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Rosetta Plying Permian, Has Plenty Left to Do at Gates Ranch

Rosetta Resources Inc. entered the Permian Basin almost a year ago, and growing production there and from its substantial Eagle Ford Shale holdings lifted the company's fourth quarter production to a new record.

Production for the quarter averaged a record 52,000 boe/d, an increase of 17% from the same period in 2012 and 2% from the prior quarter, the Houston-based company said. Production for the year averaged 50,000 boe/d, up 34% from 2012.

The increase for all periods was due to production growth from the ongoing development of the Eagle Ford assets and production from acquired Permian Basin assets (see Shale Daily, March 18, 2013). Oil production in 2013 averaged 14,000 b/d, an increase of 43% from 2012. Natural gas liquids (NGL) daily production also increased by 43% compared to the prior year.

"In 2013, Rosetta was successful in expanding our operations into a new basin that added a significant number of future growth locations to our project inventory. Our entry into the Delaware Basin provides a core asset in an oil-rich unconventional resource area that is complementary to our core Eagle Ford position, and we are accelerating development programs in both areas," said CEO Jim Craddock.

Proved reserves as of Dec. 31 increased by 39% to 279 million boe, composed of 66 million bbl of crude oil and condensate, 99 million bbl of NGLs and 677 Bcf of natural gas. Of the total proved reserves, 60% are liquids and 32% are classified as proved developed. Included in the total are 83 million boe of reserves additions, primarily from development success in the Eagle Ford, 23 million boe of reserves acquired during the year, and 11 million boe in net downward revisions. Revisions are primarily due to changes in projected condensate yields within the north-central area of Gates Ranch.

Rosetta replaced 528% of production from all sources including net reserve additions from drilling activity, price revisions, proved acquisitions and performance revisions. Finding and development costs, excluding proved acquisitions, totaled approximately $12/boe to organically replace 402% of production. The estimated standardized measure of discounted future net cash flows from Rosetta's proved reserves at Dec. 31 was $2.3 billion, representing an increase of 25% from the prior year.

Daily production from the Eagle Ford was 48,000 boe/d in the fourth quarter, an increase of 0% from the prior year and flat versus the prior quarter. Twenty-five gross wells were completed in the fourth quarter and 79 wells were completed during 2013. At Gates Ranch, 16 wells were completed and no wells were added to the total of 28 drilled wells awaiting completion at year-end 2013. Three wells were completed in the fourth quarter at Briscoe Ranch, with 12 total wells completed during 2013. Development continues in both the Lopez area and the Tom Hanks lease, where 10 wells have been drilled and completion activities are under way.

Well performance on Rosetta's largest Eagle Ford asset at Gates Ranch in Webb County continues to be in line with expectations at 55-acre well spacing, the company said. Approximately 292 of the estimated 432 Gates Ranch lower Eagle Ford well locations remain to be completed. Gates Ranch well spacing tests continue with two Upper Eagle Ford pilots on production. A third Upper Eagle Ford pilot area was drilled during the fourth quarter and will soon be placed on production.

On the L&E lease in central Dimmit County, a fourth Upper Eagle Ford pilot has been drilled and is on production. Also in Dimmit County, 32 of the 68 planned well locations at Briscoe Ranch have been drilled with 16 on production and 16 awaiting completion. Last year Rosetta delineated the Tom Hanks acreage in LaSalle County and full development is under way. Four wells were completed in 2013 and by year-end 10 wells had been drilled and are waiting on completion.

Since beginning operations in the Eagle Ford area, Rosetta had completed 205 gross horizontal Eagle Ford wells as of Dec. 31. About 76% of the company's identified Eagle Ford inventory locations, excluding Upper Eagle Ford, remain to be drilled and completed. This year Rosetta expects to drill and complete about 14% of the remaining lower Eagle Ford locations.

During 2013, Eagle Ford total well costs decreased by $500,000 per well and now range from $6-6.5 million per well, assuming average 5,000-foot laterals and 15 completion stages.

"We don't disagree that the inventory is still deep in South Texas (read Gates Ranch), but [we] contend West Texas has to pick up where that operation leaves off, and do so in a convincing and lasting way for the market to re-rate the stock..." wrote BMO Capital Markets analyst Dan McSpirit in a note Tuesday.

Rosetta's production from the Permian averaged 3,000 boe/d in the fourth quarter, an increase of 55% from the third quarter. The company operated five to six rigs in the Delaware Basin area during the quarter; 20 gross wells were drilled including 18 vertical wells and 15 gross vertical wells were completed. Rosetta also completed one gross operated horizontal well during the fourth quarter.

The company is running three horizontal rigs in Reeves County, including one rig drilling the initial well of the company's first multi-well pad to begin testing well spacing. Completion operations are under way on the second of three horizontal Wolfcamp wells spud during the fourth quarter. About 91% of Rosetta's identified Permian net horizontal and vertical inventory locations remain to be drilled and completed.

During 2013, Permian vertical well costs declined and are currently averaging $3.6 million, with more recent well cost estimates approaching $3.2 million per well.

Rosetta's 2014 capital budget is $1.1 billion, excluding acquisitions, based on a four- to five-rig Eagle Ford program and plans to drill and complete 90-95 gross wells. Rosetta said it does not expect to increase its current count of Eagle Ford drilled wells awaiting completion. The budget also includes a six-rig Permian program, including plans to drill and complete 50-55 gross operated wells in the Delaware Basin, about half of which are to be horizontal wells.

Production this year is expected to be 60,000-65,000 boe/d, and the average oil ratio is expected to be about 30% with total liquids estimated at 63%.

Rosetta reported fourth quarter 2013 net income of $29.5 million (48 cents/share) versus $42.3 million (80 cents/share) for the same period in 2012. Adjusted net income was $51.0 million (83 cents/share) versus $42 million (79 cents/share) for the year-ago quarter. The increase in adjusted net income was primarily due to production growth in core areas.

Revenues for the fourth quarter were $204.8 million compared to $178.3 million for the same period in 2012. Fourth quarter revenues including realized derivatives were $217.9 million in 2013 and $177.7 million in 2012. During the quarter, 82% of revenue was generated from oil, condensate and NGL sales, including the effects of realized derivatives, as compared to 81% for the year-ago quarter.

For 2013, Rosetta reported net income of $199.4 million ($3.39/share) versus $159.3 million ($3.01/share) for the same period in 2012. Adjusted net income for the year was $227.9 million ($3.87/share) versus $2.77/share in 2012. Adjusted net income increased primarily due to increased production and higher oil and gas prices.

Last year's revenues were $814 million compared to $613.5 million for 2012. Full-year revenues, including realized derivatives were $830.4 million in 2013 and $593.8 million in 2012. For the year, 82% of revenue was generated from oil, condensate and NGL sales, including the effects of realized derivatives, as compared to 81% a year ago.

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