Investors looking for an alternative to the much celebrated Appalachian Basin might turn their gaze to North Louisiana and the Cotton Valley Sands formation's Terryville Complex, where the acreage and plans of newly public Memorial Resource Development (MRD) have analysts talking about "potentially superior" returns.
Memorial has about 52,000 net acres in what it says is the core of the Terryville, which offers four-zone stacked pay potential from the deeper and over-pressured Cotton Valley. "Many of the horizontal wells that have been drilled to date have targeted only two zones, the Upper and Lower Red," BMO Capital Markets analysts said in a note Tuesday. "That leaves two largely under-exploited, the Upper and Lower Deep Pink. That's expected to change."
BMO's Dan McSpirit and A.J. Donnell, as well as Wells Fargo Securities' Gordon Douthat, David Tameron and Jamil Bhatti published enthusiastic research notes on MRD Tuesday, as did multiple other firms that also initiated coverage of the company. BMO and Wells Fargo rate Memorial at "outperform."
Single well returns in the Terryville are "...on par with, if not superior to, those generated by certain Marcellus and Utica producers, where similar natural gas-driven and NGL [natural gas liquid]-weighted production profiles exist," BMO said, adding that MRD is an "alternative" for investors that doesn't come with Appalachia producers' basis differential risk given the Terryville's proximity to the Gulf Coast.
Houston-based Memorial began horizontal drilling on its Terryville acreage in Lincoln Parish in late 2011. Production has more than tripled with fewer than 30 horizontal wells online, Wells Fargo said. "Guidance for 2014 implies approximately 90%-plus production growth, and we model 2015 production growth of 50%. Anchored by an inventory of over 1,400 drilling locations at Terryville across four main horizons, this equates to more than a 35-year drilling inventory."
Memorial's initial public offering last month raised net proceeds of $382.1 million after deducting underwriting discounts, commissions and estimated expenses (see Shale Daily, June 13). A $600 million notes offering followed. The company is estimated by BMO to have about $575 million in liquidity. MRD shares closed up more than 2% Tuesday at $25.98, after reaching $26.48 intraday, not far off the stock's high of $26.94.
Management has said acquisitions would only be made if they are accretive, Wells Fargo noted. However, the analysts wrote that they don't see much out there that could compete with the company's Terryville position. "Therefore, we believe that accelerating value by way of increased production growth, above and beyond the company's already attractive growth profile, is the most likely alternative at this point."
Memorial has about 200,000 net acres total including acreage in Wyoming, Colorado and Texas, as well as the North Louisiana Acreage. Terryville is the core of the portfolio, though, according to BMO. Memorial acquired its position through multiple transactions, most notably acquiring the Terryville Field from Petrohawk in May 2010. The cost basis for the Terryville acreage is estimated at less than $1,000/acre, according to BMO, and about 76% is held by production.
Fewer than 200 vertical wells have been drilled in the core of the shallower and normally pressured Cotton Valley, and these weren't very successful in draining the reservoir, BMO said, adding that there's not much data on later deeper vertical wells that targeted the over-pressured rock.
"...[E]arly wells that have benefited from modern completion designs and techniques show promise of economic and repeatable results, so much so that we put field-level returns in the same class as that observed in the prolific Marcellus and Utica shale plays," BMO said. There are more than 20 horizontal rigs currently drilling the Cotton Valley trend from North Louisiana to East Texas, according to the firm. Anadarko Petroleum Corp., Devon Energy and ExxonMobil Corp.'s XTO Energy Inc.
BMO said investor resistance to the Memorial/Terryville story could come from two areas. First is what the analysts called "branding." There's not "a heated land grab" going on as was seen in the Utica Shale. "Our counter is that returns are returns are returns," they said. "Let the returns speak for themselves."
Another reason for caution is that the potential of the play is "largely untested" with horizontal wells, BMO said. Of the four benches, the Upper and Lower Pink "are the big unknowns in terms of recoveries and costs." The repeatability of returns from the Upper and Lower Red zones "is a not unrelated issue." However, vertical wells have provided reason for optimism, and if Memorial is successful in its efforts, there's exploration upside, BMO said.