PennzEnergy Rejuvenating U.S. Operations
PennzEnergy Co. -- recently formed when Pennzoil Products Group
was spun off to merge with Quaker State -- is in the process of
reactivating its onshore U.S. operations and tip-toeing deeper into
the Gulf of Mexico. PennzEnergy operations are focused on three
areas: domestic onshore, domestic offshore, and international.
Operations are in East and West Texas, on- and offshore Gulf of
Mexico, and in Egypt, Azerbaijan, and Venezuela.
"Prior to a year ago we had basically abandoned the onshore
United States. We were still active in the Gulf of Mexico, which is
very important to us. Yet the major emphasis was on large projects
internationally. We basically were a one-legged stool. In today's
downturn you know what that means," PennzEnergy CEO Stephen D.
Chesebro' told attendees at an Independent Petroleum Association of
America luncheon last week in Houston. "So what we've done is
created a more balanced program. We've put the E back in
exploration and production so that two years ago we had four people
in the company drawing maps; today we have 43 people in the company
"We have re-instituted exploration on our domestic acreage, so
we have a balanced program. We produce about 130,000 barrels of oil
equivalent in a day. And then with the incremental international
you can show the growth that is required. Our international program
is a major program now. We're in five, soon to become six,
countries. Eight to 10 is plenty for a company our size. We're
focused in the Middle East, Caspian, and in Latin America. We're
not all the way around the world."
Strictly an E&P company, PennzEnergy ranks among the top 10
domestic independents. Chesebro' said a "pure play" company, such
as PennzEnergy, has an easier time aligning the interests of its
management, employees and shareholders. He noted the
de-consolidation is somewhat contrary to what's going on in the
Domestically, in East Texas, PennzEnergy, which is 60% gas, 40%
oil, has a net revenue interest in about 95 MMcf/d of gas
production. "We've continually increased that as we have infill
drilled. Our drilling group has done an outstanding job." Chesebro'
said the company makes about a 30% return at today's prices with
its drilling in the region. "This is our highest return business
even at today's prices." Plans are to expand East Texas operations.
A new low-pressure gathering system will bump production up above
100 MMcf/d, he said.
In the Raton Basin, where gas is coal-bed methane, PennzEnergy
owns about 600,000 acres with plans to develop the assets. "We
expect to get that program kicked off this year. This is exciting
because it provides long-term production-reserve and cash-flow
growth that we need in our company.
In South Texas the company has three areas of interest. "This is
where we had zero people working this until about a year ago. We
had six 3D surveys that were shot and put on the shelf. We pulled
them down. We're working on those right now." PennzEnergy is
working to add acreage in the area. "We need about another year to
really see the benefits. The technology is showing that we have
some very exciting opportunities here."
In the Gulf of Mexico, PennzEnergy has about 620,000 net acres
and what has turned out to be a serendipitous arrangement with the
United Kingdom's Ranger Oil. "Two years ago they committed to
spending $100 million on wildcat drilling [on PennzEnergy acreage].
When I first joined the company I said, 'Man, that ties up all our
acreage. We can't get out there and get after it.' But I can tell
you today I love it because we wouldn't be out there drilling
wildcats today if it wasn't for their commitment."
Chesebro' said a company the size of PennzEnergy doesn't need to
be in the deep-water Gulf of Mexico with two to three hundred
blocks. "We've got 30-some blocks. We're to the point now we're
buying prospects from the last two [lease] sales as opposed to two
years ago just buying some acreage." The company has some
deep-water production, with operator Shell, from acreage it has on
Garden Banks. PennzEnergy also is active with Enterprise Oil on
PennzEnergy's capital budget in 1998 was $440 million, later cut
to $400 million. "We set a preliminary target this year of $300
[million]. We're sinking below $250 [million] right now." Still,
with the way things are in the industry now, Chesebro' said he
expects to accomplish more for less. "We will get probably five
times as much exposure this year with something in the $250 million
capital range with the leverage we have than we did last year."
A priority going forward will be to cut PennzEnergy's
debt-to-equity ratio to something below 50%, Chesebro' said. last
week the company said its fourth quarter 1998 earnings will be cut
by a required $49 million after-tax, non-cash charge for the
reduced value of gas and oil reserves, mainly due to lower
commodity prices. PennzEnergy also formally announced a reduction
in capital spending to $250 million. "While the capital budget is
now 40% below 1998's, the company's reserve exposure through the
drillbit is more than double that of last year."
Joe Fisher, Houston