MAY 2020

The U.S. industry seeks a path forward amid calamitous market forces.

MAY 2020/VOLUME 40/NUMBER 5

30 SPECIAL REPORT: THE PATH FORWARD 30 THE E&P SURVIVAL GUIDE AmidAmid a pandemic a pandemic and aand disastrously a disastrously timed timed OPEC+ OPEC+ supply supply war, war, executives, executives, analysts analysts and consultantsand adviseconsultants hedging advise strategies, hedging keeping strategies, a close keeping watch a closeon markets watch and,on markets potentially, and, potentially, rebuilding business plans from the ground up. 39 FULL REVERSE MarketMarket forces forces are at are competing at competing odds, odds, with with a silent a silent virus virus killing killing global global demand demand for oil for and oil foreignand antagonists foreign antagonists pushing morepushing volumes more volumesinto the supply into the pipeline. supply pipeline.How does How it end, does and it end, and who wins—or just remains standing? 41 OFS: LOWER-FOR-LONGER SCENARIO As E&Ps jam the brakes on capex spend, the largest U.S. oilfield service providers respond in unison, cutting costs where they can and laying down equipment where they must.

44 THE MASKED OILMAN We’re taking a departure from the normal here. But what’s ‘normal’ right now anyway? And what will be normal next quarter? So, we asked. 44 48 DWINDLING DEBT OPTIONS Debt markets are bifurcated, with questions arising over E&Ps’ ability to pay upcoming maturities.

54 ROUGH RIDER Locked up in an MLP bankruptcy for nearly two years, Maverick Natural Resources has new management and a new business model aimed at the relentless pursuit of free cash flow.

58 48 THE WATER’S FINE Historic service cost lows and fewer barriers to entry could trigger investment back into the U.S. Gulf of Mexico … even at $30 oil.

64 THE BAKKEN TAKES A HIT Between a historic oil price crash and resource maturity, some say the Bakken may have only five or six good drilling years left. What’s the opportunity now?

68 BORN IN THE BAKKEN The story began 20 years ago in Richland County, Mont., with a prospector, two wildcatters, Halliburton and a bold venture: land a lateral in the middle Bakken— and frac it.

72 HEDGING IN TOUGH TIMES In oil and gas, the decision to not hedge has always been at producers’ own peril. Fewer E&Ps have hedges in place than in prior years, according to a survey, which suggests a difficult path through the recent price collapse.

May 2020 • HartEnergy.com 1

COLUMNS 9 FROM THE EDITOR-IN-CHIEF Following a brief but ill-timed market share war that pushed millions of barrels of oil into a glutted world, Saudi Arabia and 1616 S. Voss Rd., Suite 1000 Houston, TX 77057 Russia are now trying to put that genie back into the bottle. But 1.713.260.6400 Fax: 1.713.840-8585 will it matter? HartEnergy.com Editor-in-Chief 11 ON THE MONEY Steve Toon There is fear that crude and product inventories held in storage [email protected] will be filled to tank tops in the near term. Editorial Director Len Vermillion 13 A&D TRENDS [email protected] Transactions activity, which was already muted to begin the year, Executive Editor-at-Large went into radio silence as the pandemic and the oil price war sent Leslie Haines oil tumbling to its lowest level in 21 years. [email protected]

Senior Financial Analyst Chris Sheehan, CFA 85 E&P MOMENTUM [email protected] Faced with a devastating collapse in oil prices in a global battle for market share, some Texas producers are calling for the return Senior Editor Darren Barbee of proration. [email protected] Senior Editor Blake Wright 100 AT CLOSING [email protected] Lower for longer eventually will lead to stronger for longer—but

Chief Technical Director, Upstream Richard Mason only for the survivors. [email protected] DEPARTMENTS Midstream Editor-at-Large Paul Hart [email protected] 14 EVENTS CALENDAR

Activity Editor Larry Prado [email protected] 17 NEWSWELL A Haynes and Boone survey said a majority of respondents expect Associate Managing Editor Brandy Fidler borrowing bases to decrease by at least 20% in response to the [email protected] recent freefall in commodity prices. Assistant Managing Editor Bill Walter [email protected] 77 A&D WATCH Contributing Editors First-quarter M&A grinded out a mere $770 million in deals— Velda Addison, Susan Klann, Joseph Markman, about one-tenth of typical values—as oil and gas companies Emily Patsy, Faiza Rizvi, Brian Walzel drowned in oversupply, according to an April report. Editor-at-Large Nissa Darbonne [email protected] 86 US EXPLORATION HIGHLIGHTS Corporate Creative Director Alexa Sanders 94 INTERNATIONAL HIGHLIGHTS [email protected] Numerous oil and gas companies have restricted or stopped

