Houston-based Rosetta Resources Inc. grew net income and revenues during the second quarter, thanks to more production that was more heavily weighted to liquids. Where one goes to get that in Texas -- as everyone knows -- is the Eagle Ford Shale. As it continues to develop its core Gates Ranch area there, Rosetta is stepping out as well.
"We continue to build upon our strong Eagle Ford position as our drilling program expands into other leasehold areas that offer high-quality, high-return resource potential similar to our original and ongoing Gates Ranch development," CEO Randy Limbacher said Wednesday during an earnings conference call.
"Our long-term strategy for growth has three elements. First, we're going to develop our existing Eagle Ford asset base. Second, we're going to invest the significant cash flow that we expect to see from our Eagle Ford program over the next several years into acquisitions in lower-risk plays. And third, we're going to expose roughly 10% of our annual capital to higher-risk new ventures, including new lands and pilot testing. While not being specific, we are currently executing on a couple of these concepts."
Production from the Eagle Ford grew 6% from the first quarter of 2012, increasing from 30,400 boe/d to 32,200 boe/d. During the year-ago quarter Eagle Ford production was 21,600 boe/d. The play accounted for 96% of total production during the quarter. Overall production averaged 33,400 boe/d, up 25% from the same period in 2011 and down 1% from the prior quarter. Total liquids production for the second quarter reached all-time high levels, averaging 19,700 b/d. Liquids now represent 59% of production, up from 46% a year ago and 52% from the first quarter of 2012.
Rosetta's results were enough to make it a standout among independents during the current earnings season, at least in the eyes of BMO Capital Markets analysts Dan McSpirit and Chris Sloan. "We've seen a lot of companies report 2Q12 results over the past two weeks," they wrote. We've heard a lot of reasons (read: excuses) as to why actual results came up short of expectations. Not so with Rosetta, at least not on what counts and that's economic growth from core operations. The company's bread and butter Eagle Ford Shale operation, Gates Ranch, continues to put high-margin growth on the [profit and loss statement]. Recovery estimates are going higher. Costs are going lower."
During the conference call, management was asked about activity in the Pearsall Shale in South Texas where interest is growing, as evidenced by Magnum Hunter Resources Corp. recent acreage acquisition there (see related story).
"We've started to get some activity around our Gates Ranch, not by us but by offset operators, that we're watching," said John Clayton, senior vice president for asset development. "We've spent a lot of time looking at the Pearsall. We do think we have some of our acreage that would be more into the liquids window, but we're not in any rush on that. It is something that we have a focus on right now."
At least one analyst was curious about Rosetta management's thoughts on EOG Resources Inc.'s "16 monster wells" in the Eagle Ford (see NGI, Aug. 6).
"I think we've got a bunch of monster wells in our portfolio," Limbacher said. "EOG's doing a pretty phenomenal job. We haven't seen rates as large as the one they recently announced. One of the things we focus on is repeatability, and with that we like tight distributions of well count. We'd love to have monster wells, but I think we like the repeatability that our assets are giving us. I wouldn't look for us to drill a monster well at Gates, although we are early in the development of Gates and we probably haven't drilled the best well yet. EOG's a fantastic operator and they've got some stellar results but we think ours are pretty good, too."
Rosetta reported second quarter net income of $77 million ($1.46/share) versus $25.4 million (48 cents) for the same period in 2011. The increase was primarily due to increased production and a "more favorable product mix" as well as an unrealized gain on derivatives of $72.5 million ($46.3 million after-tax). Adjusted net income was $30.6 million (58 cents/share) excluding unrealized derivative gains. Revenues were $198 million, compared with $111.6 million for the same period in 2011. For the quarter, 83% of revenue was generated from oil, condensate and natural gas liquids (NGL) sales, including the effects of realized derivatives, as compared with 60% a year ago.
James Craddock, senior vice president for drilling and production operations, said the company has been seeing downward pressure on drilling and completion costs in the Eagle Ford that have brought total well costs down by $500,000 to $1 million per well.
"We'll use those funds [saved from well costs] to drill additional wells and add facilities that will give us more flexibility when planning our 2013 program," Limbacher told analysts.
As of June 30 Rosetta had completed 91 horizontal Eagle Ford wells. About 10% of the company's identified Eagle Ford inventory is drilled and on production. At the end of the second quarter, 19 drilled wells were awaiting completion and tie-in to facilities, 17 of which were drilled during the second quarter. Eight producing wells were temporarily shut-in for offset fracturing. Rosetta plans to complete 16 Eagle Ford wells during the third quarter and continue to operate five rigs in the play, including two rigs at Gates Ranch.
Rosetta has been evaluating Gates Ranch well-spacing performance in several areas of the lease with wells spaced from 425-565 feet apart, or 50-65 acres per well. The down-spaced areas continue to perform without interference, the company said. As a result, Rosetta has begun drilling its Gates Ranch program with wells spaced 475 feet apart or on roughly 55-acre spacing, a change from the previous 565 feet or 65-acre spacing.
"This increased well density will result in the ultimate development of roughly 428 wells of which an estimated 356 wells remain to be completed, representing a 29% growth in project inventory at Gates Ranch," the company said. Based on Rosetta's current evaluation, the estimated ultimate recovery (EUR) of the down-spaced wells is projected to be 1.67 million boe gross per well or fully incremental reserves as compared to the original 100-acre spacing assumption.
About one-half of Rosetta's 2012 Eagle Ford activity is concentrated in areas outside of Gates Ranch. Drilling and completion operations are ongoing in the Karnes Trough, Briscoe Ranch and central Dimmit County areas.
During the second quarter, the company began development at Briscoe Ranch with the drilling of the first three-well pad and completion activity is under way. Based on production data from the October 2011 Briscoe Ranch discovery well, the EUR is projected to be 890,000 boe gross per well (24% oil and 36% NGLs) with 68 total wells to be developed. And in the Karnes Trough area, four Klotzman oil wells were drilled and six were completed. A total of eight wells are on production. The average EUR estimate for Klotzman is 665,000 boe gross per well (68% oil and 13% NGLs).
Exploration work was concluded on Rosetta's seven-well horizontal drilling program in the Southern Alberta Basin. Of the seven horizontal wells, five have been completed; the first three were open-hole completions and averaged initial rates ranging from 104-403 boe/d. The most recent two completions utilized cased holes and averaged 50-205 boe/d.
The company reaffirmed its full-year production guidance range at 35,000-38,000 boe/d based on the previously announced $640 million 2012 capital program. The projected 2012 exit rate is also unchanged and is anticipated to be 39,000-44,000 boe/d.
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