Aurora Oil & Gas Limited (tickers: AEF and AUT) is a Perth- and Houston-based oil and liquids company with operations in the Eagle Ford Shale trend of South Texas. Aurora has 88,800 gross (22,000 net) acres in the “tri-county” area of Karnes, Live Oak and Atascosa Counties, Texas. The company’s largest asset in the Eagle Ford is Sugarkane Field which is operated by Marathon Oil (ticker: MRO).
At Marathon Oil’s analyst day on December 11, 2013, MRO announced $2.3 billion of its $5.9 billion 2014 budget will be allocated to the Eagle Ford, with plans for drilling 250-260 net wells (385-405 gross, of which 340-355 are company operated) in 2014. This represents a 20% increase in spending from 2013 levels.
Aurora estimates that more than 50% of the $2.3 billion allocated to the Eagle Ford will be invested in the Sugarkane Field resulting in increased drilling and spending.
Key highlights of Marathon’s outlook and initial implications for Aurora:
Higher well density – more well locations
Production data from MRO’s downspacing pilot program demonstrates that existing 40 and 60 acre spaced wells deliver higher initial results than wells at historic 80 acre and 160 acre spacing. Marathon will focus developments on 40 to 60 acre spacing, and put in place a 30 acre spacing pilot in 2014 in the high GOR oil window. Aurora currently estimates 800 gross proved well locations on 80 acre spacing on its non-operated acreage. Applying the mid-point of MRO’s 40 to 60 acre wells would increase Aurora’s estimated gross proved well locations to 1,280 from 800. This is not too much of a stretch when you consider that back in February 2013, Aurora purchased a 100% working interest in 2,700 net HBP acres in the tri-county area that they are currently developing on 40 acre spacing.
Fluids, volumes, rates, cluster spacing and proppant loading are evolving, and zipper stimulations from pads are materially impacting complexity & improving recovery. Improvements in stimulation design are outpacing impacts from downspacing. Aurora is utilizing these data points from 335 gross wells with Marathon in its own operated program with the goal of spudding 14 to 19 net wells this year. Aurora’s first two operated wells, which were pad drilled and cased at lateral lengths of 7,800 feet to 7,900 feet, posted a 30 day average rate of 821 BOEPD per well.
Reduced drilling times and costs
MRO emphasized drilling times continue to fall as do well costs. Improved completion efficiency and well performance at closer spacing offsets relative recovery impacts. Aurora COO Michael Verm said on its Q3’13 conference call: “the AFEs we have received in the third quarter have averaged $7.8 million for horizontal wells with an average length of 5,400 feet.” Verm continued on the call: “Going forward, our next three long lateral operated wells in Heard Ranch, of which two have already been drilled and cased are expected to cost an average of approximately $9.4 million for 7,800 foot laterals and 30 stages. These cost estimates are almost exactly the same as our non-operated AFEs for similar-length wells.”
Austin Chalk co-development potential
MRO said during its analyst day, “Beyond the Eagle Ford primary horizon, we’ve started to test the opportunity to co-develop the Lower Austin Chalk and Upper Eagle Ford directly with our primary Lower Eagle Ford development” and confirmed two successful pilot programs in the Austin Chalk. Additionally, Aurora discussed early Austin Chalk pilot results on its Q2’13 conference call saying the program is yielding rates up to 900 barrels of oil a day on 24-hour cast from various choke sizes. If the co-development program is lucrative, this could provide an additional level of inventory across Aurora’s footprint.
Increased production and reserve growth
Marathon’s accelerated development program and the move to tighter development spacing is expected to have a materially positive impact on Aurora’s production and reserves growth. MRO plans to run 18 rigs next year to drill 350 gross operated wells, the first step in a five-year annualized production growth plan that targets 30% to 35%. By 2017, MRO plans to hit 140,000 to 160,000 BOEPD, double its 2013 average. One thing’s for sure, increased spending from Marathon means increased spending for Aurora. We believe Aurora has the financial flexibility to keep up with MRO’s drill plan – after all, Aurora has witnessed firsthand the strong results being generated in the Eagle Ford and has taken steps to reinforce its strong liquidity position. As of Q3’13, Aurora had $106 million in cash, an undrawn $300 million credit facility, and no principal maturities on Senior Notes until 2017. Aurora is preparing guidance for 2014 and will update the market in early January 2014.
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