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  • rlp2451 rlp2451 Jan 25, 2013 7:45 PM Flag

    Howard Weill Analysis (synopsis)

    I noticed that too, rrb (which is why I included that part of the report. The report itself is sixteen pages long, including a bunch of graphs and spreadsheets.)

    The 20% decline rate is actually quite low compared to E&Ps that operate primarily in one basin such as Eagle Ford or Bakken.

    Some interesting data per your prior observations:

    Accretion per $100M Purchase Price by acquisition, and accretion per unit:
    Jonah Field: .05, .26
    Salt Creek: -.01 (but improving to 0.09 by 2016); -.01, 0.18 by 2016
    Hugoton: .03, .09
    East Texas: .05, .04
    Granite Wash: .06; .16

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    • Chesapeake did a very interesting study a few years ago on overall US decline rates including shale gas fields.

      The high decline rates are an issue for companies that either have no base production that is long lived (in the flat part of the curve) or companies that are continuously drilling at a rate above the previous year. The faster you run the harder it is to go faster the next year.

      In the case of Linn, the decline rate of 20% would drop back to ~10% within a year or two if they ceased drilling in the Granite Wash so aggressively. I'm not advocating they stop drilling, the returns are such that it offers them the absolute best returns, it just comes with the added need to managed the drilling budget, decline and cash flow.

      One of the best example is the Haynesville, where wells can come online at 17,000 to 20,000 mcf/d before declining 85% in year one. A company producing 100,000 mcf/d of stable (~7% decline) gas could drill 1 Haynesville well and push their decline rate to ~20% on a blended basis, yet the next year, with the well heavily declined down to say 3000 mcf/d, the rate would drop back towards the 7% range assuming no other wells were drilled.

      One company that has done a superb job of managing decline is Range Resources. They have kept their foot on the accelerator for years, but typically have not operated with a budget that runs too far out of cash flow. They also seem to manage to grow production year after year with low F&D costs, low operating costs. I am really suprised that companies like Range or Southwestern or even Chesapeake have not brouht a E&P MLP public. Aside from Pioneer, there really aren't any E&P MLPs that have a public c-corp sponsor. I would have thought we would see more sponsored E&P MLPs where the c-corp divests their high PDP down to the MLP and redeploys the cash into exploration. Will be interesting to see if Quicksilver follows through with their proposed E&P MLP which might fit into that model of being a conduit for drop downs of high PDP properties.

      • 2 Replies to rrb1981
      • I think you'll see more of that in the next few years as basins mature from development to production.

        I don't know if you saw this article I posted earlier in the week:

        Big Oil may be on the verge of a beautiful friendship with a new sidekick. The likes of BP are sitting on the mature wells that often don't generate a decent enough return. Until now they had few options for offloading them. But the emergence of a subset of Master Limited Partnerships specializing in pumping oil and gas provides a growing group of buyers.

        Most MLPs concentrate on fee-based businesses like pipelines that are impervious to commodity-price swings. But the oil- and gas-producing MLPs are expanding fast. There are now 13 such publicly listed companies, with a combined value of $20 billion - compared with just five worth $3.2 billion six years ago. Two more may hit the stock market this year.

        Driving their ascendancy is the growing number of oil and gas assets that don't hit their current owners' financial targets. Larger American explorers like Exxon Mobil typically target returns on capital employed of more than 15 percent. After around five years of production, the ROCE on most wells typically falls to around 7 percent, according to MLV & Co.

        MLPs, though, don't pay corporate income tax and partners can also deduct their share of capital spending from their individual tax bill. That should allow these new owners to produce returns on older wells in the low teens - and thus give them the currency to make attractive offers for the assets, boosting Big Oil's overall margins.

        BP and Anadarko have already sold such fields to Linn Energy , the largest of these producer-MLPs. In total Linn scooped up $2.8 billion of assets last year, almost twice the pace of 2011.

        That trend should continue. Producer-MLPs own just 3 percent of America's oil and gas wells - and the first shale fields are now maturing. On paper, 80 percent of all wells may be a better fit for these partnerships than with Big Oil, according to analysts at MLV & Co. They reckon, though, that a five-fold ownership increase to 15 percent over the next five years is more realistic.

        Producer-MLPs are riskier than their pipeline brethren - commodity hedging is never perfect. But so long as this is reflected in higher yields, everyone is a winner. Except for the tax man, that is.

        CONTEXT NEWS

        - New Source Energy Partners and Quicksilver Production Partners look set to list on the stock market this year. Both filed with the Securities and Exchange Commission for an initial public offering last year.

        - The two firms are master limited partnerships that specialize in energy exploration and production.

        - MLPs are exempt from paying corporate income tax and distribute most of their earnings directly to investors.

      • "The high decline rates are an issue for companies that either have no base production that is long lived (in the flat part of the curve) or companies that are continuously drilling at a rate above the previous year. The faster you run the harder it is to go faster the next year."

        Gee with such high decline rates in natural gas and rig counts now less than half of what is required to maintain supply - where is it all coming from? Tomorrow surely natural gas prices are increasing to the real marginal cost of production around $4.50? What would that do to line valuation? ;-)

        Same guy who claimed EPs would benefit from low borrowing costs? Which ones?

        They have kept their foot on the accelerator for years, but typically have not operated with a budget that runs too far out of cash flow. They also seem to manage to grow production year after year with low F&D costs, low operating costs. I am really suprised that companies like Range or Southwestern or even Chesapeake have not brouht a E&P MLP public. Aside from Pioneer, there really aren't any E&P MLPs that have a public c-corp sponsor. I would have thought we would see more sponsored E&P MLPs where the c-corp divests their high PDP down to the MLP and redeploys the cash into exploration. Will be interesting to see if Quicksilver follows through with their proposed E&P MLP which might fit into that model of being a conduit for drop downs of high PDP properties.

        HUm sell individual investors fee laden products because valuation to the seller exceeds what the assets can actually be sold for?

        Good antics! Very entertaining. Bring back the 3.0 ebitda ratio when you have not found one other EP with has the business model of LINE. All this prattle about decline rates is funny too. What is the LINE business model for asset life?

 
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