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Eagle Ford Blooms for Rosetta

During the third quarter, Houston-based Rosetta Resources Inc. quickened its pace in the Eagle Ford Shale where it grew production 68% from the year-ago level; production was also wetter. Management also disclosed last week that the company is testing two new areas outside of the Eagle Ford.

Rosetta ran five rigs and drilled 25 gross wells in the Eagle Ford with a 100% success rate and 16 wells completed during the quarter. Daily Eagle Ford production grew 13% from the second quarter, increasing to 36,500 boe/d from 32,200 boe/d. Overall production for the quarter averaged a record 37,100 boe/d, up 45% from the same period in 2011 and up 11% from the prior quarter. Total liquids production reached an all-time high, averaging 22,300 b/d. Total liquids now represent 60% of the company's production, up from 51% a year ago and 59% in the second quarter of 2012.

"Not only did we see marked increases on a year-over-year basis but we also achieved another period of double-digit quarter-over-quarter production growth," said CEO Randy Limbacher. "Our commodity mix also continues to move favorably toward a larger percentage of higher-valued liquids products that when combined with our increased volumes have led to greater revenues."

During an earnings conference call management tipped that the company is testing two new areas. James Craddock, senior vice president of drilling and production, said Rosetta was raising its capital guidance to $660-680 million, adding $20-40 million for activities to include the drilling of two exploratory wells "that are not part of the Eagle Ford program [and] several acquisitions both within and outside of the Eagle Ford Shale."

John Clayton, senior vice president of asset development, reminded analysts that management has said the company would like to be testing one or two plays in "new ventures." He wouldn't elaborate on the exploratory wells. "...I think it's fair to say that we're testing two plays right now outside of the Eagle Ford, and I'll leave it with that. But that's pretty consistent with kind of how we've approached this before, up to 10% of our capital allocated towards new ventures and one to two plays being tested at any given time."

Beyond that, there was little shared during the call about the new ventures, leaving analysts hungry for details. "We're expecting questions on new ventures to escalate..." analysts at Tudor, Pickering, Holt & Co. wrote after the call. "The company is doing some exploration drilling in two undisclosed plays," noted Wunderlich Securities Inc. analyst Irene Haas. "While the market is looking for exploration catalysts from the company, we believe that [Rosetta] has the balance sheet to acquire early stage projects to build a second core area if needed."

Net income in the third quarter was $17.7 million (33 cents/share) versus net income of $31.9 million (61 cents) for the year-ago quarter. Adjusted net income was $40.3 million (76 cents/share), which excludes an unrealized loss on derivatives of $35.4 million ($22.6 million after-tax). Adjusted net income increased by $7.2 million over the year-ago quarter, primarily due to increased production and a more favorable product mix, Rosetta said.

At the end of September Rosetta had completed 107 horizontal Eagle Ford wells, and about 11% of the identified inventory is drilled and on production and 28 drilled wells were awaiting completion. Rosetta plans to complete 15-20 wells during the fourth quarter and continue to operate five rigs in the play, including two to three rigs in the Gates Ranch field. Rosetta expects to end the year at the high end of its forecasted exit rate range of 39,000-44,000 boe/d. "Assuming a similar level of activity to 2012," the company expects to "deliver about 30% year-over-year production growth next year at competitive finding and development costs."

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