Art Director Robert D. Avila employee travel due to the coronavirus pandemic. [email protected] Senior Marketing Manager Tamara Murphy 97 NEW FINANCINGS Private-equity sponsor Tailwater Capital LLC tied up a fourth fund Vice President, Marketing Greg Salerno in what otherwise has been a largely barren landscape for capital raising. Its Tailwater Energy Fund IV LP raised $1.1 billion in Publisher Kevin C. Holmes capital commitments. [email protected] • 713.260.4639 Vice President, Sales Darrin West 99 COMPANIES IN THIS ISSUE [email protected] • 713.260.6449 ABOUT THE COVER: In March, supply and demand dynamics for global oil were rocked like never Director, Business Development Chantal Hagen before, with the coronavirus pandemic removing potentially tens of millions of barrels of usage per day [email protected] • 713-260-5204 from the markets and an untimely market share war between Saudi Arabia and Russia pushing millions of gallons of unneeded supply into the mix. With prices plummeting, U.S. independents look for answers. Business Development Representative Kelli Muhl Illustration by Robert D. Avila. [email protected] 713-260-6450 Information contained herein is believed to be accurate; however, its accuracy is not guaranteed. Investment opinions presented are not to be construed as advice or endorsement by Oil and Gas Ad Materials Coordinator Carol Nunez Investor. [email protected] Oil and Gas Investor (ISSN 0744-5881, PM40036185) is published monthly by Hart Energy Publishing, LP, 1616 S. Voss Rd., Suite 1000, Houston, Texas 77057. Periodicals postage paid at Houston, TX. Ride-along enclosed. Advertising rates furnished upon request. POSTMASTER: Send address changes to Oil and Gas Investor, PO Box 5020, Brentwood, TN 37024. Address all correspondence to Oil and Gas Investor, 1616 S. Voss Rd., Suite 1000, Houston, Texas 77057. Telephone: +1.713.260.6400. Fax: +1.713.840.8585. [email protected] Vice President, Content Subscription rates: United States and Canada: 1 year (12 issues) US$297; 2 years (24 issues) Peggy Williams US$478; all other countries: 1 year (12 issues) US$387; 2 years (24 issues) US$649. Single copies: US$30 (prepayment required). Denver residents add 7.3%; suburbs, 3.8%; other Colorado, 3%. Chief Financial Officer Copyright ©Hart Energy Publishing, LP, 2020. Hart Energy Publishing, LP reserves all rights Chris Arndt to editorial matter in this magazine. No article may be reproduced or transmitted in whole or in parts by any means without written permission of the publisher, excepting that permission to Chief Executive Officer photocopy is granted to users registered with Copyright Clearance Center/ 013-522/96 $3/$2. Richard A. Eichler Federal copyright law prohibits unauthorized reproduction by any means and imposes fines of up to $25,000 for violations.

May 2020 • HartEnergy.com 3

ONLINE CONTENT | MAY 2020 | Subscribe at HartEnergy.com/subscribe

LATEST CONTENT Videos Oil Price Plunge, Coronavirus Spur Tax Relief For Wyoming Producers The Wyoming governor recently signed a bill to help oil and gas producers reduce severance and conservation taxes.

Exxon Mobil Chops Spending By 30% Exxon Mobil Corp. on April 7 throttled back a multiyear investment in shale, LNG and deepwater oil production and will cut planned capital spending by 30% this year as the coronavirus pandemic saps energy demand and oil prices.

Occidental Petroleum Names New CFO In Management Shakeup Women in Energy: Brenda Schroer Occidental Petroleum Corp. did not provide a reason for the leadership change, but the CFO Hear from Brenda Schroer, senior vice transition marks the second major management change at the oil and gas company recently. president, CFO and treasurer of Concho Resources Inc., and a featured 25 Influential Oil, Gas Companies Stepping Up During Coronavirus Pandemic Women in Energy honoree. The following is a sampling of companies in the oil and gas industry stepping up during the www.HartEnergy.com/videos COVID-19 pandemic to help make a difference, including BP Plc, Chevron Corp., Petrobras and more.

