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

Energen Corporation (NYSE:EGN)

Q2 2012 Earnings Call

July 26, 2012 11:00 AM ET

Executives

Julie Ryland – VP, IR

James McManus – Chairman and CEO

Chuck Porter – VP, CFO and Treasurer

Analysts

Holly Stewart – Howard Weil

Tim Rezvan – Sterne Agee

Cameron Horwitz – US Capital Advisors

Gabriele Sorbara - Imperial Capital

Timm Schneider – Citigroup

Cameron Horowitz – US Capital Advisors

Operator

Good morning. My name is Julie and I will be your conference operator today. At this time, I would like to welcome to the Energen, Second quarter 2012 Earnings Conference Call. (Operator Instructions).

Thank you Ms. Julie Ryland, you may begin your conference.

Julie Ryland

Thank you and good morning. Today’s conference call is being held in conjunction with Energen Corporation’s announcement yesterday, of the results of operations of the three months ended June 30, 2012.

Our comments today will include statements expressing expectations of future plans, objectives and performance that constitute forward-looking statements made pursuant to the Safe Harbor Provision of the Private Security 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 more complete discussion of the risks and uncertainties that could affect the future results of Energen and its subsidiaries.

I would add there are four pages of maps in supplemental graphic information that we’ll referring to during this call. You may access these viewing them or pressing from our homepage, which is www.energen.com.

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

James McManus

Thanks Julie and Good morning to you all. This was another really excellent quarter for Energen. Earning adjusted for non-cash market-to-market gains of $0.73 per diluted shares, the first call estimate of $0.62. Our second 2012, Oil and NGO production increased 40% year-over-year, our Permian Basin production alone was 54% year-over-year and our total production was up 21% year-over-year, even though we’re not focusing on natural gas.

And our third balance spring was results continue to exceed our model and our Wolfberry well performance continues to meet our expectations. Last quarter, we told you about one of the third Bone Spring wells that had the highest initial rate in the play that we were aware of, this quarter, the Black Mamba 1-57 #1H in Loving County tested initial stabilized rate of 2257 BOE per day, 69% oil and that blew the first quarter well out of the water by about 500 barrel of oil equivalents a day. Once again, this well was not tested, wide opened, but rather on a 16/64 inch choke and had a pressure of 39,000 PSI so it obviously could perform even better than that.

But the biggest news it that we’ve added 1230 horizontal Wolfcamp and Cline locations to our potential drilling inventory in the Midland Basin and Eastern Shelf. Clearly, the pace of drilling in the horizontal Wolfcamp and Cline plays have increased and more information is now available that supports the viability of these emerging plays across much of our Midland Basin acreage as well as in Mitchell County on the Eastern Shelf where we have legacy water flood operations.

Based on well data and internal evaluations by our team of geologists and engineers, we believe that our current acreage position in the Midland Basin and the Eastern Shelf hold the potential for 860 drilling opportunities in the upper Wolfcamp and Cline as well as 420 potential locations in the middle and lower benches of the very thick Wolfcamp Shale formation.

Let’s take a look at the maps we have posted to our website beginning with an overview of the Permian Basin. If you’ve had a chance to pull those out, hopefully what you’ll see is we’ve sort of updated a little bit our total acreage position now to 275,000 acres and what we have done is overlayed our outlines of the new plays, the Cline play and the Wolfcamp play, particularly in the Midland Basin, we’ve also added an outline of the Wolfbone play in the Delaware Basin although we’re not active right now on the vertical play. And then on the left-hand side of the slide, we give you whether the play is vertical or horizontal and what we’re focusing on right now in each basins. If you then go to slide two, we’re going to give you a much more detailed view of how our acreage lies within these plays.

Most of you are familiar with our Wolfberry, so I won’t really cover that. Again, you can see our performance there, but obviously what’s new here is the Wolfcamp horizontal play, we’re showing 64,000 net acres in there and 785 potential locations on 160 acre spacing. And if you look at the map, down in Regan County and you go a little bit north, you’ll see that the red circle there where it has drilled eight horizontal Wolfcamp wells, the last two have been and 6,000 foot laterals and they’ve had very impressive IP rates of 900 per day. So just to the Southwest.

And then we also, as many of you know, participated in a well with Laredo where we have a red dot right there on the line between (inaudible) Glasscock County. Then we had a 21% working interest that had 700 barrel oil of equivalent per day sort of early IP rate from that 80% oil.

So we feel very good about this particular acreage, particularly in the southern portion of the region, but also that the play may have viability outside of Glasscock and (inaudible). In addition to that, we’ve identified 80,000 acres in the Cline horizontal play with 495 potential locations on 160 acres spacing. And again, if you look at the green circle above our acreage in Glasscock county you’ll see that the rate it was drilled 29 horizontal Cline wells bit of IP did an average of 600 barrel of oil equivalents per day.

It is also additional industry activity that’s not nearly on the map from Devon and others in the play. And we’re – in fact we were excited about the potential in the Midland Basin for both the horizontal Wolfcamp and the Cline. If we the return to the next slide and that we’ve outlined here, we really trying to do a sense for how the Wolfcamp sort of pick in as you move from the north to south. So, on the upper left hand of the slide, you’ll see the little rig we’ve drawn is Martin County. And then, on the far right hand side, Glasscock county and you can see that the Wolfcamp pick in as you move from north to south.

And one of the reasons we delineated how many number of wells we had is obviously the lower Wolfcamp as you can see goes away in Martin County. So if you go to the next slide, this sort of details our 1280 potential Wolfcamp and Cline locations delineated by upper Wolfcamp, 365 locations, 60 acres mid of Wolfcamp 250 locations 40,000 acres and lower Wolfcamp a 170 locations 27,000 acres and the Cline with 495 acres and 80,000 acres there.

