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Eclipse Resources Focused on 'Survival' This Year

Ohio pure-play Eclipse Resources Corp. is planning to hunker down this year with a focus on preserving capital and protecting its asset base to ensure not just its "survival" but "prominence when the commodity cycle inevitably returns," CEO Benjamin Hulburt said Thursday during the company's year-end earnings call.

The company's gains, including nearly 200% growth in its year-over-year production in 2015, were not enough to offset the significant drop in commodity prices. The production beat and operational gains, such as extending its lateral lengths to 13,942 feet on some of its recent Utica Shale dry gas wells at lower costs, have also not been enough to deflect the market's unfavorable view. The company received a delisting notice from the New York Stock Exchange late last month because its average closing price dipped below $1/share over a consecutive 30 trading-day period (see Shale Daily, Feb. 29).

It has idled its drilling program, deferred completions on 23 Utica Shale wells to date, written down the value of its proved reserves by 58% to just $212.9 million and said it recorded a $787 million impairment on its proved and unproved properties in 2015. It has also voluntarily curtailed its production to protect against low prices.

Sounding agitated by the state of affairs and how the market has regarded the company, which operates in just five eastern Ohio counties, Hulburt said Eclipse is determined to turn a corner once prices rebound.

"The long and short of it is that although we recognize the difficult environment and are taking prudent steps to address it, myself, our board of directors and our management team believes strongly that the value of our company is much stronger than what the market currently reflects," he said. "We plan to be in this for the long term to realize that value."

Until Thursday, the company had been tight-lipped about its plans for this year. It announced a 2016 capital budget of $168 million, which includes $130 million for drilling and completion activities. Financial analysts had expected lower. The company said the budget would be fully funded with cash flows and added that it does not intend to borrow from its $125 million revolving credit facility.

The budget is down from 2015's, when Eclipse spent $309.5 million. The company's effective borrowing base, however, is just $97 million after counting $28 million in letters of credit outstanding. It has enough cash on hand, or $184 million, to fund this year's operations, but analysts fear that if natural gas strip prices don't improve, the company could face financing and liquidity issues beginning in 2017.

To help cash flow this year, Eclipse said it expects to sell between $15-20 million of noncore/higher-cost assets. To get to this point, it also said that it cut jobs in the second half of 2015, which it believes will reduce its general and administrative expenses to $36 million this year.

The company entered 2015 with three rigs and has since dropped all of them. It produced 247 MMcfe/d in the fourth quarter, up 100% from the year-ago period. For the full-year, the company's production averaged 207.9 MMcfe/d, up 186% from 2014, and consisted of 66% natural gas. But in keeping with a plan it initiated earlier this year, the company said it would curtail its production to keep 2016 volumes roughly in line with 2015 at 200 MMcfe/d (see Shale Daily, Jan. 5).

"We believe that in today's commodity price environment, maximizing next year's production growth should not be our primary objective," Hulburt said. "As 2016 continues to unfold against an ongoing volatile commodity backdrop, the managed production program that we have implemented will remain in place for the foreseeable future. We don't believe it is in the best long-term interest of this company to drill our best inventory and sell our production at these low prices."

COO Thomas Liberatore said managed production would consist of both choking back wells and shutting them in across the company's wet and dry gas acreage.

"To date, the curtailments in production have included both liquids rich and dry gas production areas and we continue to monitor and adjust the production mix using a well-by-well analysis," Liberatore said. "It is also important to note that these curtailments, which include full shut-ins as well as curtailed production rates, do not harm the quality of the future production profiles of the wells."

Eclipse said its operations would be weighted toward the second half of the year to further delay restarting its drilling and completion activity. The company plans to complete 9.4 net operated Utica wells and exit the year with 11.5 net drilled but uncompleted wells. Hulburt added that the company's budget and operations won't be "static" and could change depending on commodity prices.

To better control its future costs and protect its assets, Hulburt said Eclipse has started offering landowners a renewal fee with an amortization to extend leases that would expire in 2017 and 2018. Thus far, the company has executed agreements covering 11,000 net acres.

Full-year revenue increased 85% from 2014 to $255.3 million on higher production, but the company reported a net loss for 2015 of $971.4 million (minus $4.46/share), compared to a net loss of $183.2 million (minus $1.27/share) in 2014.

For the fourth quarter, Eclipse reported a net loss of $813.9 million (minus $3.66/share), compared to a net loss of $33 million (minus 21 cents/share) in the year-ago period.

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