While ExxonMobil (XOM) and XTO Energy (XTO) may have stolen the spotlight Monday, this week has yielded some notable news on the smaller end of the exploration and production spectrum. Let's take a look behind the headlines.
Mariner Energy (ME) is an E&P I recently identified as having some serious depth. The company's deepwater Gulf of Mexico program has really begun to shine in recent years. Last week, Mariner shares rose on Anadarko Petroleum's (APC) announced discovery of the Lucius well in the Keathley Canyon region of the Gulf. Mariner and Plains Exploration & Production (PXP) have proven most wise to partner with the energy company of the year in the deepwater.
Despite its seafaring moniker, Mariner also has a major onshore component, focused on the Permian Basin in west Texas. The company is now branching out to a new core area, as it picks up bankrupt Edge Petroleum's operations for $215 million, net of adjustments. More than 80% of the acquired reserves are in south Texas. The purchase also brings in some complementary Permian acreage on the New Mexico side.
If you've come on board Mariner for the prospective offshore bounty, don't be too put off by this move. Think of the onshore business as the lowest-risk leg of Mariner's stool, providing support for its deep-sea adventures. The shelf and deepwater Gulf projects are going to provide more flash, but onshore development will require less cash.
Speaking of requiring cash ...
The last time we looked at Brigham Exploration & Production (BEXP), the company was exploding its share count with a major equity offering. These Austin, Texas, cowboys had overspent their freshly restricted bank line, and were turning to shareholders to plug the gap. When the company said it would use some of the proceeds to increase its capital budget, I couldn't believe my ears. It's a good thing the company's Bakken wells are coming on so strong, or shareholders would probably be demanding the CEO's head on a pike right about now.
Tuesday, Brigham announced that an operated Bakken well flowed at a rate of nearly 3,400 barrels of oil equivalent per day "during an early 24 hour flow back period." Note that does not say the first 24 hours. Brigham could have cherry-picked any period it wanted.
Despite adding more and more fracture stages to its Bakken wells, Brigham has seen its drilling and completion costs come down by more than a third with the industry downturn. What do you think is going to happen as oilfield activity picks up again in 2010? Schlumberger (SLB), Halliburton (HAL), and the rest of the stimulation crowd are eventually going to get their due, after slogging through a period of tough price competition.
While I believe Bakken well economics will continue to work in a $50-plus oil environment (Newfield Exploration (NFX) is more helpful than Brigham on oil price sensitivities), rising costs should factor into your valuation for any outfit doing big, multistage fracs. That's even more critical with regard to shale gas players, who largely face less robust rates of return than oil-directed E&Ps today.
Shale gas? Thought you'd never ask
Over the past year or two, we've seen countless international companies either buy or partner their way into North American shale plays. This week, Japanese trading house Sumitomo got in the act, entering into a joint venture with Carrizo Oil & Gas (CRZO) in the Barnett shale. While the former company gets to expand its natural gas footprint in the U.S., Carrizo -- fresh off a favorable borrowing base redetermination by its bank lenders -- will free up more firepower for its early-stage Marcellus shale program in 2010.
I wouldn't be surprised to see Carrizo bulk up this part of the budget (currently just $32.5 million net to the company) if early well results are strong, and private equity partner Avista Capital is game. Carrizo actually offers some of the highest leverage to the broader Marcellus play on an acreage-per-share basis, if you're seeking something smaller than one of my energy favorites, Range Resources (RRC).
Author's Disclosure: No positions in any company mentioned.