So an analysis of public data and proprietary data has increased our confidence level in the upper Wolfcamp and Cline in particular which hold significant upside potential for Energen. This level of inventory could lead to many years of additional drilling and development for us in the Midland Basin. And we’re also very interested in undertaking a more detailed analysis of the potential that may lie in the lower benches of the Wolfcamp. As you all know, our oil production is heavily hedged, through 2014, it roughly $90. So absence of sustained collapse of oil prices, we are well positioned to pursue our Permian exploration and development regardless of spot prices for the next several years.

You can review our hedge position in detail in our news release. Just a few moments. I’ll turn the call over to Chuck Porter, our CFO, to talk about our financial results for the quarter and provide an update on our guidance for 2012. Before I do that, I want to review with you the results of our 3rd Bone Spring drilling in the Delaware Basin. Energy Resources 3rd Bone Spring program continues to generate outstanding well performance in the second quarter on its core acreage east to the Pecos River in Ward, Winkler, and Loving counties.

During the second we’ve drilled 13 gross 12 net 3rd Bone Spring wells at initial stabilize rates of the nine Bone eight wells we tested during the quarter range from 371 billable equivalent per day, 37% oil, to 2257 BOE per day, 69% oil, with an average of 1167 BOE per day, 67% oil. The six more in the second quarter was sufficient production history with 30 day average production rate was 895 BOE per day, 65% oil.

Through the first six months of 2012 we drilled 24 gross, 22 net wells, the average initial stabilized rate of the 16 gross, 15 net was tested 1104 BOE per day, 70% oil. The 13 grows to our net wells with sufficient production history generated a 30 day average rate of 772 BOE per day, 68% oil. Our plans for drilling 45 gross, 43 net flows out 3rd Bone Spring wells on our core acreage. Our targeted cost of drilling completed well in 3rd Bone Springs for the remainder of 2012 remains unchanged at 6.9 million, this drill and complete cost reflects 4400 foot laterals with 10 to 11 frac stages.

We also plan to continue running 5 to 7 rigs in the Delaware Basin this year, remain the same at 475 BOE per well, the company’s net revenue is 75% the initial 30 day rates of our 2012 3rd Bone Spring wells are outperforming the mile. We are not however are changing our EURs, because the variability among the well is evidenced by the wide range of initial test rates and over time we expect the average test rates to more closely resemble our model. Still we’re getting outstanding results in our 3rd Bone Springs. Our ultimate product mix in 3rd Bone Springs is 66% oil, 18% NGL and 16% dry gas.

At $90 per barrel and $4 for gas and gas related matters, this is mostly oil, our model supports a 56% pre-tax return on our 3rd Bone Spring program in our core area. We have approximately 82,500 net acres in the Delaware Basin thought to be prospective for 3rd Bone Spring Sands, 64,000 of those acres remain undeveloped represented 400 potential drilling locations on 160s, this take us to our core holdings to total approximately 30,000 net acre average 12,800 remain undeveloped, we estimate at that we have approximately 80 potential locations remaining to be drilled on 160-acre spacing in this core area.

In addition to the third month of spring, we are testing the horizontal Wolfcamp shale potential east to the Pecos River this year. We are drilling one well and plan to drill two more in 2012. Successful results from these wells to prove up additional Wolfcamp potential in this region and add substantially to our drilling inventory in the Delaware Basin, just as the Wolfcamp and client done in the Midland Basin and Eastern Shale.

We’d like to give you an update on the performance to the two horizontal Wolfcamp wells, in which we were carried with BHP, but as operator BHP is still in the process of hooking one of those wells go up and just wrap the other one online, so we really don’t have any information to share with you at this point.

At this time, I’m going to let Chuck talk about our financial results and look for the year as a whole. Chuck?

Chuck Porter

Thank you, James. The consolidated earnings in the three months ended June 30th, 2012 totaled $131.3 million or $1.82 per diluted share. Excluding non-cash mark-to-market hedge gain, Energen’s adjusted net income totaled $253.8 million or $0.73 per diluted share. The non-cash mark-to-market gains were $121.5 million pre-tax or $78.5 million after tax. Earnings in the second quarter of 2011 were $63.3 million or $0.87 per diluted share.

We experienced significantly lower natural gas and NGL prices in the second quarter year-over-year along with higher DD&A and LOE. The average realized sales price of natural gas is 36% and NGL sales price has dropped 21%. These items more than offset a 21% year-over-year increase in production that included a 26% increase in oil production alone. Our average realized sales price for oil also increased 8%.

Consolidated adjusted EBITDA totaled $201.2 million and compared with $172.6 million in the prior year’s second quarter. Excluding the non-cash mark-to-market hedge gains, Energen Resources’ adjusted second quarter net income totaled $53.2 million in 2012 as compared with $63.1 million in the same period in 2011. Energen Resources had adjusted EBITDA of $186.4 million in the second quarter of 2012 and $161.5 million in the same period a year ago. Second quarter 2012 production totaled 6.1 million BOE. Oil and NGL comprised 47% of total production, while 54% of our production is coming from the Permian Basin.

Total LOE $20 million in the second quarter of 2012 decreased approximately 9% from the same period last year to $11.80 per BOE. Base LOE in marketing and transportation expense has increased almost 5% to $9.69 per BOE. And commodity price-driven production taxes declined approximately 23% on a per unit basis.

G&A expense per unit in the second quarter 2012 increased approximately 36% from the same period last year to $14.90 per BOE. This increase generally reflects year-over-year increases in development cost and production. Per unit net G&A expenses decreased approximately 8% in the second quarter of 2012 to $3.77 per BOE.