Dallas-based Tailwater Capital Closes Largest Fund To Date What’s Trending Commenting on the current state of the oil market, Jason Downie, founding partner of Tailwater Capital, said he expects to see ‘some of the most compelling buying opportunities’ in many years. Video: Tom Petrie’s Take On OPEC+, Oil Prices, Production Cuts Where Will the Excess Glut Of U.S. Oil Go? Excess supply has sparked a fresh dilemma among U.S. drillers, which are being asked to cut oil Icahn vs. Hollub: Sound Decision- production as storage space fills up. makers Don’t Bet On Luck

Ring Energy Sells Itself Out Of ONLINE EXCLUSIVES Delaware Basin

May Crude Oil Futures Plunge Oil Trade Groups Release New Into Negative Guidelines On ESG Reporting Yuma Energy Files For Bankruptcy Guidance provides framework for detailing With Plans To Liquidate sustainability efforts as environmental, social and governance (ESG) remains a key priority for many upstream oil and gas companies. CONFERENCES

Oil Industry Experts: Pandemic Impacts Not Just Dollars— Change, Too

Culture shifts as result of at-home workforce Attend Hart Energy’s experience, staffing cuts and ESG priorities. Energy ESG Conference on Sept. 1 and hear from speakers who will provide an overview of the capital that has moved into the “must ESG” column As Shale Struggles, Crude Tankers and a look at what we Ply Oceans Of Cash know about the impact of ESG strategies on financial returns. Even with very high day rates, the oil market contango means that floating storage makes economic sense. EnergyESGConference.com

May 2020 • HartEnergy.com 5

FROM THE EDITOR-IN-CHIEF WILL IT MATTER?

hen last we spoke on this page, Saudi Bernstein analyst Neil Beveridge projects Arabia and Russia were launching a near-term oversupply of 13 MMbbl/d in Wtheir market share salvos to glut the second-quarter 2020, “which will test in- market with oil to spite the other. This as the ventory limits and could push prices back to global economy listed sharply due to coronavi- US$20/bbl or below,” he said in an April 13 rus fears and taking some estimated 20 million report. “Even with SPR [Strategic Petroleum to 25 million barrels per day (MMbbl/d) out of Reserve] filling and Chinese stockpiling demand. Now they’re trying to put that supply (combined 500 MMbbl), we still expect that genie back in the bottle. But will it matter? OECD inventories could build by a further Unfortunately, scant little. At least in the 500 MMbbl, which would take storage utili- near term. zation to record levels.” STEVE TOON, Our cover story in this issue analyzes the In a report April 12, Citi’s Ed Morse said he EDITOR-IN-CHIEF first wave of the COVID-19 induced demand also feels sallow regarding bloated inventories destruction and OPEC+ instigated supply and near-term prices. surge, but that is just the first chapter of this “However large and credible the combined epic drama that will take months and like- OPEC+ and G20 cuts, the main problem is ly years to unfold entirely. Realistically, the timing; it’s simply too late to prevent a su- world needs to recover from the coronavirus per-large inventory build of over 1 billion bar- before the oil markets are going to return to rels between mid-March and late May and to any kind of a semblance of yesteryear’s pric- stop spot prices from falling into single dig- es led by renewed demand. And if the bug its,” he said. “With these combined cuts un- takes hold again for a round two, timing is folding only in May (affecting delivery in June anyone’s bet. and July), front-end contangos should widen The historic agreement between OPEC, again and prompt prices should fall, triggering Russia and a supermajority of other G20 further involuntary production cuts.” nations in early April to remove some 10 So it gets worse before it gets better. Citi’s MMbbl/d from global supply will serve to forecast for Brent to average in the second “flatten the curve,” so to speak, to slow the quarter? $17. flow before global storage options breach the However, there is a light at the end of the brim. It was the breathtaking, unprecedented pipe. Morse said the too-little-too-late April drop in demand as the world stayed home to OPEC+G20 agreement, while ineffective near stay safe that quickly turned the attitudes of term, should “rapidly” help markets to rebal- spatting oil-producing nations from fight to ance going into the third quarter, “and with flight, according to IHS Markit vice chair- our expected demand rebound, should facili- man Daniel Yergin in a statement. tate a rapid change from a massive inventory “What facilitated the deal was the real- build to a massive inventory draw, supporting ization on the part of the major producers prices for the rest of the year.” that they were not, in any event, going to be Those prices: $35 Brent in the third quar- able to find markets for their oil at high pro- ter ($33 WTI) and $45 in the fourth quarter duction levels. ($42 WTI). “What this deal does is enable the global oil But it doesn’t stop there. “If OPEC+ ful- industry and the national economies and other ly complied with proposed cuts, through to industries that depend upon it to avoid a very 1Q21, this would likely tighten markets sig- deep crisis,” he assured. “Without this deal, nificantly, driving oil prices into the $60s and the global industry would have run out of stor- even $70s in 2021,” Morse said. But that op- age for the flood of excess oil in a few weeks timism is likely to be tempered if Russia and and prices would have crashed, which would OPEC raise production as second-half 2020 have also really hit financial markets. This re- inventories draw down and prices recover. strains the buildup of inventories, which will With that caveat, Citi calls for an average of reduce the pressure on prices when normality $56 Brent in 2021 and “seeing the $60s at returns—whenever that is.” times,” with WTI averaging $52. That’s not to say there won’t be near-term So will the deal matter? Bernstein’s Beve- pain. Yergin’s colleague Roger Diwan noted, ridge said the OPEC+ commitment to cut pro- “On a global basis, these cuts remove the duction by 6 MMbbl/d for a full two years out specter of an aggressive price war and low- shows “the era of supply side price manage- er the likelihood that global tank tops will ment is not over. If demand returns to normal be breached but does not solve the distress levels in 2021, this could lead to sharply high- physical markets are likely to face in May er prices if compliance holds.” and June.” Eventually it will matter.

