As operators hone their drilling and fracturing techniques, production costs in shale oil and gas plays have trended lower. Much of this effort focuses on identifying the best fracturing fluids as well as ideal well lengths and spacing.

That the US has managed to grow its overall oil and gas output at a time when production offshore Alaska and the Gulf of Mexico has declined is a testament to the quality of the onshore shale plays. In 2009 and 2010, the US managed to grow its total oil production for the first time in decades, while the nation surpassed Russia as the world’s leading gas producer in 2010.

The appeal of US shale plays to international oil companies is simple: These assets offer low-risk production growth in a politically stable nation–an increasingly rare combination. Acquirers also hope that the experience gained in US shale fields will enable them to exploit similar resources in other regions.

Investors looking for M&A activity in energy should focus on names with exposure to one or more of four unconventional fields: the Marcellus Shale, the Bakken Shale, the Eagle Ford Shale and the Permian Basin.

Of these plays, the Marcellus Shale is the lone natural gas play, but portions of the field contain meaningful quantities of ethane, an in-demand NGL that boosts wellhead economics. Moreover, the prolific nature of the Marcellus Shale and certain geological characteristics make the field one of the lowest-cost major plays in the US. The Marcellus Shale also benefits from its proximity to the Northeast and Mid-Atlantic markets, two regions that are major gas consumers.

Producers with acreage in the core of the Bakken Shale can turn a profit with crude oil prices around $60 per barrel and generate substantial internal returns when oil trades above $100 per barrel. Parts of the Bakken also contain a second oil-bearing formation, Three Forks/Sanish, which offers additional upside to production. Over the past two years, the number of rigs actively drilling in North Dakota has almost tripled. Statoil’s acquisition of Brigham Exploration, a leading operator in the Bakken, likely won’t be the last deal in this play. For more details on the Bakken Shale, check out my free report on Master Limited Partnerships.

Located in southern Texas, the Eagle Ford Shale comprises three distinct windows: The northernmost reaches produce crude oil; the central part produces NGLs and gas; and the southernmost portion contains mainly dry gas. To date, much of the development in this play has occurred in the NGL- and oil-rich windows, where early movers enjoy returns on investment that rival or exceed those in the Bakken.

Petrohawk Energy drilled the first discovery well in the Eagle Ford shale and amassed substantial acreage in the core of the play; these assets were likely the primary driver behind BHP Billiton’s acquisition of the company in July 2011.

Although the Permian Basin has been in production since the 1920s, this region in western Texas and southeastern New Mexico has been revitalized by modern drilling techniques and offers low-risk drilling opportunities in a number of oil- and gas-bearing formations.

One of the top takeover candidates in North American shale plays is GeoResources (NSDQ: GEOI), which boasts leaseholds in the Bakken Shale and the Eagle Ford, has a market capitalization of only $760 million. The company owns 46,000 net acres in the Bakken, of which it operates 33,200 acres. GeoResources has drilled and completed eight wells in a 25,000-acre block near the border between North Dakota and Montana. In 2012 the firm plans to drill between 23 and 26 gross wells in which it will have a 25 to 30 percent working interest.

Peak production rates for GeoResources’ wells in the region average almost 290 barrels of oil equivalent per day, a rate that offers a 70 percent to 90 percent return on investment with oil at $100 per barrel.  

In addition to Williams County, GeoResources also has about 10,000 acres located in eastern Montana, an area in which EOG Resources and other operators have drilled profitable wells. However, these wells aren’t as prolific as those in the Bakken’s core.

Finally, the company has 11,000 acres in Montrail County, N.D., a region that’s home to some of the most impressive Bakken wells. GeoResources holds an average working interest of about 8 percent in more than 100 wells drilled in this portion of the play.

GeoResources’ 25,000 net acres in the Eagle Ford Shale are located in the play’s oil window. The firm has two dedicated rigs drilling in the Eagle Ford, and its first three wells produced an average of 408 barrels of oil equivalent per day over the first 30 days. At the end of 2011, GeoResources had three additional wells awaiting a fracturing crew and two wells being drilled. The firm plans to drill between 20 and 25 gross wells in 2012.

In 2011 the firm’s capital spending totaled $120 million; with the budget expanding to as much as $223 million in 2012,  level of investment that should enable the firm to grow its output from between 5,000 and 5,500 barrels of oil equivalent per day to between 6,500 and 7,500 barrels of oil equivalent per day. Management expects crude oil output to increase to three-quarter of the firm’s annual production from about two-thirds of its yearly lifting.

With an enterprise value to EBITDA ratio of about 5.8 percent, shares of GeoResources are considerably cheaper than several of its peers’ likely because its acreage isn’t attractive. The company also has more than $200 million remaining on its credit line and no outstanding debt.

Further drilling results from other producers in the Bakken and Eagle Ford could provide a catalyst for the stock before the company releases its own fourth-quarter results on March 13. For more M&A targets, start your free trial of The Energy Strategist.