Range Resources, WPX Energy, and Synergy Resources were success stories in 2014
Anthony Andora, Edge Consulting Solutions, Los Angeles
In the December 2013 issue of OGFJ, we interviewed five oil and gas executives to gain their perspective on the outlook for growth in 2014. In the year that followed, all five companies - EPL Oil & Gas (NYSE: EPL), Aurora Oil & Gas (ASX: AUT), Magnum Hunter Resources (NYSE: MHR), Bonanza Creek Energy (NYSE: BCEI), and Triangle Petroleum (NYSE: TPLM) - executed on many of their planned growth strategies and reached new "highs" in 2014.
This year, we sat down with three different CEOs, from Range Resources, WPX Energy, and Synergy Resources, to gain their perspective on the future for growth in 2015 as well as the specific catalysts that each company believes may deliver shareholder value in the year to follow.
Range Resources
It has been 10-years since Range Resources pioneered the Marcellus Shale, a discovery that has resulted in billions of dollars of investment, tens of thousands of jobs, and ultimately changed the landscape of the US natural gas industry. All one has to do is look at the activity in the region and it's hard not to be impressed. But talk to Jeff Ventura, Range Resources' CEO, and he believes that there's even more opportunity for growth in the region. Ventura believes that the company can triple its production in the years to follow. That's a tall order for a company that is already producing more than one billion cubic feet of natural gas equivalent (bcfe) per day.
How will Range Resources deliver on its aggressive goal? Ventura explains, "There's no secret switch that one flips to generate results. Results require hard work, detailed planning, and a great team of individuals all dedicated to success. Together we've built the largest acreage position in the core of the Marcellus with additional stacked pay horizons. We have the drilling locations, the gathering, processing, and markets planned or contracted, and the balance sheet and the liquidity to grow to three bcfe per day."
Photo courtesy of Range Resources
In the past four years alone, Range Resources has shown its ability to succeed as the company has grown Marcellus production from approximately 0.2 bcfe per day to 1 bcfe per day. In addition, the company has successfully shifted approximately 6.4 trillion cubic feet equivalent of resource potential (tcfe) into the proved reserves category. That's a 28% compounded annual growth rate in proved reserves per year.
As the first mover in the Marcellus Shale, Range Resources acquired some of the most strategic acreage in the play. The acquisition of strategic acreage enabled Range to develop in-depth drilling programs and detailed midstream strategies to support natural gas takeaway. The forward-thinking strategies have paid strong dividends for Range as the company now anticipates that it has the capability to sell Appalachian gas to a customer base that stretches from the Northeast to the Upper Midwest, Canada, the Gulf Coast, the Southeast, and the Atlantic Coast.
In 2014, Range Resources has added 45 new natural gas customers to diversify its marketing efforts. New natural gas markets outside of the Appalachian region enable Range to diversity its pricing of natural gas to more than 20 different indices by 2018. The increased diversification should help to improve price realizations received by Range. At the end of the third quarter 2014, Range Resources had contracts in place for approximately 1.1 bcf per day of transportation capacity, growing to 1.75 bcf per day in 2016 and increasing to 2.4 bcf per day by 2018.
At the same time, increased use of NGLs, primarily ethane as a replacement for more expensive petrochemical feedstock such as naphtha, has triggered additional investor interest in Range Resources. To date, the company has two ethane projects currently up and running - Mariner West and ATEX - with a third project scheduled in 2015, Mariner East. Once Mariner East comes online Range Resources will be producing 45,000 barrels of ethane per day, ramping up to 55,000 bpd in 2016. This will result in a 25% uplift in revenue across the company's ethane portfolio compared to leaving ethane in the gas stream.
Yet, for all the company's success in the Marcellus, Range Resources also has significant growth opportunities in the Midcontinent region and in the Southern Appalachian region, including Nora and the Utica/Point Pleasant shale in Pennsylvania. Third-quarter production in the Midcontinent totaled 86 MMcfe/d while the Southern Appalachian region including Nora totaled 110 MMcfe/d.
For more than a decade, Range Resources has built its reputation as a leader in low-cost natural gas development. The company's entrepreneurial spirit, commitment to operational excellence and talented staff have transformed Range Resources from a small E&P operator into the largest producer of natural gas liquids in the Appalachian basin. In addition, management is continuing to advance its goal of growing production 20% to 25% per year, another impressive accomplishment given Range's current production levels. When one includes the stacked pay potential, which includes the Upper Devonian, the Marcellus, and the Utica, Range Resources has about 1.9 million net acres with 975,000 prospective for wet gas and approximately 950,000 prospective for dry gas.
