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PennzEnergy Rejuvenating U.S. Operations

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 drawing maps.

"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&ampP 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 industry currently.

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 Garden Banks.

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

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ISSN © 2577-9877 | ISSN © 1532-1266
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