Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Julie Ryland – IR

James McManus – Chairman, President and CEO

John Richardson – President and COO

Analysts

Gabriele Sorbara – Caris & Company

Timm Schneider – Citigroup

Mario Barraza – Tuohy Brothers

Energen Corporation (EGN) Delaware Basin Joint Exploration Agreement with BHP Bilition Call February 22, 2012 11:00 AM ET

Operator

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Energen-BHP Joint Agreement Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

(Operator Instructions). Thank you.

Julie Ryland

Thank you, Amanda, and good morning. Today’s conference call is being held in conjunction with Energen Corporation’s announcement last night of a joint exploration option agreement between BHP Billiton and Energen Resources Corporation, which is Energen’s oil and gas exploration and production subsidiary.

A map that details the potential joint exploration acreage has been posted to Energen’s website, www.energen.com and you are welcome to access that and we will be making references to the map during prepared remarks. Our comments today may include statements expressing expectations of the future plans, objectives and performance that constitute forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

All statements based on future expectations are forward-looking statements that are dependent on certain events, risks and uncertainties that may be outside the company’s control and could cause actual results to differ materially from those anticipated. Please refer to the company’s periodic reports filed with the SEC for a more complete discussion of risks and uncertainties.

At this time, I will turn the call over to Energen Chairman and CEO, James McManus. James?

James McManus

Thanks, Julie, and good morning to you all. This agreement with the quality industry partner is a great opportunity for Energen. In short, BHP and Energen Resources have the opportunity to co-own and jointly develop 56,549 net acres in the Delaware basin. Almost all the potential JV acreage is in Reeves County, West of the Pecos River, and represents the leasehold we’ve acquired over the last several years. For Energen Resources, this agreement means that any development West of the River, in the Wolf Camp shale, 3rd Bone Springs or the Avalon shale, will be at a faster pace than if we developed the acreage alone. And on multiple levels this agreement means that Energen is minimizing its risk while preserving substantial upside.

Let’s take a look at some of the specifics of the agreement that we signed yesterday. BHP has agreed to purchase three wells that we’ve already drilled, for approximately 18 million. BHP will carry us in horizontal completion operations in two of the wells. In the third well, we will split completion costs.

The map on our website indicates the three wells with a green dot. Once BHP completes the purchase of the three wells and initiates horizontal completions in the two wells, they will have earned a 50% undivided interest in 4,829 net acres.

By May 1, 2012, BHP has the option to purchase from Energen Resources a 50% undivided interest in 51,720 net acres. To earn the right to exercise this option, BHP must begin horizontal completion in one of the wells it has purchased.

Should BHP exercise this option, we would expect to recoup all of our investment to acquire the acreage, and still have a 50% interest in the acreage. On a go-forward basis, the two companies would have rights to the Wolf Camp shale, 3rd Bone Springs and Avalon shale.

I specify on a go-forward basis because we retain the producing zone in our existing wells on the acreage position. These wells are outlined in red on the map. Once BHP exercises its option to purchase, the two companies will form areas of mutual interest around the larger acreage blocks and acquire future acreage in the Delaware sub-basis on a 50/50 basis.

The potential AMIs are outlined in purple and blue on the map. BHP would operate the AMIs outlined in purple, they represent about 75% of the net acres, we would operate the AMIs outlined in blue are approximately 25% of the net acres. We obviously don’t know at this point what the drilling activity level may be in 2012 and ‘13 from the potential joint exploration agreement. If BHP exercises its option to purchase, current year drilling could result and would most likely increase our planned capital investment.

It also would have implications on the capital and drilling plans we’ve already outlined for 2013. Regardless, we plan to continue implementing our existing 2012 capital drilling and development plans for the Delaware basin, East of the River.

So, what does this agreement mean to Energen? We stand to gain an excellent industry partner with whom to explore multiple trends across the substantial acreage position. We’re positioning ourselves to accelerate the exploration and possible development of multiple trends West of the Pecos River beyond what we could have done by ourselves.

We get a crew working up to two horizontal Wolf Camp completions. We’re positioned to recoup our investment in acreage acquisition West of the River, and essentially own 50% at zero cost, provides additional cash that can be invested in acquisitions and additional capital requirements generated by the joint exploration, if they exercise their option.

And I’d point out we maintain the Wolf Camp and Avalon potential on our acreage East of the River at 100% to ourselves. And finally, we still have substantial upside potential in the basin while minimizing our risk.

Let me do this, let’s now turn to Q&A. And Amanda, I’d turn the call over to you for instructions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Gabriele Sorbara from Caris & Company. Your line is open.

