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Energen Hits Pay Dirt in Permian, San Juan Basins

Energen Corp. said three of five new exploratory wells it drilled in West Texas targeting the Wolfcamp Shale in the Permian Basin had outstanding results during 2Q2014, and the company believes it may have discovered a viable, horizontal oil play in the San Juan Basin.

Meanwhile, the Birmingham, AL-based company said regulators in Alabama have approved the sale of its natural gas utility, Alagasco, to Laclede Group Inc. in a transaction valued at $1.6 billion (see Shale Daily,April 7).

On Wednesday, Energen said the first of the five exploratory wells -- University 16-17 #1H, located in Ward County, which is targeting the Wolfcamp B bench in the Delaware Basin -- recorded a peak 24-hour initial production (IP) rate of 1,896 boe/d, 78% weighted toward oil (1,483 b/d).

The second well, and the company's first to target the Wolfcamp A bench -- Smith SN 48-37 #101H in Howard County -- had a 24-hour IP rate of 955 boe/d, with 84% oil (804 b/d). A third well also drilled into the Wolfcamp A -- Wilbanks SN 16-15 #101 H in Martin County -- had a 24-hour IP rate of 970 boe/d, with 79% oil (769 b/d).

The other two exploratory wells were the Daniel SN 10-3 #101H (peak 24-IP of 775 boe/d) and the Enterprise C19-5 #1H (634 boe/d), which were drilled in Glasscock and Reeves counties and targeted the Wolfcamp A and B, respectively.

In addition to the five exploratory wells, Energen said it drilled 19 gross (18 net) wells through June 30 as part of its Wolfcamp development program in southern Glasscock County. The company said two A-bench and two B-bench wells that were brought into production during 2Q2014 were "performing above internal expectations," adding that the four wells generated an average peak 24-hour IP rate of 1,237 boe/d, and a peak 30-day average rate of 794 boe/d.

Energen holds a 50% nonoperated stake in four oil wells drilled this year by WPX Energy in New Mexico, which target the Mancos formation of the San Juan Basin (see Shale Daily, Aug. 7, 2013). The company said the first two wells -- Chaco 2308-09A #145H and #146H -- are producing, and the results suggest that the oil play could rival Energen's opportunities in the Permian. The wells recorded peak 24-hour IP rates of 1,155 and 914 boe/d, respectively.

"We still want to see how the next two wells perform but are very encouraged by our ongoing analysis of these first two wells and increasingly optimistic that Energen could well have a viable, horizontal oil play in the San Juan Basin," said Energen CEO James McManus. "We likely will deploy a drilling rig in the San Juan Basin in 2015 to begin testing our approximately 75,000 net acres with potential in the oil window of the Mancos formation."

During 2Q2014, Energen's continuing operations produced 6.34 million boe, an 8% increase over the 5.86 million boe produced in the year-ago quarter. The latest production figure included 2.83 million boe of oil, 1.06 million boe of natural gas liquids (NGL) and 2.44 million boe of natural gas. Of note, NGL production rose 31% from 2Q2013 (815,000 boe), which the company attributed to less ethane rejection and new horizontal Wolfcamp drilling.

Broken down by area of operations, Energen produced 1.75 million boe during 2Q2014 in the Midland Basin, a 43% increase from 2Q2013 (1.22 million boe). Production in the Delaware Basin also increased, by 25%, between the two quarters, from 1.19 million to 1.48 million boe. Total Permian Basin production rose 21%, from 3.54 million to 4.3 million boe.

But production in the San Juan Basin fell 12% between 2Q2013 and 2Q2014, from 2.31 million to 2.04 million boe. The loss was attributed to declining gas production in the play.

For the quarter, Energen reported a consolidated net loss from all operations of $8 million (11 cents/share). Adjusting for non-cash items and discontinued operations, the company's adjusted income from continuing operations in 2Q2014 totaled $35 million (48 cents/share), compared to $46.9 million (65 cents/share) in 2Q2013.

Year-to-date (YTD) consolidated net income from all operations stood at $45.4 million (62 cents/share). Adjusting for non-cash items and discontinued operations, adjusted income from continuing operations YTD totaled $72.2 million (99 cents/share), compared to $81.3 million ($1.12/share) from YTD 2013.

Energen said the three-member Alabama Public Service Commission unanimously voted last week to approve its sale of Alagasco to Laclede. The $1.6 billion deal includes $1.28 billion in cash and about $320 million of utility debt. The transaction is expected to close by Sept. 30. The company estimates that its after-tax proceeds will be $1.1 billion.

"After consideration of accelerated intangible drilling costs, [we plan] to use those proceeds to reduce short-term indebtedness," Energen said, adding that its "enhanced financial capacity will be used to help fund [our] future oil- and NGL-focused drilling plans."

Energen said it was adjusting its capital expenditures (capex) plans for 2014. Guidance for production from continuing operations was unchanged at 24.9-25.9 million boe, with a midpoint of 25.4 million boe. But the company said a "drill pipe-related issue" would delay its Midland Basin Wolfcamp development program, which in turn would lower 3Q2014 production estimates.

Analysts were all agog over the results in the Permian and San Juan basins.

"Energen believes [the San Juan Basin] can offer economics similar to its Permian Play; we take this as a very bullish statement," said Irene Haas of Wunderlich Securities Inc. in a note Thursday. "Energen has about 72,900 net undeveloped acres in this play in the oil phase alone. As a result, we believe the San Juan Basin could be the next oily core area for Energen."

Haas added that Energen was drilling some of the best wells in the Permian, with more to come.

"Energen has proven quarter after quarter that it can deliver very strong wells from both sides of the Permian Basin making it among the best in the region," Haas said. "This quarter, we see Energen pushing the Wolfcamp A play north in the Midland Basin with good success in Howard County. On the Delaware Basin side, the company is completing its first Wolfcamp C well in Reeves County.

"In addition, three other wells targeting the Wolfcamp A and B are still flowing back. The company plans to drill another Wolfcamp C well later this year. EGN is also planning to drill longer lateral wells -- at 7,500 feet."

Phillip Jungwirth of BMO Capital Markets Corp. said lower production guidance for 3Q2014, which he calculated to total 66,300 boe/d, "might disappoint."

"We think investors are focused on execution, achieving production targets, and reducing well costs, Jungwirth said in a note Wednesday. "Our estimates for 2015 and 2016 are mostly unchanged, but on higher capex, and 2014 is primarily lower due to 1Q [discontinued operations].

"We continue to like Energen's Midland and Delaware Basin Permian position, but think shares could struggle to compete for capital against higher-growth peers. We think Energen could announce an accelerated 2015 program once it closes the Alagasco sale in September, but execution could remain a question among investors."

In a note Thursday, Gabriele Sorbara of Topeka Capital Markets said the news from Energen was "mixed."

"Operationally, Energen continues to execute across its position in the Permian Basin with an upbeat operational update," Sorbara said. "Further, early results from its first two nonoperated Mancos wells are very encouraging and demonstrate the potential of a competitive play not priced into the current share price, in our view. While 3Q14 production guidance was lowered due to completion delays, management reaffirmed its 2014 production guidance."

Topeka and Wunderlich each issued “buy” ratings for Energen stock, with price targets of $105 and $107 per share, respectively. Meanwhile, BMO ranked the stock as “outperform” but lowered the target price to $95/share. Shares of Energen were trading at $82.95 (down 4.09%, or $3.59/share) during afternoon trading Thursday on the New York Stock Exchange.

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