The Eagle Ford: Different Companies, Different Costs

Taking the Eagle Ford as an example of Evaluate Energy’s new analysis, the raw data itself draws some interesting comparisons. The Eagle Ford was arguably the biggest headline maker of 2011 in US Shale; the number of new wells drilled in Texas’ liquids rich shale play in Q4 2011 was double the number in Q4 2010, and the price paid per acre in M&A transactions soared to over $10,000. Below is a graph of just 6 of the major operators in the area, and the average cost per well they reported in annual reports, corporate presentations and press releases:

Source: Evaluate Energy

Evaluate Energy estimates the average cost per well for the Eagle Ford at $7.8m, using reported 2012 capex budgets, 2012 planned well activity and company reported cost per well. The wide range here shows Anadarko Petroleum predicting to make a healthy saving on this amount, with its reported cost per well at $5.8m, but Rosetta Resources and El Paso Corp (currently being acquired by Apollo Global Management LLC) are set to foot a heftier bill, with costs at $9.5m-$10m.

The disparity could be down to a number of things. In the Eagle Ford, location will play a big part; the play’s depth varies greatly across Texas, and gas/oil ratios can also be highly varied even within counties, both of these may cause fluctuation in costs. The Eagle Ford is still in the relatively earlier stages of its development compared to its more mature and higher-producing neighbours – some companies will have identified the most efficient practices, while others are still experimenting. In comparison, the Haynesville play saw the figures amongst the larger operators ending up very similar. New companies entering the play, with either less experience or different methods, will also have an impact on the level of disparity. Evaluate Energy’s horizontal drilling data shows Anadarko ($5.8m) have been drilling for oil/liquids in the areas of the Eagle Ford since Q1 2010, while El Paso ($9.5m) only started drilling for oil in the play a year later, and on a much smaller scale. This would suggest Chinese state-owned company CNOOC has made a good choice in joining forces with Chesapeake Energy, a company that could arguably be considered the powerhouse of US Shale.

(With US gas prices below $2/mcf, well below economic levels, it is assumed that most reported Eagle Ford figures will be referring to oil/liquids drilling rather than gas drilling.)

2012 Outlook

According to Evaluate Energy’s new analysis, 2012 will be another big year for the Eagle Ford. Using this average well cost of $7.8m, and reported capex/planned number of wells guidance figures, the companies/joint ventures destined to make major strides in the Eagle Ford this year can be predicted.

Source: Evaluate Energy

The number of wells itself here, for these 10 selected companies/joint ventures is quite remarkable. Even if the average well cost of $7.8m is applied to the data, these companies alone will be drilling around 1500 wells. From Evaluate Energy’s data, it is clear that this number is a low estimate; of these 10 companies, 5 report average well costs, and Anadarko ($5.8m), Pioneer/Reliance ($7.5m) and SM Energy ($7.3m) are all projecting drilling costs below this $7.8m average.

2 of the 3 non-US companies listed above, Statoil ASA and Reliance Industries, will be looking to the Eagle Ford to build on recent successes. Statoil, 50/50 Joint Venture partner with Talisman Energy in the Eagle Ford, reported record quarterly company-wide production figures in Q1 2012. The Norwegian major has moved into US Shale since June 2011, acquiring Eagle Ford acres with Talisman, and then further displayed its faith in the sector with its $4.7 billion acquisition of Bakken-operator Brigham Exploration towards the end of the year. The record production figure was mainly made up of gas outside of the US, but shale oil is clearly one of Statoil’s major plans to increase this number further. Pioneer’s ambitious Indian partner, Reliance Industries Ltd, is also on a high right now, with the news that its US Shale segment, acquired in 3 deals in 2010 (Marcellus x2 and Eagle Ford), has reported $250m revenues and $30m profit for the 2011-12 fiscal year. With gas prices low, and activity in the Marcellus likely to fall this year, operations in the Eagle Ford will be important for Reliance if this success is to continue.

Evaluate Energy now provides average well costs, which have been calculated using reported 2012 guidance figures, and planned 2012 activity, for 8 North American plays: US Bakken, Duvernay, Eagle Ford, Haynesville-Bossier, Marcellus, Montney, Niobrara, Utica. This is the latest addition to Evaluate Energy’s unique shale product, which provides its clients with horizontal drilling data, acreage holders, gas and liquids production, and M&A deals across the most important plays in the US.

