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10/16/13 at 09:49 AM

It's the biggest growth story in the sector.  Yesterday, I showed you how oil production in the Eagle Ford shale is soaring. This massive field in southwestern Texas is on track to hit a million barrels a day by this time next year.  Global oil companies are pouring billions of dollars into developing this field. But I'm more interested in the smaller producers.
Eagle Ford's massive growth could propel these companies to double- or triple-digit returns in a year or two…

The Eagle Ford is one of the country's top shale fields for three reasons…

First, Eagle Ford oil is "light and sweet." It's low in sulfur, and refiners can make more diesel and gasoline with it. So it sells at a premium to the U.S. benchmark West Texas Intermediate crude price.

Second, it's easy to move the oil. If you can't get your product to buyers, it's not worth much. But the Eagle Ford is close to both Houston and the port of Corpus Christi. In other words, producers have options: They can pipe the oil to Houston refineries or ship it to refineries on the East Coast of the U.S., depending on who's paying the best price.

The third benefit to Eagle Ford producers is that the rocks are "de-risked."

Exploring for oil isn't like operating in other industries. It's almost impossible to build a McDonald's and lose all the money you invested. But it happens all the time in oil exploration… Every time a producer drills a well, there's a chance it'll lose all its capital.

But drilling in the Eagle Ford is a lot closer to building a fast-food joint. We know the rocks hold oil… a lot of oil.

Thanks to new technology, some wells can produce 10 times the volume of oil they did just four years ago. Independent oil company EOG now routinely drills wells that produce 2,015 barrels of oil equivalent per day to start… up from roughly 150 barrels per day a few years ago.

Even more important is a trend called "downspacing."

A conventional oilfield is like a pitcher of water. The more straws in it, the faster the oil level goes down. But in the Eagle Ford, the oil is held in a relatively small section of rock. Each well is its own small "pitcher." Wells can be much closer together before they begin to suck out the same oil.

In short, companies can drill more wells – and double or triple the amount of oil they produce – without spending money on new land.

In the early days of drilling in the Eagle Ford, companies spaced their wells about 240 acres apart. In other words, they separated wells by nearly 2,000 feet.

But Eagle Ford wells didn't need 240 acres (nearly 2,000 feet).

Even that was too much. Some operators are down to 40 acres today… just 330 feet between the wells.

In other words, you can fit six wells in the same space you could have fit only two wells in before.

Let me use a real example from Penn Virginia, a small oil and gas producer in the Eagle Ford. It used to use 128-acre spacing – about 1,155 feet between its wells. It cut that down to roughly 53-acre spacing, which is about 400 feet between the wells.

Oil recovery went up from 3,600 barrels per acre to 8,125 barrels per acre. The value of the land more than doubled, from about $65,000 an acre to $148,000.

There is another huge benefit to downspacing…

The Eagle Ford's oil reserves – oil that we know can be produced economically at the current oil price – increased from 133 million barrels in 2009 to 1.1 billion barrels in 2011 (the latest data available).

That's a 760% increase in just two years.

This kind of growth is going to provide solid returns for the big producers in the area, including BHP Billiton, EOG Resources, and Marathon Oil. But investors will see bigger profits in the smaller companies, where Eagle Ford growth can really "move the needle."

Over the next two to three years, their production is likely to grow tremendously. That's going to translate into much higher share prices.

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