Our natural gas utility, which has seasonal swings in earnings generated net income of approximately $300,000 in the second quarter of 2012 and 2011. And we assessed our year-to-date results and plans for the remainder of the year. We are reaffirming our 2012 guidance range for consolidated after-tax cash flows of $795 million to $824 million. We estimate energy and resources, after-tax cash flows also remain in a range of $694 million to $723 million in 2012.

Production amount of $22.5 million BOE is reaffirmed as well. We have revised our Wolfberry production estimate down 200,000 BOE. These constraints of our gathering system, we have license of corrected issue, but the efforts likely will not be completed before the end of the year.

We are all revising upwards by about $50 million on acquisition capital spending in 2012 to approximately $1.1 billion on a consolidated basis. This increase from our previous estimate of $950 million as a result of a variety expenses, these include additional investment in the Permian for revised project plans, including Wolfcamp, Tuscaloosa in the Delaware Basin. Some increased working interest in certain other wells, additional facilities and some increased cost. Energen Resource’s non-acquisition capital is estimated to be $1.0 billion and $1.1 billion capital expenditures in 2012 are expected to remain approximately $70 million.

In total in our news release details are estimate and it’s a production capital and net well cannot play for the year. I would note that the capital allocated to look can’t drilling in the Delaware Basin includes testing and others sides that goes beyond what we would expect on very well cost in this place being as successful. Our estimate on the expense items in 2012 also invested in our news release, along with our hedge position for the remainder of the year. Approximately 71% of our total estimated production for the remainder of 2012 it hedge. Our assuming prices applicable to you unhedged all the natural gas volumes for the remainder of the year remain unchanged at $95 per barrel and $3 per Mcf.

Our assuming price unhedged NGL production has been revised downward to 96 per gallon. We say this of course dramatically reduce the sensitivity of our cash flows to changes in commodity prices. Return to a change in the average NYMEX price of gas from $3 represents an estimated net income impact of $250,000 every $1 change in the average NYMEX price that hold from $95 represents an estimated net income impact of $600,000 and every once you’re changing the average price of liquids from $0.90 per gallon represents in estimated net impact of approximately $150,000.In 2012, our utility subsidiary has the opportunity to our return on average equity between 13.15% and 13.65% and we estimate that the utilities average equity in 2012 will be approximately $360 million.

At this time, I’ll turn the call back over to James.

James McManus

Thank you, Chuck. Let me take you back just for a minute on the slides, slide number two. I mean to mention a little bit about our great performance, which is right on target, but year-to-date performance you can see on slide two it’s in the press release. 81 gross and 78 net wells initial stabilize rate 85 BOE per day, 74% oil and a 30 day average rate of 69 BOE, 77% oil. And of course our acreage positions in un-drilled locations remain the same. So, thanks, Chuck.

There you have it a brief one down with the latest developments of emergent, in short 2012 get back at 90 and 4 of approximately 48%. A pace of 175 net wells a year, we’ve got 4.5 years worth of 40 acre drilling locations in inventory in the Wolfberry. Add to that, almost 4 years of 20 acre spacing.

And then of course the 860 Upper Wolfcamp in Wolfberry locations on 160s and we believe that we believe our perspective across our acreage and at the middle and lower Wolf camp and it will continue to prove economic, that’s another 420 locations on 160.That’s a lot of potential inventory. That means we’ve got very deep inventory we could drill out here for many, many more years and I think the – some have said how much inventory they have, they don’t seem to have quite the debt, I think, hopefully we’ve gone a long way towards resolving that issue in this particular release, not to mention the upside potential, that’s still out there in the Delaware Basin.

We’ve got a lots along there in the Delaware Basin, the third Bone Spring east of the river, their encouraging results from other operators, less delivered such as – we are moving quickly our sales this year to test the Wolfcamp potential as I mentioned east if the river by drilling three wells. And the Avalon continues to be of an interest at the right gas price. In short, I wouldn’t be surprised to find that our drilling potential in inventory – inventory in the Delaware basin arises at the end of the year. So great quarter, great prospects for the future. Now I’m going to turn it over to Julie for Q&A. Julie?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Holly Stewart from Howard Weil. Your line is now open.

Holly Stewart – Howard Weil

Good morning, good morning, Julie.

Julie Ryland

Hey, Holly, how are you today?

Holly Stewart – Howard Weil

Gentlemen, good morning.

James McManus

Hey, Holly.

Holly Stewart – Howard Weil

So couple just couple of follow ups, I guess maybe first starting with the plan for the Wolfcamp in the Midland Basin?

James McManus

Well, Holly, right now, we continued, we’ve got our Wolfberry program with 8 to 10 rigs out there drilling 170 net wells a year. And we’ll be looking at that when we put the budget together in the fall to see whether it’s anything we need or want to do there in ‘13 or later in ‘12. As we pointed out virtually all of that acreage will be held by production at the end of ‘12. So there is no – there’s no lease expiration issues that were purchased forward there. People continue to sort of prove that play around us. We are looking at the potential of the pickup. So more acreage there in the Delaware Basin, possibly. But we don’t have anything planned at this point. But we’ll be looking at that when we put our budget together in the fall.

Holly Stewart – Howard Weil

Okay. And then, you notice the, I guess the 20% working interest in that one Loreto, do you have working interest in some of the others?

Chuck Porter

We do not. That was the only one that we had a working interest in. But obviously, we’ve met with Loreto. We’ve talked with Loreto. We’ve shared some information and data with Loreto and we’re really excited about the acreage we’ve got there.

Holly Stewart – Howard Weil

Perfect. And then James, you mentioned in your update on what BHP’s assist on and reeves. Any commentary from any other operators out there that if have seen results and reason?