However, as the company marches toward the three bcfe per day goal, Ventura understands that they must first execute on the immediate tasks before them. Ventura commented: "We have a lot of exciting opportunities in 2015. The Mariner East propane project should start in late December and positively impact our first quarter. Then the Mariner East ethane project should come online in mid-year and add additional uplift to our cash flow. We are also anticipating continuing with significant reserve growth. We should have results on our first Utica well in Washington County by year end. And of course there are the extended laterals with more wells on existing pads that will further increase our capital efficiency in the Marcellus. Importantly, I believe we will continue to make progress on reducing our unit costs as well."
WPX Energy
Project execution has taken on a new sense of urgency the past few years. Management teams demand it. Portfolio managers require it. And sell-side analysts make recommendations based upon its success or failure.
At WPX Energy, the company has taken an aggressive posture with regard to execution. In the past seven months, the management team led by new CEO and president Rick Muncrief has reshaped the WPX portfolio, increased production in the company's oil fields, and brought in a new corporate culture focused on greater accountability, risk tolerance, cost management, and faster decision-making.
Muncrief pulls no punches when he talks about taking WPX to the next level: "The way I see it, you have to start with a vision of what you want to achieve. From there, it's about how you get there - the strategy. We are becoming a more focused, disciplined company with an asset base capable of generating top quartile returns."
Photo by Jim Blecha.
As part of this strategy, WPX is simplifying its story by shedding mature properties and non-core assets. The company has announced the divestiture of its Powder River Basin properties and its ownership in Apco Oil and Gas International, which holds interests in South America. In fact, WPX has trimmed its portfolio from a high of eight operating areas to today's three core regions in the Williston, San Juan, and Piceance basins. The result is a stronger company that's concentrating capital in three core regions with higher rate-of-return potential.
In the company's third quarter, WPX announced that domestic oil volumes climbed 52% from the third-quarter 2013. Larger stimulations on three pads targeting the Middle Bakken and Upper Three Forks formations showed early-time production increases of 35% and higher versus the company's blended type curve for the intervals. And improved efficiencies are helping free up additional capital for deployment.
Through hard work and successful execution, WPX's goals are to increase oil production five-fold, triple operating margins, and triple the market value of the overall company by 2020.
To achieve these objectives, Muncrief explains, "We need to place emphasis on growing our margins. The way to get there is through increased oil volumes and lower costs."
In 2012, oil accounted for 8% of WPX's equivalent production. In 2013, oil increased to 10% of WPX's equivalent production. And during the third quarter of 2014, oil comprised 15% of domestic volumes. As WPX executes its long-term strategy, the goal is for oil to account for more than 25% of the company's production volumes.
When asked about his views on the recent oil price decline and how it might affect the WPX portfolio, Muncrief coolly replies, "In the near term, we've locked in about half of our projected oil volumes for 2015 at an average of $95 per barrel, protecting both our cash-flow and our capital program. At the same time, we're focused on the long-term. Our oil projects have excellent economics, and improved efficiencies are generating stronger results.
"When running a company, you have to develop your portfolio based on where you think oil and natural gas prices will go over the long-term. And I believe there are too many factors, including the potential for oil exports, that necessitate an $80 to $100 oil price environment over the long-term."
Yet, for all the focus on oil, Muncrief believes the real value in WPX is the balance the company has in its commodity mix. Muncrief explains, "While there's been a lot of talk about our oil growth, our natural gas assets are an important component of our portfolio, as well. Our vast reserve base and expertise in natural gas provides us with economies of scale that other companies don't have. And our geographic position also gives us access to premium pricing in western markets. The potential uplift that natural gas provides to our shareholders is a strong positive. In short, a balanced portfolio creates a win-win scenario for our shareholders. Having commodity diversity is something that differentiates WPX. We have a bigger view than just one basin or one product. We have optionality."
Muncrief noted, "No doubt, 2014 was a busy year at WPX. The company looks a lot different today than it did a year ago. We've reshaped WPX and streamlined our story with $1 billion of transactions. With the optionality we have, we can pivot toward oil or gas based on the price environment. Capital will go where the returns are greatest. And we will remain aggressive and opportunistic. We're trying new ideas and approaches as we pursue technical excellence and scalability."
Muncrief concluded, "In 2015, we expect longer laterals and larger stimulations to translate into increased returns in our Bakken, Three Forks, and Gallup oil plays. Improved operations should make an impact, too. And our current resource assessment of the Niobrara and Mancos formations in the Piceance could create opportunities. Adding inventory is a value driver."
Synergy Resources
"The reports of my death have been greatly exaggerated" is one of Mark Twain's most famous quotes. That timeless comment can be used to describe the Wattenberg oil and gas field in the DJ Basin.
For more than four decades, oil and gas producers have profitably explored, developed, and produced hydocarbons from the Wattenberg. And each time the field was proclaimed dead, a new drilling technique or completion technology was developed to breathe life back into the field.
