In recent years, high oil prices and improvements in drilling and completion technologies have allowed operators to ramp up activity in East Texas.The increasing rig count has gone hand-in-hand with A&D activity, with more than $6 billion in transactions consummated since 2010.Technology alone doesn't explain this activity: as with the Permian Basin, East Texas' unique geology provides multiple stacked targets suitable for horizontal and vertical development.

Geology.East Texas has been a prolific hydrocarbon province for nearly a century, and the industry's understanding of the region's geology has continued to improve as more control becomes available.At least three plays, the Eagle Ford, Woodbine (or “Eaglebine”) and Buda-Rose plays have all been driven by advances in technology, notably in the counties between the Cretaceous shelf-edge (to the south) and the Houston Arch (to the north).Geologic research suggests that this area is a separate paleo sub-basin, the “Brazos Basin,” associated with the formation of the Gulf of Mexico.The Woodbine and Buda-Rose plays each have vintage analogs, while the Eagle Ford shale play is an extension of the purely modern shale play that has revitalized South Texas.

Increasing activity.In the last year, rig count in the counties encompassing the Brazos Basin has approximately doubled.There are multiple companies with active drilling programs in the area, including Halcón Resources, EnerVest, Anadarko Petroleum, Meidu (formerly Woodbine Acquisition), Encana, Apache, Clayton Williams, Sequitur Energy, Devon Energy, EOG Resources and ZaZa Energy, to name a few.Many of these companies have been making significant bets in the Brazos Basin.

In mid-2013, Halcón began focusing on its “El Halcón” Eagle Ford play in Brazos County and is close to achieving its goal of leasing 100,000 net acres.Halcón plans to run three to four rigs in the play in 2014, and its Honza 1H well came online in third-quarter 2013 at 1,262 barrels of oil equivalent (BOE) per day, a record for Halcón in the area.

In April 2013, Contango Oil & Gas acquired Crimson Exploration for just over $420 million.Contango has about 19,000 net acres in Madison and Grimes counties prospective for the Woodbine, Buda, Georgetown and Eagle Ford.The reported 30-day initial production (IP) rates from 14 producing wells average approximately 700 BOE per day.

In mid-2013, Woodbine Acquisition LLC sold the majority of its assets to Meidu Holding Co. in a transaction valued at $535 million.The Woodbine Acquisition assets cover approximately 15,000 net acres in Brazos, Madison and Grimes counties, with production of about 5,000 BOE per day.Since acquiring Woodbine Acquisition, Meidu has drilled or permitted more than 25 wells on its acreage.

The region has also seen a large number of asset transactions and joint ventures, many associated with private-equity backed companies, such as the 2013 sale of EnCap-backed Navidad Resources to Sequitur Energy.Many buyers, especially private-equity-backed companies such as Sequitur, don't report transaction values and associated reserve and production metrics.However, those that have been reported are consistent with the greater East Texas area, which averaged about $15 per BOE and $70,400 per BOE per day in 2013.

In fact, 2013 was a big year for the Brazos Basin area, with more than $1.3 billion in deals consummated.This is a huge increase over 2011 and 2012 combined, reflecting a recognition by operators of the region's tremendous stacked-pay potential.ZaZa's latest investor presentation shows Eaglebine and Buda-Rose type curves of 989,000 BOE and 250,000 BOE, respectively, and notes significant increases in land costs since ZaZa began leasing.

The Brazos Basin covers a fairly small area, so whether the level of activity seen over the past few years continues will depend on drilling results, which many companies have been cautious about publicizing.But for now the combination of prolific geology and technology seems to be working.

—Randy Byrne, randybyrne@macquarie.com; Bob McKenzie, bob.mckenzie@macquaire.com; David Hopkins, david.hopkins@macquarie.com

Source: IHS Herold and public company investor presentations

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