James McManus

Well, you do have a contour well drilled on the eastern side of the Delaware Basin – on the west side of the river, but more to the eastern side of the basins that the raw had number two, I believe and the results have been poured in that well. Johnny may have that information right here as a very good well as best we can tell. That information is public. They’ve reported an initial rate and a 30 day rate. And while I keep talking, he’ll probably find it. I will, at least admit to you, at this point in time, BHP does plan in the first quarter of next year, now that can change. But they’ve planned to drill two offsets to the well that we’ll participate in with them on the west side of the river.

And then another two offsets to a well that they bought on the far western side. So they planned for on the acreage that they earned by drilling those three well. You remember, they didn’t exercise their option. But they did earn a little acreage around the well bore and they do have planned four offsets that we’ll participate in, in the first quarter of next year.

Holly Stewart – Howard Weil

Okay.

James McManus

Did you find that. Yeah, we did.

Chuck Porter

The actual well is the contour well had four number three H. It is public and the first 30 day average was 693 barrels of oil a day and another 391 in MCF of gas a day. So about 750 barrel a day equivalent well down there which is listed as Wolfcamp. But we don’t have a lot of insight into that well. But we did pick it up on the public day. And interesting well as James mentioned, it’s a little south of where we are. But on the eastern side of basins. So an encouraging pace of news. And I think we’ll see BHP doing some things in the last half of the year. That’s what we just anticipate. James mentioned one of those well has just been hooked up. So we’ll be monitoring that well and we’ll see what future activity we can pick up on the western side.

James McManus

But there’s a number, probably never been operated – doing things out on the western side ERG would be – Cimarex have had some activity out there. We expect that BHP at least today but run almost four rigs out there. And we expect them to have perhaps some activity on the Western side. Where we don’t have a working interest. So we’ll be watching that as well.

Holly Stewart – Howard Weil

Okay, that’s great color. And then just two more again your answer either quick for you. On just some of the activity, you said you had drilled a well in the Delaware Basin targeting the Wolfcamp.

James McManus

We have, we’re currently testing that world and working on that well. And we’re not going fair to release any results on that well. Obviously because it’s in that phase but we have a horizontal well. We’ll get them on the east side and we’ve got two more two more planned.

Holly Stewart – Howard Weil

Okay, two more drilling now. Okay and then..

James McManus

So hopefully, we’ll see I guess that we will have some information on that in October.

Holly Stewart – Howard Weil

That’ll be great. And then just a final one on the west of the take ups, any activity to speak up on I guess on your – else provide and then kind of what the plan as you’re going forward.

James McManus

Well, at this point, we don’t have any drilling plans on the website. All of our concentration has been on the east side, we’re looking that. We’d pull the budget together and of course that could change based on oil results that others might have between now and then. But, right now I think we’re content to stay east side focus will have been fantastic results and we never get these four wells that BHP’s is going to drill. We have a working interest in the first quarter next year. So, don’t know right now, if we’re going to do anything over there in 2013 at this point yet.

Holly Stewart – Howard Weil

Okay, great. Thanks.

James McManus

Okay.

Operator

Your next question comes from the line of Tim Rezvan from Sterne, Agee. Your line is open.

Tim Rezvan – Sterne Agee

Hi, good morning folks.

James McManus

Hi, Tim.

Tim Rezvan – Sterne Agee

A few quick ones kind of following up on some of the prior questions. You seemed to be, with the updated CapEx guidance. We’re looking at a kind of overspend issue in 2012. It’s safe to say that, we’re not likely to see additional kind of increases there. But what I’m getting out this going to how we talk about developing this new inventory you’ve going to rolled out last night.

James McManus

Yes. Tim we really put all of that together in the follow. And we going to look at our, our budget. And we’ll be looking at what we want to develop and what we want to spend in each one of those players. And we haven’t put all that together yet. What we have talked about is that if we do similar to what we did this year, that we thought would be pretty well close to cash flow break even that’s really I’d really say that 13.

Tim Rezvan – Sterne Agee

Okay. I’ll wait back in the queue. Thanks.

James McManus

Yeah, sure.

Operator

Your next question comes from the line of Cameron Horwitz from US capital Advisors. Your line is now open.

James McManus

Hi, Cameron.

Cameron Horwitz – US Capital Advisors

Thank you. Good morning, everyone.

James McManus

Good morning.

Cameron Horwitz – US Capital Advisors

Just a couple of quick ones for you. It looks like the Wolfberry well costs may pick up just a little bit. Is that really a function of any differences in terms of completions or what’s the driver there?

James McManus

No, I it hadn’t really picked up. John, do you want to talk about that a little bit? The capital increase really is not Wolfberry related.

Chuck Porter

No, as far as Wolfberry down the stretch e are going to do a little bit of a quoting program in the last part of the year, we’re picking up, we’re ready to do that. We’ve got a few facility issues that we are addressing but as far as well on well capital, it’s pretty consistent.

James McManus

The rig count increase, Cameron, is really to do some quarrying in the Cline and the Wolfcamp for the horizontal potential, so that’s the adder there. It’s not really that we’ve increased drilling cost or increased our investment there, we still plan on 170 net wells. So –

Cameron Horwitz – US Capital Advisors

Okay. That how –

Chuck Porter

Cameron, this is Charlie, just a bit on that, little bit on that. I mean, we’re still very comfortable with the $3.3 million – the aggregate cost going out on the Wolfberry area relates more to a combination of adding some kind of one time facilities, we often did some additional zone testing, and then there were some cost kind of creep, if you will, some of which frankly was cost that kind of came over from 2011 activity, kind of some late bills and invoices coming in. But the main point, I think takeaway is that we’re still very comfortable with the $3.3 million on a going forward basis.

James McManus

That’s good job.