Just ask Bill Scaff, co-CEO and director at Synergy Resources (NYSE: SYRG) and an oil and gas executive with more than 30 years' experience in the Wattenberg, and he'll tell you, "The Wattenberg is a field with nine lives. Just when everyone thinks it's dead it comes back stronger than ever." The field, or more precisely operators in the field, are now using horizontal drilling techniques, fracture stimulation technologies, and improved applications that are capable of generating internal rates of return in excess of 70%.
It's precisely these drilling techniques and technologies that have driven success at Synergy Resources and rewarded its shareholders. Since January 2012, Synergy's public valuation has risen by more than 250%. Production levels in fiscal 2014 have increased more than 100%. And net income and EBITDA Margin on Revenues have increased 200% and 129%, respectively.
But it's not just the company's success with drilling and completion techniques that have Scaff optimistic about the company's growth prospects in 2015 and beyond, it's Synergy's team and 35 years' of experience in the Wattenberg.
"This is a field that we've been playing in since the 1980s," says Scaff. "It's our back yard, it's what we know. We have relationships with oilfield service partners that extend back more than several decades. These relationships have helped increase efficiencies, lower costs, and drive production growth. At the same time, opportunities for growth in the northeast extension area, continued down-spacing and higher density tests focusing on both the Codell and Niobrara zones are some of the factors that are enhancing our horizontal drilling program as we move forward. We couldn't be more excited about our prospects for growth in 2015 and beyond."
Photo by Debbie Grillo, Eye Capture Photography
Scaff also commented on the company's recent $125 million dollar acquisition: "Unquestionably, growth through the drill-bit is how we've increased the value of our company. It's our bread and butter. But when the opportunity arose to increase our position in a core section of the play in which we operate, we carefully studied the acreage, examined the growth prospects, and made the decision to proceed forward."
And with that decision, Synergy Resources increased its acreage position by about 20% to more than 35,000 net acres. But it's not just Scaff who's excited about the increased growth opportunities associated with the acquisition. Many of Synergy's analysts including SunTrust Robinson Humphrey, Wunderlich Securities, and Northland Securities, to name a few, also voiced support for the deal in research notes following the acquisition.
Upon closing of the acquisition, the company will have non-operated working interests in 17 horizontal wells, 10 of which are in production (including four mid-reach laterals) and seven are in progress of completion. Working interests range from 6% to 40%. The properties are strategically located in the southern portion of the Wattenberg Field near the company's Phelps and Eberle horizontal wells where strong results have already been announced. In addition, the acquisition includes 73 operated and 11 non-operated vertical wells plus 5,040 gross acres (4,053 net) with rights to the Codell and Niobrara formations. September's net production for the producing assets averaged 1,240 boe/d.
While $100 oil prices have benefited many oil and natural gas companies for the past several years, a recent pullback in oil prices has sent a shiver throughout the industry. Lower prices have prompted some producers to reduce spending levels as they look toward 2015. When asked about capex initiatives in 2015, Scaff replied, "This isn't our first rodeo. We've been in the business since the 1980s and have seen our share of boom-bust cycles. We take a judicious approach toward spending regardless of the times. For example, when we deployed our first rig it was on a pad-by-pad basis. Once we were confident that we could keep that rig busy, we signed a longer-term contract. When we deployed our second rig, we followed the same process and eventually signed a longer-term contract. And now that we've recently deployed our third rig, we are once again deploying it on a pad-by-pad basis. If we believe we can keep that rig busy we will look toward signing a longer-term contract. But at this time we are under no obligation to do so. It's all about prudent planning and development and understanding the field in which you operate."
Synergy's deliberative approach toward planning and development appears to be working. Year-to-date, Synergy's publicly traded equity is up more than 25% even in a declining oil price environment. But operational development is only part of the equation at Synergy Resources. The experienced management team takes the same conservative approach when managing the balance sheet. Even after closing the $125 million Wattenberg acquisition, the company's debt/EBITDA is expected to be only 1.0x .
As 2014 draws to a close, few could debate Synergy Resources' success. Production continues to grow. Reserve levels are up. And the balance sheet remains strong. But perhaps even more impressive are the opportunities for growth that Bill Scaff noted earlier - opportunities that include: existing drilling locations, increased downspacing, higher density tests in both the Codell and Niobrara zones, a growing inventory of horizontal drilling locations, experimentation with extended laterals, and the possibility of potential horizontal refrac opportunities, as well as the increased number of drilling prospects in both Synergy's northeast extension area and in the recent $125 million acquisition in the southern portion of the Wattenberg.
About the author
Anthony D. Andora is pesident of Edge Consulting, a communications and branding firm that serves the oil and gas industry. With more than 15 years'experience, Andora has consulted, advised, and represented small-, mid-, and large-cap companies on a variety of issues ranging from detailed focus groups, advertising initiatives, investor relations, and national media campaigns. He has co-produced, developed, and placed content in/on CNBC, FOX Business News, Bloomberg television, The Wall Street Journal, Barron's, and OGFJ.