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U.S. Onshore Operators Building Reserves Warehouse of Liquids Prospects

Operators focused on crude oil and liquids reserves growth are building warehouses of prospects for future exploration, according to Topeka Capital Markets.

Analysts recently compiled information on more than 50 of the biggest onshore operators to exact 2013 year-end proved reserves figures. The findings indicated that natural gas last year wasn't nearly as enticing as crude oil and liquids to build warehouses of future prospects.

It's been a "choppy start to 2014" and Topeka analysts are "cautious near-term," but overall, the long-term view is constructive as operators move beyond exploration and into development mode across the U.S. onshore, said Gabriele Sorbara.

"Overall, while 2013 was a volatile year, share price performance ended the year in the green, as the group generated strong production and reserve growth in a healthy commodity price environment," Sorbara said.

E&Ps within Topeka's coverage remained mostly focused on their core resource plays, providing "consistency in production and reserve growth" for the next few years. Topeka's exploration and production (E&P) universe of 15 operators includes Cabot Oil & Gas Corp., Cimarex Energy, Diamondback Energy, Energen Corp., EP Energy, Laredo Petroleum, Oasis Petroleum, PDC Energy and SM Energy.

With gas prices volatile, pipeline constraints and under built midstream infrastructure, it's going to be a roller coaster year for many E&Ps, Topeka's analysts predicted.

"We are clearly facing several headwinds early in 2014," said Sorbara. However, analysts "are constructive on the sector longer-term and remain positive into the second half of 2014. "With the sector mostly in full-scale development mode across several core resource plays, the major headwinds going forward surround commodity pricing, differentials and execution, in our view."

According to Topeka's analysis, Sanchez Energy Corp. was tops in almost every proved reserves category, with its 2013 production growth eclipsing all E&Ps with a year/year increase of 725.4%. Production/share also was highest at 648.6%, and debt-adjusted output growth/share rose 334.9%. Reserve growth/share also was best at Sanchez, up 151.2%. Sanchez tied with Goodrich Petroleum Corp. on the highest proved reserve growth, each up 176.9% from 2012.

Sanchez's biggest operating areas today are in the Eagle Ford, Bakken and Tuscaloosa Marine Shale (see Shale Daily, March 7).

Adjusted for sales and purchases, Bakken specialist Emerald Oil Inc. scored No. 1 with 231.1% proved reserve growth, followed by Goodrich (176.9%) and Matador Resources Co. (117%). Noticeably underperforming in 2013, production-wise, were Forest Oil Corp., Bill Barrett Corp. and Comstock Resources Inc.

On drillbit finding and development (F&D) costs, Topeka's analysis indicated that Magnum Hunter Resources Inc. paid by far the most in 2013 at $55.19/Mcf. The second highest was Anadarko Petroleum Corp. at $7.84, with Stone Energy Corp. in third at $5.61. All-in F&D costs were led by Jones Energy Inc. at $7.36/Mcfe, and Halcon Resources Corp. at $6.49.

The day-to-day movements within subsectors of the domestic oil and gas industry may seem fluid to some investors, but it's been anything but since the start of the year, with producers questioning where commodity prices are headed and where they should develop now that many of the onshore resource plays have moved from probable and possible reserves to proved.

For anyone watching the subsectors, energy companies have made divergence the word of the days, the weeks and the months, Tudor, Pickering, Holt & Co. (TPH) analysts said Tuesday.

How divergent? Consider a sampling of subsector stocks. Among oilfield service operators, full-service provider Halliburton Co. has risen 14% since the start of the year, while offshore's Transocean Ltd. is down 19% from 2013's average. Within the E&P sector, Bakken/Eagle Ford shale operator EOG Resources Inc. has gained 13% since Jan. 1, while Marcellus Shale-focused Cabot Oil & Gas Corp. is off 16%.

The integrated producers group has proven to be as volatile as any other, with Norway's Statoil ASA climbing 16% year-to-date, and Chevron Corp. down 8%. ExxonMobil Corp. began 2014 trading just above $99.00/share; at midday Tuesday it was down at around $94.64.

Overall, the subsector indices appear to point to a flattish year-to-date performance, but "this is very misleading," said TPH analysts.

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