Cameron Horwitz – US Capital Advisors

Okay. That’s helpful. Thanks. And then just also well costs, thinking about it, I know it’s early and you guys aren’t drilling any of this year but in terms of the horizontal program, I mean, what would you guys expect on well costs both for the Wolfcamp and Cline when you do kind of transition to horizontal?

James McManus

Yeah, of course, the lateral link is going to be a big dictator there, for example, the John, you checked me on this because we got a lot of numbers flying around, but the Yellow Rose, which was – Wolfcamp was only 4400 foot lateral and I think the cost on that one was around $7 million. But if you get out to 6000 feet, I think we have some of those numbers. We can tell you what we think is short, we have – what a short lateral is and then what a longer lateral is, I know we had it yesterday.

Chuck Porter

We do try to find that James, so –

James McManus

You got the Board presentation from yesterday, anybody? Okay. We got that information. We’ll find it, just a second. And things are little in the industry, Cameroon, so, Cameroon, 4,000 $7.7 million.

Cameron Horwitz – US Capital Advisors

Okay.

James McManus

75,100 foot climb well fell $11 million. Wolfcamp, 75,100, $10 million, but that’s a little bit shallower in 4,000 foot Wolfcamp $7 million. So we’re – yeah, it’s kind of 7 to 10, depending on how fully to go with the lateral. Does that make sense?

Cameron Horwitz – US Capital Advisors

Okay. Yeah. It’s very helpful.

James McManus

I mean a lot of this is dialing off of obviously Laredo information since they’ve got a lot of stuff published out there and they’re very close by us. And we work through altogether with them.

Cameron Horwitz – US Capital Advisors

Great. That’s it from me. I appreciate it.

James McManus

The economics look really, really good on both of these placements, and that’s why we cataloged and are excited about it.

Operator

Your next question comes from the line of Gabriele Sorbara from Imperial Capital. Your line is now open.

Gabriele Sorbara - Imperial Capital

Good morning, guys, Good morning, Julie.

Julie Ryland

Good morning, Gabriele.

Gabriele Sorbara - Imperial Capital

Most of my questions have been answered. Maybe we can dig into that a little bit. You had a really nice well here at the Black Mamba. It looks like it’s about maybe 7 to 9 miles away from kind of that little area you guys were drilling in 2011 in and Ward County. Just trying to get a sense, is this a one-off type well? Did you see anything different? Are we going to continue to see variability or is it a sweet spot?

James McManus

Yeah, I’m going to let Johnny address that. We really didn’t think though that we were (inaudible). You can’t make this stuff up the real well name is Black Mamba, but I’ll let Johnny – but, Johnny, you want to comment on that?

Chuck Porter

Yeah, all of the above, Gabriele, it’s geology, it’s going to change as we go. We are pleased that you’re right, we are close 5 to 7, maybe a little bit further miles away from the (inaudible). So we continue to see nice wells in that area. As you move back closer to the west side, you do see some variability, but overall, we’re very pleased with that program. And we continue to drill strong wells throughout the Bone Spring on the east side of the river.

James McManus

Yeah, I mean, I’ll go a little further with the commentary. I don’t know of any other operators that’s got a stronger basket of wells in the 3rd Bone Spring in Texas that we drilled this year.

Gabriele Sorbara - Imperial Capital

Great. The wells look a little bit gassier this quarter. Is something you expected from that area or is that kind of a surprise for you guys?

James McManus

I think we’re still in the range of tolerance and of course you can have a well that comes in with a lot of the gas, sort of skews it. But I think we’re still very close, may be fall back a little bit, but still around the 70% mark, which is excellent. And I think that’s just statistics, Gabriele, next quarter I may reverse itself again.

Gabriele Sorbara - Imperial Capital

Okay. It looks like you bid on some acreage in Lea County, New Mexico, just curious how much legacy acreage you guys have up there and how much acreage is available for leasing – blocked up already?

James McManus

Well, we have very little legacy acreage up there. We do operate a couple of properties where you have joint interest at a couple of properties that just came through acquisitions years ago, we never really made a leasing push in that area, we’re looking at it now. There are some sales out there that where acreage still pops up from time to time, but most of it is locked up as you have observed here, that is a very good price and we keep looking acreage has had the shelf life in every now and then and it turns over. So we keep come in the area for more acreage to pick up.

Gabriele Sorbara - Imperial Capital

Okay, great. I know it’s very early, but how do we prioritize kind of the Wolfcamp, Cline. And some of these other plays, you guys have in your inventory. And it sounds like we’re going to get the CapEx and production guidance update probably later this year. I just wanted to get a sense of, if you were to put money somewhere first, where would it be?

James McManus

Yeah. Well, Gabriele, right now obviously we’re going to probably at this point we’re continuing to focus on 3rd Bone Spring, Delaware. But if we get success in the Wolfcamp and these three wells we drill, we might well shift over to Wolfcamp as we would hold up all. And how we factor in decline in the Wolfcamp since there is no pressure relative to lease expirations, that’s something we’re going to look at with our overall capital structure, cash flow, production growth, all those things will be in the mix and we’ve not done that yet, that’s probably until the fall.

Gabriele Sorbara - Imperial Capital

Okay. Just quickly, just a significant, and that well, but Wolfcamp well – Pecos River, was that completed or when is it scheduled to be completed?

James McManus

It’s completed.

Gabriele Sorbara - Imperial Capital

Okay. Thank you, guys. Appreciate the color.

James McManus

Thank you, Gabriele.

Operator

Your next question comes from the line of Timm Schneider from Citigroup. Your line is now open.

Timm Schneider – Citigroup

Hi, guys. How is it going?

James McManus

Hi, Timm.

Chuck Porter

Hi, Tim.