However, efficiency gains by in situ producers were offset by rising GHG per unit emissions from integrated producers. Emissions from integrated projects (those that both extract and upgrade bitumen) increased to an average 119 kg of CO₂e per barrel of synthetic crude production in 2010, up from 113 kg per barrel in 2009. In contrast, emissions from in situ projects were down for a second consecutive year, emitting 79 kg for every bitumen barrel of production compared with more than 89 kg in 2007. The combined total average emissions in 2010 were 110 kg CO₂e emissions per barrel.



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Latest Trends for 2011

Evaluate data shows finding costs rising again in 2011 and sharply higher than a decade ago.

It would appear that the continued upward trend has been due both to rising operating costs (Evaluate data shows the average cost of producing a barrel of oil equivalent)   as shown in the graph below….

…..and to a rather lacklustre performance in terms of reserves added via exploration drilling:  the graph below shows the trend in reserves added via exploration and indicates that companies performed no better in 2011 on this measure than in 2010.

Ranking the Companies

There are significant fluctuations in company costs and reserve additions from year to year so we have taken a 10 year average to try to smooth out the data.

The graph shows Total delivering the lowest 10 year average finding costs of any of the Majors, followed closely by ExxonMobil and Petrobras. BP turns in the highest cost in the group at just under $5/bbl oil equivalent. This is partly because BP had some pretty big negative revisions to reserves in the last 2 years that caused its ranking to hit rock bottom.  If you ignore revisions and just look at the cost or finding proved reserves via discoveries alone, then BP actually comes out on top with the lowest 10 year average finding cost on this (narrower) definition.

If we look at how much oil and gas was added per exploration well drilled, there is a pretty close match in the rankings with Total and ExxonMobil discovering many million more barrels per well drilled than the others.

The assets in question were originally put up for sale in February 2011, but buyers were possibly put off by the UK budget that followed shortly after, which raised petroleum taxes in a surprise move to reap an additional £2 billion for the treasury. 12 months later and following several suspended projects on the back of the tax increase, the government introduced measures to underwrite up to 75% of decommissioning costs, making the North Sea a more viable acquisition target again.

On the same day as the North Sea asset divestment, it was revealed that BP acquired 84,000 acres in Ohio, prospective for the emerging Utica shale play. The consideration was undisclosed but is thought to be around $330 million, representing a cost per acre of just under $4,000. This represents a high price for a largely unproven play but early indications from Chesapeake’s exploration programme indicate that the liquids rich play could surpass that of the Eagle Ford in which the liquids rich sweet spots demand in excess of $20,000 per acre.

Continental Resources agreed a deal to acquire the assets of Wheatland Oil Inc for $340 million. Wheatland Oil’s principal assets are a 5% interest in a large portion of Continental Resources’ Bakken acreage. The assets include 37,900 acres of developed and undeveloped acreage, 17 million boe of proved reserves and production of 2,500 boe/d.

There were two results from national licensing rounds this week with India announcing the results of their 9^th NELP round and Uruguay announcing the result of their second round focusing on offshore exploration blocks. India’s 9^th round included a diverse mix of assets including deep and shallow water blocks off the East and West coasts and onshore assets in four different states. Although the government previously intimated that the round would be open to foreign companies, the results were dominated by domestic state-run firms who received over half of the operatorships. Only one company based outside of India were successful in gaining an operatorship, with US-Based Deep Industries winning operator status for three blocks.

In Uruguay, the results of the second national licensing round were reported, 3 years following its first offering of exploration blocks to energy companies. As the blocks are located in deep water areas, which requires technical knowledge and deep pockets, the list of qualified bidders were made up of major and mid-cap companies. The final block awards went to BP and BG who each won three blocks and Total and Tullow Oil who took one block each.

Pengrowth will receive a highly developed Canadian asset base, weighted evenly between gas and liquids at a cost per proven boe of $29. The high valuation can be explained through the additional upside of NAL’s portfolio which includes over half a million acres of undeveloped land, $1.4 billion of accrued tax pools and 38 million boe of probable reserves.

US based Master Limited Company, QR Energy, acquired mature assets in the mid-continent for $230 million. The assets hold 13 million boe of proven reserves which are 93% liquids and 98% developed but only have moderate production rates due to their level of maturity. This has led to a competitive cost per boe of proven reserve of $17.70 but a high cost per producing boe of $195,000, compared to the typical cost in the US of around $60,000.

Parallel Energy Trust acquired the remaining 41% interest in the liquids rich West Panhandle Field from Bravo Natural Gas LLC for $189 million. The cost per proven boe of reserves equated to just $10 as although the reserves are only 5% gas, the liquids are composed purely of less valuable condensates as opposed to oil.

