While the Bakken and Eagle Ford shales are liquids-rich plays with similar well economics, the development of each play has differed, due in part to macroeconomic conditions and differences in infrastructure development. Because the Bakken is more mature than the Eagle Ford, analyzing its historical transaction trends provides insight into the current development phase and likely near-term events in the Eagle Ford.

The Bakken

The Bakken rig count grew from nearly 100 to more than 200 from early 2007 through 2008. Although the Bakken appeared to be prepared for further growth, depressed oil prices in early 2009 and macroeconomic events led to a 50% decrease in the rig count. Although the number of transactions in the Bakken increased, the average transaction value fell dramatically from $956 million in 2008 to $24 million in 2009. The stagnation in mergers and acquisitions (M&A) activity effectively delayed investment and development in the Bakken.

Recovery in the oil and gas markets resulted in robust M&A. Transaction values in the play increased from $118 million in 2009 to $4.6 billion in 2010, increasing to $7.4 billion by the end of 2012.

Following 2011, acreage transactions as a percentage of total transactions began to fall, and continue to fall through 2014 as development progresses, signaling the transition from a growth phase into a more mature phase of the basin life cycle, characterized by a large influx of proved transactions. Since 2012, M&A activity has declined steadily, most likely due to the rising price of entry relative to remaining undeveloped potential.

This declining M&A activity trend is likely to continue in 2015 and 2016; however, larger corporate consolidation may reverse the trend as the basin becomes more de-risked.

The Eagle Ford

The developing of the Bakken provides a strong analogy to the potential lifecycle of the Eagle Ford. However, there are a few key differentials.

Relative to the Bakken, the Eagle Ford developed at an accelerated rate due to a few key factors. First, development was not marred by depressed oil prices and a market recession. Second, the Eagle Ford is in South Texas with access to sizable legacy pipeline infrastructure. Finally, development in the Eagle Ford accelerated at a much faster pace due to operators’ shorter learning curves gleaned from Bakken development as well as other unconventional plays.

Prior to 2010, there was little activity in the Eagle Ford. However, in 2010, there were 22 transactions, 60% acreage transactions, and the rig count increased by almost 100% year-over-year.

Since 2013, the trend in types of transactions in the Eagle Ford has switched from primarily undeveloped acreage transactions to primarily proved and mixed transactions.

This indicates the Eagle Ford is reaching a similar level of maturity a year earlier than the Bakken. Further examination of the transaction data yields an even stronger trend. When the number of acreage transactions begins to fall, mixed transactions--those that have both a proved and an acreage component--exceed the number of proved transactions.

In 2011, acreage transactions in the Bakken greatly outnumbered both mixed and proved; however, in 2012 acreage transactions fell significantly, but mixed transactions reached record highs. Following 2012, Bakken acreage transactions continued to fall, mixed transactions began to taper and proved transactions comprised a majority of all of the transactions, indicating the play had matured.

The Eagle Ford is following a similar lifecycle as the Bakken. Analysis of the transaction data supports this.

Acreage transactions accounted for a majority of the M&A activity early in the development of the Eagle Ford. As development progressed, the number of acreage transactions continued to fall. In 2013, the land-grab phase in the Eagle Ford effectively ended, with acreage transactions falling below 50% of total M&A activity. Market activity mirrored that of the Bakken. In 2012, mixed transactions accounted for 75% of total transaction activity.

In 2013, mixed transactions began to fall. First-half 2014 indicates proved transactions will account for a majority of transaction activity, with proved transactions outnumbering mixed 5-to-1. These statistics indicate that the Eagle Ford’s development lags the Bakken’s by about one year.

As the cost of acquiring proved reserves with declining upside increases, new entrants to these plays will likely decline. If these trends continue, transaction activity in both of these plays will consist almost entirely of consolidation among current basin operators.

--Buddy Carruth and Chase Machemehl, Scotia Waterous, buddy.carruth@scotiabank.com