Energen said that its considerable hedge position together with increased production and decreased per-unit lease operating expense (LOE) helped to counterbalance the negative impact on first quarter results of considerably lower oil and gas prices.
Energen’s oil and gas exploration and production subsidiary, Energen Resources Corporation, entered the year with 65% of its first quarter 2009 production hedged at prices well above market. As a result, Energen was able to protect its earnings and cash flows from the full impact of the major reduction in the price of natural gas, oil and natural gas liquids (NGL). For the first quarter of 2009, Energen Resources’ average realized sales price for its production of 26.7 billion cubic feet (Bcf) equivalent declined 19% year-over-year; without its hedges, Energen Resources’ averaged realized sales prices in the first quarter of 2009 would have declined about 50%.
Energen Resources’ first quarter 2009 production increased 9% over the same period last year. For the last several years, the company has accelerated development of its unproved reserves, primarily in the San Juan and Permian basins; the positive results of this acceleration are still being felt in 2009 even though the development pace has been slowed significantly due to current economic conditions and low commodity prices. Energen Resources estimates that its 2009 production will grow 4% to about 106.5 Bcf equivalents (Bcfe) in 2009 despite an estimated 50% reduction in identified capital spending relative to 2008.
Energen Resources’ total per-unit LOE in the first quarter declined about 18% year-over-year to $2.01 per thousand cubic feet (Mcf) equivalent (Mcfe). Base LOE and marketing and transportation expenses in the first quarter of 2009 fell about 2% largely due to decreased compression expense and lower field service costs, partially offset by increased ad valorem taxes. The biggest decline in per-unit LOE came from commodity price-driven production taxes, which fell 57% on a per-unit basis.
Probable, Possible Reserves Revised To 1.85 Tcfe:
An updated approximation of Energen Resources’ probable and possible reserves places the company’s unrisked, unproved reserves inventory at about 1.85 trillion cubic feet (Tcf) equivalent. Unrisked costs are anticipated to be $1.24 per Mcf equivalent (Mcfe) of probable reserves and $1.17 per Mcfe of possible reserves. Applying Energen own risking to its total unproved inventory, the total finding and development cost per Mcfe is an estimated $1.80-$2.10 per Mcfe.
As with Energen’s year-end proved reserves, Energen Resources’ technical staff estimates the physical quantities of its unproved reserves at year-end; these, in turn, are reviewed by independent reservoir engineers. The same commodity prices utilized to compute year-end 2008 proved reserves were applied in establishing the company’s probable and possible reserves estimates.
2009 Earnings Guidance Range Affirmed
The coampny said it is affirming its 2009 earnings guidance range of $3.10 – $3.50 per diluted share. A key component of this guidance is Energen’s assumption that commodity prices applicable to its unhedged volumes will average $6 per Mcf for natural gas, $50 per barrel for oil, and 65 cents per gallon for natural gas liquids.
“While our substantial hedge position significantly helps protect our earnings and cash flows from the full impact of current low commodity prices,” McManus told, “we are not immune to prices that average less than $6 and $50. Currently, natural gas strip prices for the remainder of the year are well below $6 per Mcf, while oil strip prices for the remainder of the year are just over $50 a barrel.”
Cash Flows Outlook:
Energen Resources ended 2008 with cash available of $24 million and finished the first quarter of 2009 with cash available of $52 million. After funding identified capital spending and a small portion of the company’s dividend, Energen Resources is anticipated to generate in 2009 free cash of $184 – $214 million, resulting in total cash available of $208 – $238 million. These considerable discretionary cash flows may be used to help fund the company’s strategic investment opportunities, including oil and gas property acquisitions and potential shale development. In general, Alagasco utilizes all of its after-tax cash flows to fund its capital expenditures and the majority of the company’s dividend.
Chesapeake Agrees To Farm Out Alabama Shale Acreage To Energen
Effective April 1, 2009, Chesapeake Energy Corporation has agreed to farm out its half-interest in about 660,000 acres in Alabama shales to Energen Resources. Under terms of the agreement, Energen Resources has 18 months to spud one Conasauga shale well and one Chattanooga shale well; after each well is drilled, Chesapeake will farm out its 50% leasehold interest in each shale to Energen Resources.
Chesapeake will hold a net overriding royalty interest of about 1%-2.5% convertible to a proportionately reduced working interest of 25% (net 12.5%) at 125% payout on a well-by-well basis. This will result in an after-payout working interest to Energen Resources of about 87.5%. The company intends to drill two wells within the terms of the agreement. The independent producer also plans to pursue a new partner as it seeks to unlock the potential of the Conasauga and Chattanooga shales in Alabama.
Credit Facilities Strengthened:
The company’s $200 million, bilateral line of credit with regions has been renewed for another 364 days. This line of credit will be allocated $165 million to Energen and $35 million to Alagasco. The company also has negotiated a $35 million line of credit with Citibank. Of that amount, $20 million is keen to Energen and $15 million to Alagasco. The new, 364-day, bilateral line of credit became effective last week. In total, Energen has access to $515 million of committed credit facilities.