Timm Schneider – Citigroup

First question is, I know – this is with respect to Midland. You talked about that the down spacing to 20 acres in the Wolfberry anti-horizontal development of the Wolfcamp would be mutually exclusive, is that still the case and if what do –

James McManus

Yeah, – go ahead.

Timm Schneider – Citigroup

I was just wondering if they kind of means that the down spacing is off the table now and you guys are focusing on the horizontal development or how you guys are thinking about that?

James McManus

Yeah, it’s no required to get this – steady in terms of the horizontals off the table. For example, you could imagine that you might still have enough uphold, If you drill a horizontal clients still support a vertical down space, moves very well that’s comprised that the (inaudible) in Wolfcamp now, where you’re completing in the Wolfcamp that might well aluminates 20 acre down spacing. And so really just can be looking at the economics of which one of those two are better at this point as start to look like the horizontal side of things, might well it good, but they’re not completely mutually exclusive because you might be able to sit a client horizontal and as well.

Chuck Porter

And let me add Tim, I mean – at the Wolfcamp is a tremendous resource, so I wouldn’t say that anything’s off the table as James as pointed out, we still may be able – we’ll have to look at the geometry, but those two may not be mutually exclusive any more we made – there may be some combination one may went out of the other. But there’s a lot of resource, there is lot of geometry we need to look at for the future.

James McManus

Yeah, I guess the best way to say at now, we’re not sure that they are mutually exclusive at all.

Timm Schneider – Citigroup

Okay, got it. Could there be a every situation we can actually re-enter existing vertical Wolfberry wells and complete those as horizontal for some of the disformations.

Chuck Porter

Not really, even now we run larger casing the most 5.5 benches, lead to be shrim healing with these long laterals little – these all will be great through wells and we would want to take those other softline anyway.

Timm Schneider – Citigroup

Got it.

James McManus

And – go ahead.

Timm Schneider – Citigroup

Okay, actually go ahead, if you have to scrub anything that…

James McManus

Well, I’m going to say, well, I got you in the line, clearly where you are seeing most of the activity is up of Wolfcamp and Cline in the Midland and that’s the part that we feel the best about right down but the middle of lower I think operators are going to start to move to test it.

Just like a approach has down, down any, it’s in arch area and you that resources there as well. And that’s why we catalog that resource also if you – but in terms of where we feeling the best about right now, also lot wells in the upper Wolfcamp and the Cline and continuous improvement has been made by the completion techniques and lateral links.

One of things we’ve benefited from is watching that process and we get ready to jump on the train, we’ll jump on it way ahead of the start point that those who kind of kick the playoff that anyway. And this one, I guess this is more with respect to your actual 1300 locations. My question here is, is it just kind of was it just kind of based on read throughs of what had done with respect to 160 acre drilling or did you guys do any risking here, should we just look at this kind of un-risked potential that you guys are looking at?

Chuck Porter

I think it’s unrisk potential, and I think the way you kind of approach it makes a lot of sense, frankly, others may approach it a different way but the way you when add it makes some sense to me and obviously not every location we got on there may not came out of it, it’s an unrisk situation, but it’s based on a lot of work that we did and these are potential reserves they’re not P1s, P2s are P3s. But they feel pretty good right now. So my guess is, some of this would definitely move into the possible category based on the results their operators are getting.

Timm Schneider – Citigroup

And then lastly, I guess this is a longer-term strategic question. So just going up the 1300 locations, you know you essentially doubled your current existing drilling inventory kind of ignoring derisking aspect of the equation, so how do you guys think about the development of this acreage over the longer term and maybe pulling forward some of this NPV by accelerating the development. How would you fund accelerated growth and should be open to strategic initiatives. You know I’m thinking maybe joint ventures or so are potential divestitures in your portfolio.

James McManus

Yeah, Tim, I think has to be on the table as you sort of consider, what’s the best place to put your capital and how you would develop things and as these plays become even more developed and you feel better about it, those issues are going to kind of crop to the top. One of things again, we’re going to be looking at is the other, the backdrop of all this is fear of oil price drop as well and how far extended you wanted to get out there on some of this stuff while things are a little bit, but curious overall, even though we have to get hedge position and I think in the fall as we look at all of this and catalog inventory have more information.

We’ll be looking at coming out kind of with an overall plan. No, I’m not telling anything but the reason I can’t tell you anything as a lot of this is just now coming to lever up and we’ll be making these decisions on looking at these issues as to which is the best way to deal with our overall capital but in terms of what we would consider, and how we would look at it, I think we have to consider everything we thought have value.

Timm Schneider – Citigroup

Okay, perfect. Thanks guys.

Operator

Your next question comes from the line of (inaudible). Your line is now open.

Unidentified Analyst

Good morning, guys.

James McManus

Hi.

Unidentified Analyst

Hey, how is everything going?

James McManus

Right.

Unidentified Analyst

That’s good. Adam, just a quick housekeeping question on the vertical Wolfberry, it looks like you guys completed and tested 28 net wells this quarter. What was the average initialized rate for all those wells?

James McManus

Yeah, we’ve got that information, I think, just a second we have to get it out.

Chuck Porter

It was may be slightly less than what the year-to-date was, but like three or four barrels a day.

Unidentified Analyst

Yeah, yeah. I know, it looks like it’s just a small downtick, I mean because of first last quarter, it was at 88, I believe I doubt. So it’s slightly lower on is that to do with the constrain sorted something changed within the wells that you guys drill this quarter.

Chuck Porter

That’s actually got a little bit to do with constraints. We’ve got some back pressure issues and we don’t – we’re not I mean the performance and the consistency is there, but we do have a little bit of back pressure.

