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Energen Ups Capex 10% to Focus on Wolfcamp, Spraberry

Permian-focused Energen Corp. said it will increase its capital expenditure (capex) budget by 10%, to $1.1 billion, for the full-year 2015 so it can focus on development and appraisal programs in the Wolfcamp and Spraberry formations, and expects the company's overall production to increase by nearly 20% as a result.

The Birmingham, AL-based independent said Thursday that it plans to drill 151 gross (143 net) wells in its 2015 drilling and development program. The bulk of the capex budget, $810 million, is allocated to the Permian’s Midland Basin for 129 gross (122 net) wells -- that includes $485 million for the company's Wolfcamp development project, and 88 gross (82 net) wells there, plus another $70 million in a Spraberry development project that calls for 12 gross (12 net) wells.

The company is spending $143 million in the Permian’s Delaware Basin for 14 gross (13 net) wells, and $63 million in the San Juan Basin, including $29 million for eight gross (eight net) wells targeting the Mancos Shale. Energen also plans to devote $60 million on an appraisal program for eight gross (eight net) wells in the Wolfcamp, and another $80 million for an appraisal program for 12 gross (12 net) wells in the Spraberry.

Energen plans to run four horizontal rigs for its Midland Basin development program for the rest of the year. It will also deploy one horizontal rig in the Midland Basin for its appraisal program through October, and one horizontal rig for its Mancos Shale appraisal program in the San Juan Basin for the second half of the year.

During 2Q2015, Energen drilled 29 gross (27 net) wells and completed 19 gross (19 net) wells in its Midland Basin development program. The company took note of a two-well, pad drilling program in Glasscock County, TX, that tested eight Wolfcamp A and B wells that generated average peak 24-hour initial production rates of 1,076 boe/d, and peak 30-day average rates of 856 boe/d.

"We're seeing encouraging production response from some of our changes we made in our completions, and our days to drill to total depth continue to decline to industry-best numbers," CEO James McManus said during a conference call to discuss 2Q2014 on Friday.

Energen reported adjusted net earnings per share (EPS) of $7.66 billion (10 cents/diluted share) for 2Q2015, after subtracting a $75.1 million non-cash mark-to-market loss, and $42.9 million in an after-tax asset impairment. The company said more than 75% ($33 million) of the impairment was related to a write down of a field in the Central Basin Platform in tertiary recovery, while another $3 million covered about 775 net acres in Reeves County, TX, in its Enterprise area.

Adjusted EPS for 2Q2015 also excluded $1.2 million for income associated with its San Juan Basin divestment (see Shale DailyFeb. 17). Last February, Energen agreed to sell the majority of its San Juan natural gas assets to a private company for $395 million. The assets included about 985 net operated wells on some 205,000 net acres. The deal closed in March.

By comparison, Energen reported adjusted EPS of $26 billion (36 cents/share) in 2Q2014. The company said the decline was largely attributed to low commodity prices, coupled with higher depreciation, depletion, and amortization (DD&A) costs from increased drilling, which in turn was partially offset by the increase in production.

Excluding the San Juan divestiture, Energen said production for the full-year 2015 is now expected to be 500,000 boe higher, with a midpoint estimate of 22.7 million boe (62,215 boe/d). The midpoint estimate for 2015 is 18.8% above adjusted production of 19.1 million boe in 2014.

The midpoint estimate for 2015 includes 11.8 million boe from the Midland Basin (up 59.5% from 2014, 7.4 million boe), 5.3 million boe from the Delaware Basin (down 8.6%, from 5.8 million boe), and 3.6 million boe from the Central Basin Platform (down 12.2%, from 4.1 million boe). Of note in the Midland Basin, the midpoint estimate for production from the Wolfcamp/Spraberry/Cline formations more than tripled -- from 2.1 million boe in 2014 to 7.7 million boe in 2015.

Midpoint production for 3Q2015 is estimated at 5.8 million boe (62,815 boe/d), down slightly from a previous estimate of 5.9 million boe (64,239 boe/d). McManus said the company added two frac crews in the Midland Basin, and plans to run three for most of 3Q2015. Consequently, Energen now estimates midpoint production for 4Q2015 at 6.2 million boe (67,978 boe/d).

During the Q&A session with analysts, McManus said Energen had taken note of Exxon Corp.'s decision to bolt on 48,000 acres to its holdings in the Midland Basin (see Shale DailyAug. 6).

"I think you've seen some [acreage] trade pretty high," McManus said. "We're still trying to get [acreage] on a little bit better value basis. As oil continues to decline and slide, hopefully we may see some adjustment in those prices and some additional activity. There has been a good bit of activity, and I expect [we] will have some things to look at. And we would like to increase our position out there."

In a note Monday, Irene O. Haas, analyst for Wunderlich Securities Inc. said Energen had "turned in a strong quarter,"

"While well results are looking better and better in the Delaware Basin, the company's wells in the Midland Basin still offer the best returns for now, in our view," Haas said. "This fall, we look forward to seeing Energen drilling its eight-well program in the San Juan Basin, which could offer positive catalysts."

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