable investment.
We're going to see more appreciation among Eagle Ford companies. As more companies come in, we'll probably see some outright acquisitions – which will lead to a major payday for shareholders.
Good investing,
Matt Badiali

Further Reading:

In the Eagle Ford, also known as "Texas' oil kitchen," drillers may have found the greatest payday they'll ever hit. Find more from Matt on how to invest in what could be the largest oil discovery in the U.S. here: How to Double Your Money in the Next Great Texas Oil Field.
And for the inside story on the Eagle Ford from a real Texas wildcatter, read Porter's recent essay: The Most Important U.S. Oil Discovery in 40 Years.

Market Notes


All of these moves can thank the extreme weakness in the U.S. dollar for their power.
The dollar is the world's most important paper currency. And last month, Ben Bernanke told the world he'd print as much of it as needed to fight off a recession. The market has responded to this inflationary talk by clobbering the value of the dollar by more than 6%... a gigantic move for a major currency. Money rushed into real "hard assets" like copper and silver as a result.
Before you rush more money into commodities, make sure to note the chart below. It shows the past 18 months of trading in the U.S. dollar. While the dollar has long-term problems, its recent down move has left it stretched like crazy to the downside. The best bet over the short term is that the dollar rises and the extreme move in commodities gives back some of its gains.

The dollar is oversold and due for a relief rally

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