Founded in 1998, EPL Oil & Gas, Inc. (TICKER: EPL) is an independent exploration and production company headquartered in Houston, Texas with an office in New Orleans, Louisiana. The company's operations are concentrated in the U.S. Gulf of Mexico shelf, focusing on the state and federal waters offshore Louisiana.
Adds Five Blocks for $70.4 Million
On January 2, 2014, EPL announced the acquisition of assets in the shallow-water central Gulf of Mexico from Nexen Petroleum Offshore U.S.A. Inc. for $70.4 million. EPL also assumes asset retirement obligation for the region, which is expected to be roughly $27 million. Including the obligation, total cost for the assets is $97.4 million.
EPL assumes 100% working interest in five leases on the Eugene Island 258/259 field, specifically the 254, 255, 257, 258, and 259 blocks. The transaction is expected to close in late January 2014 with an effective date of September 1, 2013. The Eugene Island blocks are currently producing roughly 900 net BOEPD, with 95% oil. EPL estimates approximately 2.6 MMBOE of proved developed producing reserves (91% oil) as of September 1, 2013. Although the field has exhibited shallow decline, the company has identified upside potential beyond the current proved reserves, particularly in the deeper sections of the play.
The new blocks will be incorporated into EPL's research plans. In its Q3'13 earnings release, EPL announced the signing of 3D seismic commitments for $45 million. The testing will cover a minimum of 1 million acres (200 blocks) and EPL expects to have the data in-house by 2H'14.
EPL's guidance for the upcoming year, announced on January 6, 2014, consists of a front loaded $360 million budget directed at its core areas. The emphasis on early spending will expedite the company's goal of running eight rigs throughout the year, up from its current number of five. Roughly 70% of the budget is expected to be spent on drilling wells and sidetracks. The budget may be modified depending on production results and is not included with potential acquisitions. The capital expenditures will be funded solely through cash flow generation.
Pro forma for the Eugene Island purchase, crude oil production for midpoint 2014 is expected to be between 19.5 MBOPD and 20.5 MBOPD (increases of 15% to 21% over 2013). EPL is forecasting total production to range from 23 MBOEPD to 26 MBOEPD. EBITDAX is expected to range from $465 million to $500 million, using the midpoint and high-side of current guidance respectively.
Entering 2014, EPL's capital expenditure program is supported with nearly 13,000 BOED, or roughly two-thirds, of its oil production hedged with fixed price contracts at $93.67 per barrel.
Track Record Speaks for Itself
EPL's historical success in the shallow Gulf of Mexico adds further optimism for the recent acquisition. The company's primary objective after acquiring a property is to double its reserves. And EPL's track record speaks for itself.
In January 2011, EPL acquired proved reserves of approximately 8.1 MMBOE of Gulf of Mexico shelf properties from Anglo-Suisse Offshore Partners (ASOP) for approximately $200 million. In three years, EPL deployed its technology and operational know-how to the asset base to triple the proved reserves to approximately 27 million barrels of oil.
In September 2012, EPL acquired proved reserves of approximately 36 MMBOE in the shallow waters of the Gulf of Mexico from Hilcorp for approximately $550 million. The company is aiming to double the current reserve estimates in the play.
Since stepping up the acquisition front in 2010, EPL has expanded from its legacy assets in four blocks to interests in 49 blocks, while operating 31. As illustrated by the graph below, the company has successfully grown its base by unlocking previously unseen reserves and effectively making the most of its properties through execution and geological knowledge.
If history provides any insight into EPL's ability to successfully acquire undervalued assets and subsequently grow those assets then today's announcement may be another milestone in EPL's success.
Prior to the acquisition, EPL was trading at $26 per share. In an article from the Oil and Gas Financial Journal on December 12, 2013, CEO Gary Hanna said, "The stock currently trades even at 1P, but the 2P and 3P is very high quality and an oily, long-life play holds great reward."
The addition of 2.6 MMBOE of proved reserves has the potential to take that stock price higher if it continues to trade at 1P.
Final Thoughts on EPL
- Oil Focused. EPL's focus is to grow its oil-weighted production through acquisition and exploitation in areas within its synergistic footprint on the shelf. Despite holding property in the Gulf, EPL has a penchant for extracting oil from the historically gassy play. Approximately 73% of its total daily production is from crude oil. In its latest presentation, EPL describes how increased knowledge and testing of the Gulf is revealing oil reserves in the deeper parts of the region. The company expects oil to account for 80% of production in 2014.
- Growing Reserves. Pro forma for the acquisition today, EPL has roughly 80 MMBOE of proved reserves. Its proven plus probable plus possible reserves are between 150 MMBOE and 300 MMBOE. The company is now producing roughly 18,340 BOPD. EPL's three-year production replacement percentage is approximately 415% compared to other peer Gulf of Mexico shelf operators' percentages of 349%, 86% and 215%.
- Capital Efficiency and Asset Intensity. If these two metrics don't highlight EPL's growth potential, we're not sure what does. OAG360 notes EPL's TTM Capital Efficiency is 277% meaning for every $1.00 that EPL puts into the ground, EPL is generating $2.77 of EBITDA. The average for our database of 87 E&P companies is 219%. Additionally, EPL's Asset Intensity, or the amount of cash flow needed to keep production flat is 44%. This means EPL can reinvest 56% of its remaining cash flow towards growth. Other Gulf of Mexico shelf peer operators have Asset Intensities of 47%, 43% and 60%.
- Science. EPL strives to be leaders of science in the basin and invests in detailed geographical studies before undergoing drilling. The research resulted in a drilling success rate of 84% in 2013, and comparable results were seen in 2012.