Until the price of oil hits $60 a barrel ¿ without falling ¿ investors may want to be cautious of oil and gas companies operating largely in Texas' Eaglebine region.
"The Eaglebine is an 'emerging' shale play that never quite emerged," Housley Carr of RBN Energy, an energy-focused analytics and consulting firm, wrote Sunday.
While the region may be rich in resources, timing and logistics make it difficult to operate profitably.
The chart below shows the increase in interest in Eaglebine from 2011 through the end of 2014 when oil prices were high. At the end of 2014 there were nearly 50 rigs in operation in the region. However, as the fall in oil prices, which began in summer 2014, proved to be more than a blip, rig counts fell dramatically. Carr knows of only one rig currently in operation in Eaglebine.
Although the Eaglebine region could prove to be an enticing play, the economics of drilling there are less enticing at current prices. Eaglebine has a large percentage of silica-rich sands, which makes production more complicated, Carr wrote. Within that sand, Eaglebine has high hydrocarbon potential but getting to it -- and then transporting it -- is difficult. The region has little pipeline capacity to transport crude, which means that much of the oil there is moved by truck -- representing increased time and costs.
The wait for Eaglebine to become profitable may be too long for players in the region.
"With WTI prices still below $50 a barrel, and with the forward curve suggesting prices won't rise beyond the mid-$50s anytime soon, it may well take some time for drillers and producers to return in significant numbers to the Eaglebine," Carr wrote.
For example, just last week, Halcon Resources (HK) announced plans to restructure its balance sheet through an accelerated pre-packaged Chapter 11 bankruptcy filing. Halcon's primary drilling operations are in North Dakota's Bakken region and in South Texas on the cusp of the Eagle Ford and Eaglebine regions. During a call with analysts earlier this month, management said that it paused drilling in the Eaglebine, though it still believes it is a "wonderful asset."
Eaglebine could prove to be a more profitable play if oil rebounds but it will also require transportation capacity being added to the region.
Until those projects materialize, however, it isn't enough for energy investors to wait for oil to get above $50 a barrel to see better portfolio returns. They must also pay close attention to where energy companies do business.