The gathering system that we build just not going to hold or hold, we’re trying to push through right now, that’s one of the cost checks talking about that we’re making to solve that problem.

James McManus

Our 31 wells averaged 81 barrels of oil equivalent a day, 77% of that was up and the reason like all is up, percentage is up is because we do have back pressure on the gas side, which goes back, getting back pressure in the total system which does retired your overall production up yet, and they’ve really two categories.

One is internal and we have and some of our properties an internal issues where we do need to increase our facility sides and our transportation pipeline sides, we know, we have a little external constrain going on and we are, so we have two different solutions placing compression and some things in line there. So, yes, something that we have to overcome, but nothing wrong with the Wells at all. It just a little pressure problem that’s sort of, man-made.

Julie Ryland

This is Julie again in the – given that these wells are statistically consistent, Yeah we may won we moving away from – this is full in development stage, we’ve got a couple years now worth of results under our belt they are different creature, frankly, from but still evolving 3rd Bone Spring and it may well being that, we don’t go into a lot of detail. That’s one reason that we took out the second quarter results. And just ramp with year-to-date sort of rimmed, we sort of riming process but and then only really talk about if there was some significant deviation upper, down. So that maybe in the hopping as well on a go-forward basis.

Unidentified Analyst

Okay. And I know you guys are right now we’re in the early stages of figuring out how we’re going our plan CapEx for next year, but if you are going to accelerate on the horizontal side, do you foresee any midstream or gathering constraints because you’re not the only ones who having this issue right now and in the Midland Basin?

James McManus

Well, Murray, that’s something we’ll certainly have to look at. We’ve not had any constraints so far. I would point out we are operating at a pretty high capacity as a company relative to the number of rigs we’re operating out here. We’re the sixth most active operator in the basin. So anything that we may do maybe a shifting of one activity to another more so than an overall increase in activity. That’s another way. We’ve just got look at the whole thing and see how it comes together, Manpower, resources, rig availability, MPVs of various plays tested against one another and also where we are on the risk curve on these various plays and which one we want to take a little bit more time before we go after. I know that’s a lot of information, but all of those things are things we’re going to be looking at. We don’t have the answers yet.

Unidentified Analyst

Okay. Well, I appreciate your time and looking forward to seeing you guys in a couple of weeks.

James McManus

Great. Thanks.

Unidentified Analyst

All right. Take care.

Operator

Your next question comes from the line of (inaudible). Your line is now open.

Julie Ryland

Hello? I think we might have lost him, Julie. Is there any other questions or we’ll wind up.

Operator

Yes.

Julie Ryland

Okay. Great.

Operator

Your next question comes from the line of Cameron Horowitz from US Capital Advisors. Your line is now open.

Cameron Horowitz – US Capital Advisors

Hey, guys, one follow-up. Can you just talk about from a high level perspective, what are you seeing in the Wolfcamp east of the Pecos River from a geologic perspective? How does that compare to what you saw to the west of the Pecos River?

James McManus

That’s a quantitative question with very little data really. I think we suspect we’re going to be all here. Hopefully we’ll see the oil cuts come up. I mean, we’re very optimistic as far as the shale quality. I’m not sure – physical basis we’ll see a lot of different at least not in relative terms that we can recognize today. We will do some science types of course, add to the body of data and begin to understand a little bit more, but we are hopeful basically, I mean, we know that the Wolfcamp has hydrocarbon in it, as we move east as the Bone Spring changes, we hope that the Wolfcamp changes also in a similar manner, we’ll say – higher, and a little more production on the east side of the river. That’s the sort of our theory that we’re chasing now.

Cameron Horowitz – US Capital Advisors

Okay. And I mean do you see the potential for various different – in the Wolfcamp there as well similar to what you’re seeing in the Midland?

Chuck Porter

Yeah, as we’ve disclosed, this one bench, there will be three benches out here as well.

James McManus

At least well – and when I say three, the lower one is pretty much wet so when John says at least two there will be an upper and middle probably out here.

Chuck Porter

And we are taking that data from that. So I think where of course James mentioned earlier that we don’t participate in that play right now. But we have noted that from operator’s comments in the way it’s looked that lower down is wider than the upper teens. We sort of narrowed our focus to those two.

Cameron Horowitz – US Capital Advisors

Okay. Thank you for that. And then just last one for me. And we saw several oil, I guess, rolls out of (inaudible) Gallup formation and San Juan, just to be aware of your thoughts there, in terms of prospectivity for you guys.

James McManus

Yeah. We think – we think we get that – Tim I think you said economic, It’s got excellent prospectivity for us and Canada has disclosed a 30 day IP rate for a well in lot called live broker at 438 barrel of oil equivalents per day 74% oil and we got in the library of oil phase we kind of categorize into one order, maybe a little bit more fractured one is not yet. And Canada seems to be playing where it’s not. We’ve got 81,000 undeveloped acres in that play in the oil phase, all pretty much held by production. So that has a lot of potential for us as a company if that turns out to be an economic play.

Cameron Horowitz – US Capital Advisors

No plans to test this year?

James McManus

Well, I mean again, our HBP in Kansas can drill a number of wells down there is a lot of acreage for people to necessarily grab. I think they joint ventured with some people who already had the acreage. And so, we don’t have any plan to test until the results get a little bit better frankly.

Cameron Horowitz – US Capital Advisors

Okay. Great. Thank you guys for all the color. I appreciate it.

James McManus

Thank you.

Operator

Your next question comes from the line (inaudible). Your line is now open.

Unidentified Analyst

Hey, guys. Hi, James.

James McManus

Hey, how you’re doing?

Unidentified Analyst

Can you provide some color on and how you’re improving, any shortages front fractionation of capacity like a pioneer earlier pioneer has some issues there. I just wonder if you have more clarity on that.

