Joint venture with Wolfcamp Drillco targets Permian
EP Energy (ticker: EPE) reported fourth quarter results and reserves yesterday, showing a net loss of $140 million, or ($0.57) per diluted share. Full year results are a net loss of $27 million, or ($0.11) per share. Both quarterly and full year results exceed those of last year, which were losses of $3,731 and $3,748, respectively. After correcting for derivatives and other special charges, adjusted earnings are $172 million for Q4 and $180 million for 2016.
Total reserves are down 21% in 2016 to 432 MMBOE, from 546 MMBOE in 2015. Most of this decrease was due to EP’s Haynesville asset divestiture and lower commodity process. In this divestiture, closed in March, EP sold 34,000 net acres for $420 million to Covey Park Energy.
EP expects 2017 CapEx to be between $630 and $730 million, significantly above 2016 spending of $488 million. This spending will allow the company to complete 175-190 gross wells, primarily in the Permian basin. This is a significant increase over 2016 levels, when the company completed 98 wells.
EP recently announced a joint venture with Wolfcamp Drillco Operating to fund future Permian basin development. Up to 150 wells are planned, to be completed in two 75-well tranches. Under the terms of the venture, Wolfcamp Drillco will fund 60% of all well costs in exchange for a 50% working interest in the joint venture wells. Once Wolfcamp Drillco achieves a 12 percent internal rate of return on its invested capital its working interest will revert to 15 percent. EP will be the operator of all wells in the venture.
Source: EPE Q4 2016 Investor Presentation
EP plans to spend $245-$325 million in the Permian in 2017, drilling 90-105 wells targeting the Wolfcamp formation. Nearly as much will be spent in the Eagle Ford, where $260-$270 million will fund the completion of about 60 wells. Finally, $125-$135 million will be spent in the Uinta Basin to complete about 25 wells targeting the Altamont Field.
Q&A from EPE Q4 conference call
Q: I’m curious if you could provide more color for the LOE ticking up in Q4 versus Q3. And also, I’m little bit surprised about the guidance for 2017 of how significantly higher versus most recent LOE per unit levels you’re guiding to.
EPE Chairman, President, CEO Brent J. Smolik: The thing I’d remind you on, is that we start off at a very low LOE per barrel or in total or however you want to look at it. So, we’re starting in a good place. We are starting to sense a little inflation. So, you’ve got to think about that and then as we expand, especially in the Wolfcamp, but as we expand into new areas where we have less infrastructure in place on the surface, we tend to be a little less efficient.
And so, because we’ve got more growth planned in this year’s program in the Wolfcamp, we factored in some of those less-efficient kinds of early flowback, early water production kinds of parts of the development, we scheduled those into the growth, but then, remember those things sort of trend back to lower levels once we get out of that early phase and we get everything into the system.
EPE COO Clayton A. Carrell: I would add that based on our historical LOE performance, it’s a strong focus of ours and we’ve been able to beat our estimates in the past and that’s what we’re focusing on doing here.
Q: And did you factor in any service cost inflation?
Brent J. Smolik: We do have some in there. We’ve got some on the capital side and we – on your specific question on LOE, we dialed in some inflation also. Again, we’re not certain of that. We’ve put it in guidance and then, we’ll work really hard to minimize any inflation and a lot of that we’ve already got sort of secured in the first half of the year. So, it’s really a second half of the year risk, I think.
Clayton A. Carrell: I would also add that if you’re thinking from a unit cost standpoint, remember that in 2016, we had Haynesville volumes in there for the first four months of the year that are out of the go-forward in 2017.
Analyst Commentary
From KLR Group:
We are increasing our target price $1 to $8.50 per share following a ~6% improvement in capital productivity, a ~10% increase in our '19+ forward capex and the incorporation of the Wolfcamp Drillco JV partly offset by a ~10% increase in our operating expense assumptions. EPE has made significant strides over the last year to improve its balance sheet and based on our outlook we anticipate the company should be able to navigate its leverage position. EPE generates an '19 capital yield of 145%+, slightly above the group median of ~145%. The company has materially improved its capital productivity (reduced capital intensity by 25%+ since 3Q/15) via drilling efficiencies, enhanced completion designs and service cost deflation. Notably, EPE has reduced Wolfcamp well costs by ~25% and drilling days to spud rig release by 40%+ since '14. EPE has optimized its completion design (larger proppant volumes, tighter frac stages, increased fluid volumes), which has resulted in higher production and a recent increase in the company's type curve. The company now expects a Wolfcamp well (~8,500' lateral, utilizing a Generation 3 completion - 2,000 lbs. of proppant per ft., ~195’ frac stage spacing) recovers ~750 Mboe, up from its previous type curve of ~600 Mboe (~7,500' lateral) and up ~6% from our previous estimate of ~710 Mboe, resulting in a ~6% improvement in our capital productivity assumption.