Falkland Oil & Gas secured their long awaited deal for a rig this week as part of a farm-out agreement with an unspecified company.  The deal will see Falkland Oil and Gas relinquish a 25% interest in its license area in return for the partner contributing 25% of both past and future costs, with the latter comprising of a two well exploration programme during 2012. Falkland Oil and Gas’ acreage is located in the South Basin which unlike the North Basin and its 1 billion boe of oil in place Sea Lion discovery, has yet to be drilled.

Shell and CNPC concluded a landmark deal in China that will see Shell take up a production sharing contract in 3,500 square kilometers in the Sichuan Basin. The deal marks the first ever PSC in the expanding shale gas industry in China, which the Government hopes will put a partial end to the country’s dependence on foreign resources. It has been estimated by the EIA that China may hold over 1,000 TCF of gas in its shale deposits although it has to be proven whether the resources can be extracted with the same ease as in the US plays.

In the midstream sector Williams Partners struck a $2.5 billion deal for private company Caiman Eastern Midstream LLC, a company specializing in the transportation and processing of gas from the Marcellus shale play. As part of the deal Williams Partners and Caiman Energy, will also partake in a joint venture to develop infrastructure in the Utica play. The Utica shale play is in its infancy but may be the next US shale play to take off if Chesapeake’s positive operating results so far, extends across the entire formation.

Although presumably smaller than the INPEX deal, Atlas Energy LP made the largest transaction where the acquisition cost was reported of $190 million. Atlas Energy LP will acquire 312 bcf of gas reserves in the Barnett shale from Carrizo, 57% of which are developed and have a reserve life index of 24 years based on current production. The Barnett shale play was a forerunner to the US shale gas industry’s rise to prominence over the past six years. Since this time however, as more liquids rich plays such as the Eagle Ford has been setting land price records, the Barnett shale resources have been steadily decreasing in value due to its remoteness from the main gas markets in the US and its lack of higher value liquids reserves. In this particular deal the acquisition cost equates to just $3.65 per proven boe ($0.61 per mcf).

BP revealed two deals in Namibia this week where it gained initial or increased stakes in 5 offshore blocks. The first deal involved BP farming into Serica Energy’s stake in 4 blocks which have yet to receive seismic mapping. BP will pay for an extensive 3D survey across the assets to gain an initial 30% interest which will rise to 67.5% should BP also opt to cover the cost of an exploration well. The second deal saw BP increase its stake by an additional 20% in block 2714A, which was part of its first foray into the country through a farm in with Chariot Oil and Gas. The interest is being acquired from Petrobras and the terms of the deal were undisclosed. The block contains the Nimrod “megastructure” which may contain 4.9 billion boe, and is due to be drilled in the second half of 2012.

In Canada, Crescent Point Energy continued its aggressive acquisition campaign of 2012 with the takeover of Reliable Energy for $99 million. The deal was announced on the same day that Crescent Point closed on the $625 million purchase of Wild Stream Exploration, and brings the company’s M&A expenditure during 2012 so far to $1.4 billion. The deal ties in closely with Crescent Point’s strategy of accumulating and developing land in the Bakken area of Saskatchewan, in which its vast experience in the shale resource gives them an operating advantage over other companies.

There were few other significant new E&P deals, but there was still some activity in the market with pre-existing agreements and joint ventures. El Paso held its vote for the protracted takeover by Kinder Morgan, which received a 95% vote in favour. Meanwhile KKR and Chesapeake teamed up to form a new joint venture targeting investment in US oil and gas assets. The partnership will tap into Chesapeake’s experience of frontier US plays, which has seen them build up large portfolios of land in emerging plays such as the Utica and Marcellus before the land prices became restrictive. The initial capital of the partnership will consist of $250 million, with 90% of the contribution coming from KKR.

In Iraq, Statoil gained approval from Iraq’s Oil Ministry to divest an 18.75% stake in the West Qurna-2 field to Lukoil for undisclosed terms. Due to the fiscal terms of the production contract, which gave the lion’s share of revenues to the state, the sale will have little impact on the financial statements of Statoil, but will help to free up capital to put into higher return projects. Statoil took a stake in the field in 2009, as part of Iraq’s reconstruction, and accepted the low returns the field would bring due to the supposed importance of gaining a foothold in a region that looked to be opening up to western companies.

