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Energen Focusing on Midland Basin Wolfcamp Over Higher-Cost Delaware

Taking into account depressed commodity prices, Energen Corp. will focus its drilling efforts this year on its Midland Basin Wolfcamp acreage while holding back on the higher-cost Delaware Basin Wolfcamp, CEO James McManus told analysts following the company on Friday. Planned capital spending is lower than last year and is to be bolstered by proceeds from an asset sale.

"Making responsible capital allocation decisions in a declining commodity price environment is never easy and requires some tough decisions," McManus said. "Fortunately for Energen, we have a high-quality asset base, particularly in the Midland Basin, where we can generate acceptable returns from our Wolfcamp development program and drive double-digit production growth…even in the current market. A solid hedge position, a clean balance sheet, and lower drilling and completion costs also are working to our advantage in 2015."

Energen plans to invest $1 billion in its 2015 drilling and development program. The estimate reflects a decrease in service costs of about 10%, which the CEO said could go lower in the Permian Basin. More than 50% of 2015 drilling and development capital will be focused on the Midland Basin Wolfcamp and Spraberry appraisal and development programs. Capital investment for drilling and development in 2015 reflects a 26% decrease from the $1.36 billion invested in 2014.

In the Midland Basin, five full-year and two partial-year rigs will be employed to drill an estimated 68 gross wells in the Wolfcamp A and B development program. Plans call for the program to expand from southern Glasscock County to Martin County; 44 gross wells are slated to be drilled in Glasscock County and 13 gross wells to be drilled in Martin County. The cost to drill and complete the wells is estimated to be $6.5-7.5 million each.

The other 11 gross development program wells will be drilled in a continuation of a 20-well program begun in December to test tighter spacing concepts. All 20 wells are being drilled in southern Glasscock County at an estimated average drill-and-complete cost of $6.0-6.3 million each.

During 2015, Energen expects to complete 68 gross (66 net) wells in the development program, including 24 gross (24 net) wells from the company's 2014 program.

Energen also plans to drill 15 gross appraisal wells in the Midland Basin. These include seven Spraberry tests and five Wolfcamp wells. The budgeted costs to drill and complete these wells is estimated to range from $9.0-10.0 million per well. Another three Wolfcamp appraisal wells will test 10,000-foot laterals at an estimated drill-and-complete cost of $11.5-12.0 million per well. At current low commodity prices, the company said it has no plans to drill Cline Shale wells.

The focus of Delaware Basin drilling in 2015 is on retaining leasehold. The company has paid $36.8 million to extend certain leases and also will drill six Tier 1 wells and two Tier 2 wells at an estimated cost to drill and complete of $10.0-11.0 million per well; three vertical Wolfbone wells also are scheduled to be drilled at an average cost of $4.0-4.5 million each. In addition, Energen plans to drill three Third Bone Spring wells in the Delaware Basin at an average cost of $7.0-7.5 million per well.

"The toughest issue we faced in allocating capital in 2015 was how to deal with our substantial Delaware Basin Wolfcamp potential. The high drilling costs across the basin in this young play, coupled with areas of high gas content and lack of infrastructure in more remote areas of Reeves County, does not support an active drilling program at current strip prices," McManus said. "Our approach has been to allocate enough capital to preserve most of our Wolfcamp potential through lease extensions and a two-rig drilling program in 2015.

"At the same time, we have ranked our Wolfcamp acreage in the Delaware Basin. Tiers 1 and 2 encompass more than 95,000 net acres and offer the greatest potential for success in four identified zones (Wolfcamp A, B, B/C, and C). The greatest potential for realizing reduced drill-and-complete costs in development is in Tier 1, where we also enjoy reasonable to good infrastructure. If oil prices rebound significantly, we believe Tier 2 could offer potential in the eastern Delaware Basin where infrastructure is in place but where more work is needed to drive down costs given a higher pressure regime and challenging rock mechanics.

"Our Tier 3 properties in southwest Reeves County, which we believe to be largely natural gas assets, are challenged not only by persistently low natural gas prices but also by a lack of infrastructure, and we have removed the well potential there from our unrisked drilling inventory. In our financials for the quarter, you will note that we took impairments on Tiers 2 and 3."

Energen's delineation work in the Mancos oil formation in the San Juan Basin begins this year with a one-rig program. Current plans are to drill six wells in the South Central area, one well in the Southwest area, and one in the Southeast/Jicarilla area. The average cost to drill and complete is estimated to be $6.5 million per well.

The company has agreed to sell the majority of its natural gas assets in the San Juan Basin to a private company for $395 million. The sale includes 985 net operated wells on 205,000 net acres.

"We estimate that our capital budget for drilling and development in 2015 of some $1.0 billion will approximate internally generated cash flows plus proceeds from the sale of our San Juan Basin divestiture package such that Energen's debt-to-ebitdax [earnings before interest, taxes, depreciation, amortization and exploration expenses] multiple at year-end 2015 remains well under 2.0x. This level of spending also is expected to generate production growth of approximately 15%," McManus said.

This year's production (excluding volumes from the San Juan Basin divestiture package) is estimated to range from 21.4-22.4 million boe (58,545 to 61,285 boe/d), with a midpoint of 21.9 million boe. This reflects an increase of 15% from comparable, adjusted 2014 production volumes of 19.1 million boe. First quarter production is estimated to range from 4.4 to 4.8 million boe (4,889 to 5,333 boe/d), with a midpoint of 4.6 million boe.

Severe winter weather across the Permian in late December/early January is estimated to negatively affect first quarter and calendar year 2015 production by 225,000 boe, with 61% of the impact being felt in the Midland Basin.

About 57% of the company's 2015 production guidance midpoint of 21.9 million boe is hedged. Hedges also are in place that limit the company’s exposure to the Midland-to-Cushing differential.

Birmingham, AL-based Energen reported fourth quarter net income of $65.4 million (89 cents/share) versus $84.09 million ($1.15/share) for the year-ago quarter. Adjusted net income was $41.1 million (56 cents/share) versus $50.1 million (69 cents/share) for the year-ago quarter. The difference in adjusted net income primarily is attributable to an 8% decline in realized oil and natural gas liquids (NGL) prices, increased lease operating expenses, and increased depreciation, depletion, and amortization expense, partially offset by an 18% increase in oil and NGL production, the company said.

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