Rockies operator WPX Energy Inc. has taken on a partner for some of its gassy Piceance Basin operations, G2X Energy, a Houston firm that, among other things, develops natural gas to methanol projects.
The agreement with TRDC LLC, a G2X subsidiary, would be to develop the Trail Ridge properties in Colorado's Piceance Basin Highlands. Tulsa-based WPX would remain as operator.
"We're bringing value forward by accelerating the development of what has been a quiet part of our Piceance holdings," said WPX CEO Rick Muncrief. "This is a creative way to generate returns that are among the best in our portfolio."
Under the agreement, WPX is to receive $40 million for swapping a 49% stake that includes 100 proved developed producing (PDP) wells. The working interest sold represents 27 Bcf of PDP reserves and 46 Bcf of proved undeveloped reserves.
TRDC also is committed to a $170 million drilling carry on about 400 future gas wells and plans to invest more down the road. WPX agreed to pay 28% of the Trail Ridge development costs and receive 51% of the production and reserves until TRDC has completed its drilling carry commitment. The structure allows WPX to generate returns comparable to its oil plays during the carry period, according to management.
This year eight wells would be developed through the partnership, with 25 more wells scheduled in 2015 and 50 in 2016. By 2017 and beyond, they plan to drill 100 wells a year. WPX has an estimated 1,300 remaining Trail Ridge drilling locations.
The joint development agreement is for the Williams Fork and Iles formations and does not include deeper opportunities in the Mancos and Niobrara formations, WPX noted.
"WPX has a proven track record for predictable and cost efficient natural gas production in the region and will be an excellent partner for G2X," said CEO Tim Vail. "We see this transaction as a creative way to secure reliable, low cost natural gas feedstock for our methanol and gasoline plants under construction and in development."
Neither of the management teams offered any clues into how G2X might use the WPX gas, but G2X develops, owns and operates production facilities that convert gas to methanol and drop-in automotive gasoline. In early 2013, Vail announced plans to build a gas-to-gasoline facility in Louisiana using methanol conversion technology developed by a subsidiary of ExxonMobil Corp. (see Daily GPI, Jan. 18, 2013). The facility as designed would use gas to produce methanol, then convert the methanol to gasoline for 90% of its production. About 10% of the output would be liquefied petroleum gas or propane.
Tudor, Pickering, Holt & Co. (TPH) analysts said the joint agreement was a positive for WPX, which has been attempting to revamp the gas-oriented business by selling off some properties and moving to more oily targets (see Shale Daily, Aug. 20; Dec. 29, 2013).
The Trail Ridge assets weren't modeled by TPH "but looking at the undiscounted carry and consideration implies 72 cents of upside to our $23.00/share price target.
"Activity should add to growth in 2015 and beyond, pulling forward inventory depth," said analysts. "However, we’ll be looking for color on type curve and well costs over the coming months to build into our net asset value model. It seems like there is more to come on the transaction side, and we continue to believe monetization of Marcellus and Apco are two events on deck."
WPX, whose main focus today is the Piceance with a 221,000 net acre stake, has said it plans to sell off more gas-rich items in its portfolio. It holds, among other things, 114,000 acres in the Marcellus Shale, 84,000 acres in the Bakken Shale, and it has a 69% interest in Apco Oil and Gas International.