Since this time, Statoil has failed to make further inroads into the country, whilst its peers have snapped up assets in the autonomous Kurdistan region of the country, which offers better financial terms and is a less hostile region compared to the rest of Iraq. To do business in Kurdistan, however, means to be excluded from operating in Iraq as Hess Corp found out last year, but companies with only a marginal exposure are already finding that the risk of upsetting the Oil Ministry in Iraq is far outweighed by the benefits that can be gained from working with the Kurdistan Regional Government instead. Statoil have never indicated that they wish to enter the region, but rumours have followed the company around ever since it tried to open an office in Kurdistan, before political pressure from Baghdad made them backtrack.

Although the deal is weighted towards gas, 37% of the reserves are composed of natural gas liquids which will offer some respite from ailing US gas prices. The reserves are highly developed at 81%, are 98% operated and the financing that Linn Energy agreed upon immediately following the purchase was at a competitive rate of 6.25% making this acquisition fairly safe if not spectacular. Upon the announcement of the deal, the lack of any dramatic change in the volume or share price of Linn echoed the sentiment that the deal value was fair but the level of debt that Linn continues to add to its balance sheet is likely to make some investors nervous.

The acquisition is the second largest in Linn Energy’s history, falling short of the company’s $2 billion acquisition of a package of assets in the US mid-continent from Dominion Resources in 2007. For BP the deal represents only a small portion of the funds needed to cover the $37 billion charge as a result of the Deepwater Horizon explosion. The deal fits in well with the BP’s divestiture plan to offload mature assets in order to focus on higher growth opportunities.

Whitecap Resources made its fifth significant acquisition in its short history with a C$550 million takeover of Midway Energy this week. Whitecap gained stock market status in June 2010 via a reverse takeover of Spitfire Energy and since then has gone on to make almost $1 billion worth of oil weighted acquisitions in West Central Alberta and South East Saskatchewan. These acquisitions have been financed via $500 million of equity transfers and $350 million of placings and despite the dilution in stock that this has inevitably caused the share price of Whitecap has still prospered with a 37% increase in the past year. This latest deal however has not been met with the same positivity as in the past with the share price of Whitecap falling 6% on the day of the deal announcement. The reason for this is likely due to the high metrics of the Midway acquisition, which even after taking into account the value of undeveloped land and tax pools, equates to $24 per proven boe and infers only a 2.5% annual return on the acquisition cost based on the NPV of these resources. This will significantly drop however if Whitecap reaches its stated target of a recovery factor of 15% as opposed to the 5.4% recovery rate that the reserves are currently based on.

In Ghana, Kosmos Energy increased its stake in the Deepwater Tano block by 4.05% via the exercise of its right to acquire Sabre Oil & Gas, in a deal that could range in value between $365 and $410 million depending on certain performance milestones. The main asset of the Deepwater Tano block is the Jubilee field, which was discovered in 2007 with recoverable reserves of 1 billion barrels of oil and has a current production capacity of 120,000 boe/d. The block also includes the Tweneboa and Enyenra discoveries and additional opportunities that may arise from the 2012 exploration programme on the block.

El Paso’s exploration and production division has been on the market since Kinder Morgan Inc announced a $38 billion takeover of the company in October 2011 and immediately stated its intention to divest all non-midstream assets. The final offer falls short of the value implied by the EBITDA multiple in the Kinder Morgan/El Paso deal, had the E&P division received the same premium, and short of Evaluate Energy’s prediction at the time of $8 billion. However, the Henry Hub benchmark price of gas has fallen from $3.39 per mcf to just $2.55 per mcf since the announcement of Kinder Morgan’s intent to sell.

El Paso has 3.3 million acres across the US which dwarfs the likes of Petrohawk’s 770,000 acres (who were acquired for $12 billion last year). The company is hampered by the fact that 85% of its production is composed of US gas and therefore exposed to the low natural gas prices. Also only a small proportion of El Paso’s leasehold comes from the US shale plays which has been the main driver of M&A activity in the country over the past 3 years. As per El Paso’s 2011 10-K, Apollo and Riverstone will receive 4TCF of proven resources at a cost of $10.72 per boe as part of the deal.

Cove Energy attracted firstly a $1.6 billion offer from Royal Dutch Shell but this was then usurped just two days later by the Thai based NOC, PTTEP who offered £2.20 a share, valuing the full capital of Cove at $1.8 billion. By the close of trading in London on Friday the share price of Cove stood at £2.40 indicating that a further offer by Shell is expected soon. The motivation for Shell and PTT to take over the assets of Cove is to get a foothold into the growing East African gas sector. A few years ago this region was largely unexplored, but since this time huge gas fields have been unearthed by Anadarko and ENI in Mozambique and Statoil in Tanzania which will justify a significant LNG sector off the East coast of Africa to supply the Asian markets. Cove is an equity partner in Anadarko’s discoveries in the Rovuma Offshore Area 1 block which are currently estimated to hold as much as 30 TCF of gas. Cove also holds further acreage offshore Kenya but recently entered a deal to dispose of its Tanzanian asset to Wentworth Resources.

