Permian Basin-focused Energen Corp. raised its full-year guidance after second quarter output climbed 5% sequentially, the beat coming on outperformance using updated well designs.
The Birmingham, AL-based independent issued its quarterly results Tuesday, highlighting the gains using its proprietary Generation (Gen) 3 fracture (frack) designs.
Case in point: 10 new Wolfcamp wells in the Delaware sub-basin, built using the Gen 3 design, delivered average peak 24-hour initial production (IP) rates of more than 300 boe/d per 1,000 feet of lateral. In the Midland sub-basin of West Texas, eight Wolfcamp A wells in Howard County averaged IPs of 283 boe/d per 1,000 feet, 90% weighted to oil.
“In the second quarter of 2018, Energen continued to build on its track record of execution, growth and financial strength,” said CEO James McManus. “Wells completed with our Generation 3 frack design drove a 7% production beat to our guidance midpoint.”
With three more months of outperformance under its belt, Energen has raised its estimated production targets for the remainder of 2018.
“At the midpoint of our new guidance range for 2018, Energen will reach a milestone by producing more than 100,000 boe/d for the first time in company history,” the CEO said.
Energen’s hedge program is helping to mitigate the negative impacts of widening differentials in the Permian, “and we have solid arrangements in place to provide flow assurance for our oil and gas production.
“These factors, together with the rigs and services we need in place, will allow us to continue focusing on execution as we implement our robust drilling and development plans.”
Production in 2Q2018 totaled 97,400 boe/d, which beat the guidance midpoint of 91,000 boe/d. Oil production also outpaced the guidance midpoint by 7%. Energen placed on production 10 net wells in the Midland and nine net in the Delaware.
Of the wells placed on production, 43% were multi-zone pattern wells completed in batches at original reservoir pressure. Energen used 10 horizontal drilling rigs and four frack crews. The company continues today running 10 rigs, and has added one frack crew.
Among the operating highlights in the quarter was a 9,542-foot lateral Wolfcamp A well in the Delaware that was drilled in a record 22.75 days, spud to total depth. The company also drilled its longest lateral length well to date in the Midland at 11,178 feet.
Net income was $68.3 million (70 cents/share) in 2Q2018, compared with $29.5 million net (30 cents) in the year-ago quarter.
Drilling and development capital investment in 2Q2018 totaled $318 million, within guidance of $300-330 million. Energen also invested $9.5 million to acquire 670 net acres of unproved leasehold, primarily in the Delaware.
“Estimated total capital spending for drilling and development activities in 2018 remains unchanged from prior guidance at $1.1-1.3 billion,” management said. However, “higher potential costs associated with ancillary services and steel tariffs, as well as additional nonoperated activity likely will lead to capital investment near the high end of the range.”
Energen expects to drill around 122 gross/112 net operated horizontal wells this year and complete 123 gross/114 net, including 30 gross/28 net from 2017 that were drilled but uncompleted.
The average lateral length of wells scheduled for completion this year is about 8,000 feet.
Based on the Gen 3 well performance, Energen expects its full-year production will be 97,000-104,000 boe/d, a 5% increase over previous guidance. At the guidance midpoint, output would increase by almost one-third over 2017. Oil production at the midpoint for this year has been increased by 4%.
Energen raised its midpoint guidance estimates for 3Q2018 production by 6.5%, and for 4Q2018, output expectations were increased by 4%.
“With 4Q2018 production of 111,500 boe/d at the guidance midpoint, Energen now estimates that its 4Q2017-to-4Q2018 exit rate will reflect an increase of 14%,” management said.
The company’s average realized prices in the last six months of 2018 are to reflect commodity and basis hedges, oil transportation charges of around $2.05/bbl, natural gas liquids (NGL) transportation and fractionation fees of 15 cents/gal, and basis differentials applicable to unhedged production.
“Natural gas and NGL production are also subject to percent of proceeds contracts of approximately 85%,” Energen noted.
Based on recent strip prices, Energen’s assumed gas basis for open months is minus $1.05/Mcf for August-December; minus 88 cents/Mcf for August-September; and minus 1.16/Mcf for 4Q2018. The assumed per-unit Midland to Cushing basis differentials for unhedged sweet and sour production are around minus $15.50 for August-December; minus $13.65 for August-September; and minus $16.75 for 4Q2018.
Energen’s assumed commodity prices for unhedged volumes from August through December are $66.75/bbl of oil, 80 cents/gal of NGL and $2.75/Mcf of gas (August-December).
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