The growth of oil and natural gas production has been a constant feature of Enerplus'(ERF) performance. During the third quarter, Enerplus' production reached around 87,500 barrels of oil equivalent per day, or boepd, and registered growth of around 8% year over year. I expect that the company will continue its production growth streak even into the fourth quarter of this year. I have listed some metrics of the company to understand its production growth:
Crude oil and liquids production share
Enterprise Value, or EV
Enerplus estimates a production growth of around 7% for this year. Assuming a similar growth rate for the quarter ending in December this year, the company is expected to produce at a rate of 94,000 boepd. However, the company estimates average production of around 92,000 boepd during the fourth quarter. The proportion of crude oil and liquids was around 48% in the third quarter, which is equal to company's target proportion. The amount of crude oil and liquids production comes out to be 45,000 boepd on a total production of 94,000 boepd in the fourth quarter. At the current EV of around $4.76 billion, the EV/boepd ratio is expected to decrease going forward.
Production in the company's Fort Berthold project located in the Williston Basin, North Dakota is expected to support the growth of crude oil and liquids. During the third quarter, the production from this project was around 18,000 boepd from around 103 wells. As per the third quarter production rates, Fort Berthold constitutes around ~21% of the company's daily production. The company has more than 130 potential drilling locations with a proved reserve of around 43.7 million barrel of oil equivalent, or boe. If the company maintains a similar proportion of production from Fort Berthold, the increase in production in the quarter ending in December this year would be around ~20,000 boepd (based on production of around 94,000 boepd).
Looking at the high production achieved from two wells, Pinto and Mustang, I expect that the company could generate better production results in the coming quarters from the Bakken/Three Forks region. Pinto is located in the Bakken while Mustang is located in the Three Forks formation. The 30-day initial production, or IP, of Pinto and Mustang were more than 40,000 barrels and 36,000 barrels respectively due to better well completions. Enerplus plans to spend around 50% of its capital expenditure for the fourth quarter in this region, which is ~$113.5 million. At a per well capital expenditure of around $11.5 million in the region, Enerplus is expected to drill ~10 wells.
Production growth is also expected from Enerplus' two density increase programs in the Fort Berthold region. The two programs are Fur Bearers Pad, which consists of seven wells, and the Snakes Pad, which consists of eight wells. In the Fur Bearers test, the company completed three wells and the rest of the wells are expected to complete this month.
It has initiated Three Forks appraisal work. Enerplus is currently coring the lower Three Forks benches selectively across some of its acreage. Coring is a technique to study rock structures and determine whether oil and natural gas can be produced economically. EOG Resources (EOG), another company in the region, has shown positive production results from the lower benches in wells near Enerplus' upcoming Three Forks wells. The potential exists for Enerplus to increase its well inventory as it goes after deeper horizons.
Continental Resources (CLR), a major player in these formations, is one of the major lease holders in the region with an acreage position of around 1.2 million net acres. The company is carrying out a number of density pilot programs in the Bakken/Three Forks region, and it plans to drill around 300 wells next year. Among these wells, Continental plans to drill around 26 exploratory wells in the lower Three Forks formation. In addition to well drilling, the company has decreased well cost over the years; last year it incurred well cost of around $11.3 million per well and plans to decrease the cost to around $7.5 million per well by next year.
Marcellus continues to strengthen
Production from the Marcellus averaged 83 mmcf/d during the third quarter, well above the original exit guidance of ~75 mmcf/d. The production from Enerplus' Marcellus shale properties is expected to achieve high levels of production during the fourth quarter ending in December this year as new wells are brought into production.
Capital Spending schedule
U.S. natural gas year to date ($ million)
Total percentage of capital spending in U.S. natural gas
Estimated total capital spending for this year by Enerplus ($ million)
Total capital Spending year to date ($ million)
Capital spending on U.S. natural gas expected for fourth quarter ($ million)
Enerplus' wells in the Marcellus formation continue to see strong performance year to date, or YTD.
Average production rates range between 10 million cubic feet per day, or mcfpd, to 13.5 mcfpd, and capital expenditure is around $7 million per well. If we assume budgeted cost, this means the company is going to drill around ~five wells. During the third quarter, Enerplus drilled around 2.8 natural gas wells in the U.S. So, I expect the company is more likely to report a higher production from the Marcellus shale formation.
In addition to the company's drilling activities, further production growth is expected due the acquisition of Marcellus properties for $153 million, which will provide 42 mcfpd of production. These properties are located in the northeast shale producing region of Pennsylvania and have similar production rates as mentioned above.
I expect the expanding differentials of natural gas prices will affect Enerplus' revenue in the coming quarters. At an average selling price of $2.96 per thousand cubic feet, Enerplus realized average gas sale is around 20% lower quarter over quarter and $0.52 per thousand cubic feet lower than the NYMEX price. Iexpect the price differential will exist in the coming quarters due infrastructure bottlenecks in the region. The price differential will continue to persist at $0.80 per tcf of natural gas until next year when compared to the Henry Hub prices.
Another player in the Marcellus shale is Chesapeake Energy (CHK). The company's production in the Marcellus shale is around 825 mcfpd as of the third quarter of this year. The average daily rate of its wells in the Marcellus is around 9.3 million cubic feet equivalent per day. In comparison, Enerplus' wells in Marcellus have a higher daily output. Chesapeake has around 128 wells that are in various stages of completion.
The company is focusing on wells that have an estimated ultimate recovery, or EUR, of more than 10 billion cubic feet equivalent, or bcfe. Chesapeake currently operates five rigs located in Bradford and Wyoming counties. In Marcellus, the company is focusing on pad drilling. It has 65% of its wells on pads and plans to increase the number of pad drilling wells to 80% by the end of next year.
Strong results expected
Enerplus' operations in the Bakken and Marcellus shale are expected to provide strong production growth in the coming quarters. This production growth is expected to help the company reach its production guidance. In addition to production growth, the company's wells in both shale formations continue to show high production rates.
While production remains in place, the company has effectively managed sales of its natural gas production from the Marcellus shale by going into long-term sales contracts. This will help the company manage the price differential arising due to infrastructure problems. So, Enerplus' strong production coupled with its production management will give the company better revenue in the coming quarter.