Mitsubishi entered their second significant farm-in in recent weeks with a $280 million deal in Papua New Guinea with Talisman. This adds to the $2.9 billion farm-in of Canadian shale gas assets with EnCana last week. The deal involves 9 blocks which are not currently producing but are believed to contain enough resources to warrant an LNG export terminal.

Centrica continued their aggressive start to 2012 with another acquisition in the North Sea, this time via a deal with Total for $386 million. This adds to the $223 million deal with ConocoPhillips for the Statfjord field, the acquisition of the Fogelberg discovery and the award of 7 exploration licenses in Norway since the start of the year. Unlike other recent acquisitions by the company, this deal is weighted towards oil, with a 64% weighting for the 22 million boe of reserves being acquired (on a 2P basis).

In the oil services sector, URS Corporation acquired Flint Energy Services for C$1.475 billion. The acquisition metrics look high in regards to the EBITDA and cash from operations with multiples of 14.6 and 15.7 respectively. Flint Energy Services is a North American oil services company that specialises in the booming shale resource extraction industry.

The deal is a coup for Encana who have replaced one deal that included producing assets, pipelines and storage facilities for $7,700 per acre (unadjusted), with one that only includes undeveloped acreage for C$17,700 per acre. The terms of the deal are all the more impressive once the change in the gas price is taken into consideration, with the Petrochina deal struck when the Henry hub was trading at $4.22 per mcf, compared to the price on the day of Mitsubishi’s deal of just $2.67 per mcf. The Henry Hub price is fairly inconsequential however for this deal, with the majority of production surely destined for the Asian markets via the major gas exporting hub that it being built up in Kitimat on Canada’s western coast near Vancouver. The deal announcement gave Encana’s share price an immediate  5% boost, but the gains were soon tempered by Encana’s announcement of their 2011 earnings, which barely registered a profit following $1.3 billion of impairments, in what may be a common theme in the coming weeks for gas weighted North American companies.

CVR Energy received an unsolicited takeover offer from its largest holder Carl Icahn, who currently holds a 14.5% interest in the US refining and fertilizer company. Icahn had already spoken of his discontentment with the current share price of CVR Energy and although his offer represents just an 8.7% premium on the day prior trading price, Icahn is offering a further incentive of a bonus to shareholders should he succeed in finding another buyer within 9 months. The EV to EBITDA ratio for CVR for the latest financial period (Q3 2011) gives some credence to Icahn’s view that the company is undervalued, with a multiple of just 2.5 compared to the typical EBITDA multiple for US refiners of 5-6 just 2 years ago. Using this multiple however suggests that CVR isn’t any more undervalued than its refining peers, such as Marathon Petroleum (multiple of 1.9), Valero Energy (multiple of 1.9) or HollyFrontier (multiple of 1.3). And the refinery industry being “undervalued” hasn’t stopped Hess Corp’s Hovensa joint venture being permanently shut down due to poor returns, or Swiss refiner Petroplus recently going bankrupt.

ConocoPhillips furthered its asset divestiture program this week, with a $1.3 billion sale of its Vietnamese assets to private company, Perenco. The deal is by far the largest to date for Perenco and due to the non-disclosure of Perenco’s financial accounts, it’s unclear whether the deal will be financed through debt or existing cash. The assets will contribute close to 20,000 boe/d and will include pipelines and interests in fields that are yet to reach their full plateau production, such as the Golden Lion project, in which Perenco will become the second largest shareholder behind PetroVietnam.

Crescent Point Energy continued its aggressive acquisition program with the announcement of two deals in Canada. The larger of the two was a C$427 million acquisition in the company’s core operating area of the Saskatchewan Bakken from PetroBakken Energy. The second concerned a C$130 million deal in Manitoba, a province in which Crescent Point had only limited exposure to before this deal. Both acquisitions are heavily weighted towards oil, contain producing assets with additional drilling locations and accumulated tax pools. The transactions bring Crescent Point’s spending on acquisitions for the year to $1.2 billion, just short of the $1.3 billion the company spent in 2010 and half of the $2.4 billion total in 2009.