Gabriele Sorbara – Caris & Company

Just, it looks like the three wells you guys sold down to BHP can really de-risk that entire block there to the West. Just trying to get a sense of what zones BHP would complete, and where you guys completed -- were those 3rd Bone Spring wells from you guys?

James McManus

Gaby, we did not actually complete the wells. Johnny, why don’t I let you go through that? Two of those, we drilled the hole well. One, we drilled the horizontal leg I believe the Wolf Camp, I believe; and the other one, we’re going to.

John Richardson

I mean, basically was our 2012 exploration program which we’d now share with BHP. Two of those wells are horizontal wells. One is completed; one is completed drilling, casings run. The other one will be very soon; the lateral is drilled in it. And the other is a vertical test well; the well to the West is a vertical test well. So we are ready, pretty much ready to go with the completion stage on all three of those.

James McManus

Let me add, Gabriele, because I think Gabriele’s question was what zones. And the one that we’ve got completed, drilled horizontally, is in the Wolf Camp, is it not...

John Richardson

Yes, both the laterals...

James McManus

Both laterals in the Wolf Camp and then in the vertical well, the other vertical well at this time it hadn’t been decided what we are going to complete in that well.

Gabriele Sorbara – Caris & Company

Okay, great, that’s helpful. Any chance of what kind of valuation, what consideration that acreage could get that additional 52,000 net acres if the option is exercised?

James McManus

Our cost in that acreage is about 100 million.

Gabriele Sorbara – Caris & Company

But in terms of BHP acquiring that acreage, what kind of value could we get?

James McManus

Well, we would recoup all of our costs, and our cost is $100 million, so, 100 million.

Operator

Our next question comes from Timm Schneider with Citigroup. Your line is open.

Timm Schneider – Citigroup

So, obviously this is only, their decision is two and a half months from now, May 1st. Did you guys get that there is a sense of urgency on kind of the way they are thinking about this, and can you give us a little bit of a history of this transaction, who approached who, and how all this came about?

James McManus

Basically BHP acquired Petrohawk, and Petrohawk had been pretty actively trying to pick up its position here as a part, before BHP bought them, and then as a part of BHP. And we’ve had a number of discussions with them about sharing information in this basin. And because of the relationship that grew out of discussion about how to develop this basin and things that they are testing in Reeves County as well, it naturally led to a discussion of potentially partnering on this deal and out of those discussions came this joint venture agreement.

Timm Schneider – Citigroup

Now, assume two different scenarios, right? Assume you’re doing the joint venture in one scenario; assume you’re not doing it in the other one. Kind of how do these two different plans progress over the next couple of years?

James McManus

Well, our hope is that we will be successful enough in the drilling and testing of these wells, that BHP will be interested in going forward on the joint exploration, and that they will exercise their option. Now if they don’t, then we will have to look at how we approach the acreage and testing on our own. And I don’t know what the answer to that is right now.

Timm Schneider – Citigroup

Okay, guys. I will get back in the queue. Thanks, guys.

James McManus

We had just to add a little bit to that, as Johnny said, we had drilled these three wells out there to sort of start the process of testing outside of the basin, and had not quite gotten to the completion stage when this joint venture agreement was struck.

Operator

(Operator Instructions). Our next question comes from Mario Barraza from Tuohy Brothers. Your line is open.

Mario Barraza – Tuohy Brothers

Hey. Some clarification on the 100 million, is that cumulative to the 18 million, or in additional?

James McManus

In addition to, and it would also -- we are going to get carried in a couple completions here that are going to probably cost in the neighborhood of $12 million. So, we get $18 million for the wells, ball park completion costs about $12 million and then our cost in the acreage is right around $100 million. And it’s a lot of acreage; we would still maintain 50% of it, but we would have no cost in it because we are recouping all the costs that it took to buy it all but we are still getting it, we are still retaining a 50% interest, if you follow that.

Mario Barraza – Tuohy Brothers

Okay. And then just on another question, you guys had said during the fourth quarter call that you had put a few of the Bone Spring wells with higher water cuts on pump. Do you have any update on that, by chance?

James McManus

No update at this time.

Operator

We have no further questions at this time. Mr. McManus, I turn the call over to you.

James McManus

Okay. Well, thank you for joining us today. Again, we are excited about this development and think it can help us out in a lot of different ways, and appreciate your interest. Thank you and you all have a great day.

Operator

And this concludes our conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Energen Resources' CEO Discusses Delaware Basin Joint Exploration Agreement with BHP Bilition (Transcript)
This Transcript
All Transcripts