James McManus

Yeah, Pioneer, currently as we understand it, sell their own NGLs we contract for all that. And we’ve not really had an issue with moving the product that I know about Johnny wants any more color. We don’t have that issue.

Chuck Porter

James, interface rejection and I think we’ve budgeted well for that. We’re pretty well on track. But there some warming of the plants and rejection, but James mentioned, we did not experience those particularly difficulties.

Unidentified Analyst

Okay. So in terms of pricing trend that you see a flat pricing for the rest of this year and improving next year?

James McManus

I mean, who know really, we’ve got to assume $0.90 a gallon I think in our forward looking and that’s a realization that maybe 43%. So we’re not okay about that but who knows.

Unidentified Analyst

Okay. That’s good. So what’s the hedging philosophy going forward, would you ever have planned to monetize into many hedges to get some cash flow?

James McManus

No. I think another company did that didn’t work out the well form, I’m getting a little bit, but now I don’t think we would monetize any in the money hedges until the thought that we know which way pricing is going to go and then try to put them on later. I mean our intention when we hedge is to get the full benefit of the hedge.

Unidentified Analyst

Okay. It sounds good. And also for less River acreage any improvement infrastructure any color there in terms of build-up of gas processing plant.

James McManus

Well, the west side certainly we focused on the ease do you because the infrastructure is available over there and can readily meet your product now. We believe that the as there is success of the number of operators drilling that infrastructure will start to develop. But it’s pretty sparse over there on that side right now.

Unidentified Analyst

Okay, in order BHP is building out some tens there’s, so may help other operators?

James McManus

I think that’s true. If they get enough encouragement to one of the investing facilities and be forward in that direction. I think you’re absolutely right that will help out that’s far and been one of the most active people over there.

Unidentified Analyst

Okay. Thanks. I will jump back to the queue.

James McManus

Okay, thanks.

Operator

Our next question come from (inaudible). Your line is now open.

Unidentified Analyst

Hi, I think that I have couple of quick ones starting from the (inaudible)before. Can you just refresh me on HVP issues and that acreage West to the Chico’s that was involved the BHP potential?

James McManus

Yeah. We have got most of the expirations out there start to occur in 14, 15 and 16. I think there is roughly 19,000 acres and 13 expires with most of that being along in the June and July timeframe and what is that the world have to evaluate whether we want to overdo that based on what’s going on out there, but it’s more of a 14, 15 sort of issue.

Unidentified Analyst

I appreciate that, and then I’m back into that a bit, what kind of gas price do you need to make that – to make the dry gas drilling competitive in your portfolio.

Chuck Porter

Yeah, we’ve really talked about and I guess we are referring to all of your questions and I’m really talking about the upload within Canada, which is sort of south of the dry gas states in Niobrara and you’re going to coming back and referencing the dry gas part where there have been some pretty decent well as Joe. We think it’s more a $5 to $6 price would that start come interesting, but we think that’s a real reservoir. We like that we think that’s got great gas optionality in our portfolio, but it’s not something we’re going to undertaking until gas prices from back.

Unidentified Analyst

Okay. Great. And then one last one. Can you talk specifically about what gives you confidence on the client out in Mitchell County?

Chuck Porter

Yeah, we’ve got – we talked about that successful information now, again things are alluding at and haven’t been any well test out there, but we did drill saltwater disposal well on there we got to log, the client looks very similar up there on that log, as it does in Alaska county. And that’s really what we’re doing by we’re also going by the fact that Devon is leasing like Matt add in that kick of area and at least a lot of stuff right next door to us in Mitchell County. So those two are the factors that are leading us to believe, we build in lots in touch fiscal information that’s all you’ve got to go on. Now production is going to be the key, but on the log things look very similar. But you don’t want to take that to the house, but that’s a good indication.

Unidentified Analyst

Okay. And thanks for answering my questions.

Chuck Porter

Okay.

Operator

(Operator Instructions) Your next question come from the line of Timm Schneider from Citigroup. Your line is now open.

Timm Schneider – Citigroup

Hi, guys. Just one quick follow-up. I’m going to get two granular here with this CapEx stuff, but since it’s your bread and butter play. I noticed the CapEx into third Bone Spring actually went down $5 million from 350 to 345. I know it’s a lot, but just wondering what that was being driven by directionally?

Chuck Porter

I don’t think, I know.

Timm Schneider – Citigroup

Yes.

Chuck Porter

Answer to get I would stated there could have been some maybe has been some well substitution different (inaudible) a lot on that line, but it’s we didn’t think into that degree.

Timm Schneider – Citigroup

Okay. No worries. And then how much of the CapEx increase what you say was one-time in nature meaning was for gathering infrastructure or facilities along those lines?

Chuck Porter

Well, I was saying it’s kind of hard to say. We had about $7 million that relates facility related items, including additional tank batteries, water disposal and things like that. And maybe they were in addition to our plan, so that was – we also had about $14 million of items, that would be basically called new acquisition and they would range from additional – resold they bought the more small property acquisition that we made. And then maybe categorize some of it and let’s go change related to the Wolfberry that we’re doing along with some additional non-operated projects that came in. So again, I would just – we did have some of those increases, some of those which would be more one-time in nature. And again, we believe the important point is that we’re comfortable with the $3.3 million target cost in the Wolfberry and also the roughly $7 million in the Bone Spring.

Timm Schneider – Citigroup

Thanks, guys.

James McManus

Thank you.

Operator

There are no further question at this time. I will turn the call back over to the presenters.

James McManus

Okay. Thank you, Julie. And I appreciate you all being with us today. Thank you very much for your attention. And have a good day.

Operator

This concludes today’s 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 Corporation's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts