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PennzEnergy Co. — recently formed when Pennzoil Products Groupwas spun off to merge with Quaker State — is in the process ofreactivating its onshore U.S. operations and tip-toeing deeper intothe Gulf of Mexico. PennzEnergy operations are focused on threeareas: domestic onshore, domestic offshore, and international.Operations are in East and West Texas, on- and offshore Gulf ofMexico, and in Egypt, Azerbaijan, and Venezuela.
“Prior to a year ago we had basically abandoned the onshoreUnited States. We were still active in the Gulf of Mexico, which isvery important to us. Yet the major emphasis was on large projectsinternationally. We basically were a one-legged stool. In today’sdownturn you know what that means,” PennzEnergy CEO Stephen D.Chesebro’ told attendees at an Independent Petroleum Association ofAmerica luncheon last week in Houston. “So what we’ve done iscreated a more balanced program. We’ve put the E back inexploration and production so that two years ago we had four peoplein the company drawing maps; today we have 43 people in the companydrawing maps.
“We have re-instituted exploration on our domestic acreage, sowe have a balanced program. We produce about 130,000 barrels of oilequivalent in a day. And then with the incremental internationalyou can show the growth that is required. Our international programis a major program now. We’re in five, soon to become six,countries. Eight to 10 is plenty for a company our size. We’refocused in the Middle East, Caspian, and in Latin America. We’renot all the way around the world.”
Strictly an E&P company, PennzEnergy ranks among the top 10domestic independents. Chesebro’ said a “pure play” company, suchas PennzEnergy, has an easier time aligning the interests of itsmanagement, employees and shareholders. He noted thede-consolidation is somewhat contrary to what’s going on in theindustry currently.
Domestically, in East Texas, PennzEnergy, which is 60% gas, 40%oil, has a net revenue interest in about 95 MMcf/d of gasproduction. “We’ve continually increased that as we have infilldrilled. Our drilling group has done an outstanding job.” Chesebro’said the company makes about a 30% return at today’s prices withits drilling in the region. “This is our highest return businesseven at today’s prices.” Plans are to expand East Texas operations.A new low-pressure gathering system will bump production up above100 MMcf/d, he said.
In the Raton Basin, where gas is coal-bed methane, PennzEnergyowns about 600,000 acres with plans to develop the assets. “Weexpect to get that program kicked off this year. This is excitingbecause it provides long-term production-reserve and cash-flowgrowth that we need in our company.
In South Texas the company has three areas of interest. “This iswhere we had zero people working this until about a year ago. Wehad six 3D surveys that were shot and put on the shelf. We pulledthem down. We’re working on those right now.” PennzEnergy isworking to add acreage in the area. “We need about another year toreally see the benefits. The technology is showing that we havesome very exciting opportunities here.”
In the Gulf of Mexico, PennzEnergy has about 620,000 net acresand what has turned out to be a serendipitous arrangement with theUnited Kingdom’s Ranger Oil. “Two years ago they committed tospending $100 million on wildcat drilling [on PennzEnergy acreage].When I first joined the company I said, ‘Man, that ties up all ouracreage. We can’t get out there and get after it.’ But I can tellyou today I love it because we wouldn’t be out there drillingwildcats today if it wasn’t for their commitment.”
Chesebro’ said a company the size of PennzEnergy doesn’t need tobe in the deep-water Gulf of Mexico with two to three hundredblocks. “We’ve got 30-some blocks. We’re to the point now we’rebuying prospects from the last two [lease] sales as opposed to twoyears ago just buying some acreage.” The company has somedeep-water production, with operator Shell, from acreage it has onGarden Banks. PennzEnergy also is active with Enterprise Oil onGarden Banks.
PennzEnergy’s capital budget in 1998 was $440 million, later cutto $400 million. “We set a preliminary target this year of $300[million]. We’re sinking below $250 [million] right now.” Still,with the way things are in the industry now, Chesebro’ said heexpects to accomplish more for less. “We will get probably fivetimes as much exposure this year with something in the $250 millioncapital range with the leverage we have than we did last year.”
A priority going forward will be to cut PennzEnergy’sdebt-to-equity ratio to something below 50%, Chesebro’ said. lastweek the company said its fourth quarter 1998 earnings will be cutby a required $49 million after-tax, non-cash charge for thereduced value of gas and oil reserves, mainly due to lowercommodity prices. PennzEnergy also formally announced a reductionin capital spending to $250 million. “While the capital budget isnow 40% below 1998’s, the company’s reserve exposure through thedrillbit is more than double that of last year.”
Joe Fisher, Houston
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