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Raub Report July 2012

July 5, 2012

Think of an egg and the little chicken inside is breaking out.  I believe this is an apt analogy for what is happening to our South Texas region as a result of the Eagle Ford Shale drilling boom.  The old dry shell has cracked open from the inside and a little chick emerges to become a big rooster.  There is a newspaper article every day about the Eagle Ford drilling and  I have also been to a number of presentations on Eagle Ford activity.  Here are some take-aways I think are relevant to commercial real estate and investing in San Antonio.

While the first ever fracking well was drilled in 2002, the first in the Eagle Ford was in 2008.  The estimates are that the Eagle Ford play will be slightly larger than the Bakken play in North Dakota, and each separately are twice the Prudhoe Bay field in Alaska.  While we Texans have been down this road of oil booms and busts many times since Spindletop in 1901, the consistent estimates are that this will be a “multi-generational” production play.  There were 94 permits given in 2009; over 2,800 in 2011.  There are about 260 active rigs now, but the estimate for the entire build out of the Eagle Ford is over 22,000 wells. It may take 20 years to drill all of those wells and each well may have a 20 year life span. So the last wells will still be productive 40 years from now.  Then, there are one to two more shale plays beneath the Eagle Ford!

Conclusion: This is real.  Many companies have made large commitments to the field including Chesapeake, Lewis, Halliburton, Schlumberger, Weatherford, Baker Hughes, and many others.

Result: The extremely rural South Texas landscape is changing irreversibly.

Here are some stories: #1. The high school principal at Cuero High School is extremely concerned because so few of his boys are graduating.  The oil companies are offering jobs as soon as they can get their commercial driver’s license at pay twice what their fathers make.  #2.  One of the local sheriffs lost 2 of his deputies who were hired away by an oil drilling company.  They left $40,000 a year jobs to take $80,000 per year jobs.  Then, adding insult to injury he had to hire replacements at $60,000.  But to soften the blow the county’s tax income has hugely increased.  #3. One stretch of I-35 is so jammed that the fatalities average one a day.  #4. A company not related to the oil industry was bought out and the new owners are going to double the employees from 600 to 1200 because the area is coming alive. #5. The banks are so flush with cash no one wants to borrow money; the loans have been paid off and the regulators are unhappy with banks having too much cash.  #6. Some small towns will not allow new restaurants to open until they can prove from where the new employees are going to come.  Everyone is town already has a job.

The cities lack the ability to expand because they have never had to do so before.  To provide permanent housing requires more water supply, more sewer treatment, more streets and repairs, and on and on.   IRC Builders Funding, Ltd. is beginning to underwrite a few interim construction loans for pre-sold homes in Eagle Ford towns.  Others we know are developing home lots in cities where there is good infrastructure but no new homes have been built for 30 years.

The total salaries currently being earned from the Eagle Ford exceed $3-billion per year.  Much of that will be spent in San Antonio, the only major metropolis along with Corpus Christi in the region.  The jobs in the Eagle Ford are expected to reach 117,000 in the next 9 years.  In San Antonio, 20,000 new jobs a year is very good; we are projected to increase 150,000 jobs over the next five years.   The impact of the Eagle Ford on San Antonio and commercial real estate will be substantial and, I believe, sustained.  This little chicken could crow.

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