May 2020 • HartEnergy.com 9

ON THE MONEY ANXIETY OVER INVENTORY

arely has there been as many mov- weighed down with debt-to-EBITDA ratios ing parts in the global crude market. of about 5x, levels that would make them RHow much demand for oil has been financially unattractive as takeout targets, really destroyed by the coronavirus pan- he said. demic? How much oil has Saudi Arabia Sheffield argued that it was not in the stra- really loaded onto crude carriers in hopes tegic interests of the U.S. to return to the of buyers? If there were a resolution of the days when the U.S. depended on imports price war between Saudi Arabia and Russia, from the Middle East for 60% of its crude would it simply help sentiment—and offer oil needs. little real solution? While commissioner Sitton said pro- There’s no way crude and product inven- duction cuts as high as 20 MMbbl/d to 25 CHRIS SHEEHAN, CFA tories held in storage won’t continue to rise, MMbbl/d would be needed to balance the SENIOR FINANCIAL barring an overnight cure for the coronavi- global market, lower cuts could also play ANALYST rus. The fear is that storage—whether float- a role. If 10 MMbbl/d of production cuts ing, coastal or landlocked—will be filled to were able to “extend the life of intermittent tank tops in the near term. The hope is that storage” to, say, four months versus a previ- by reaching a deal on global production, the ously expected two months, that would buy date for maxing out storage will be pushed additional time for a recovery in demand by out to allow the world economy more time the global economy. to get back on its feet. But according to an early April report by There’s no shortage of estimates of oil de- Citi, moves to cut production may be com- mand destruction or the timing of inventory ing “too little, too late.” builds to fill storage. “What’s required is a good 10 MMbbl/d Analysts’ estimates of peak demand loss- immediate reduction in oil supply that is es for a time ran around 20 million barrels needed to prevent inventories globally from per day (MMbbl/d) but jumped as high as reaching tank tops,” according to the report. 26 MMbbl/d in a late March interview by The Citi analysis assumed a drop in glob- Jeff Currie, global head of commodity re- al demand of nearly 16 MMbbl/d on aver- search at Goldman Sachs. Ryan Sitton, the age for the second quarter, peaking at 18.5 Texas Railroad Commissioner, carried an MMbbl/d in the eight weeks through the estimate of 18 MMbbl/d, but he raised it to end of May, it said. 22 MMbbl/d to 24 MMbbl/d after U.S. job- A critical question is how much of the less claims surged to 6.65 million, setting a cuts materialize on a voluntary basis, and new weekly record, in early April. how much they occur due to forced shut-ins Although details are few, a proposal for a as producers are simply unable to sell their 10 MMbbl/d cut in oil production has been production. aired by President Donald Trump with Sau- Among key producers, “Russia will be di Arabia Crown Prince Mohammed bin forced to cut output by at least 1 MMbbl/d Salman, who in turn contacted Moscow. In due to a combination of lost condensate addition, commissioner Sitton spoke earlier production from lost natural gas sales and with Russian oil minister Alexander Novak, export bottleneck,” said Citi. “Saudi Arabia, calling for “an unprecedented level of in- in the midst of a period of allocating sales ternational cooperation” in the wake of the to clients, looks likely to be confronting a coronavirus impact on oil. market that might want—at any price—no Pioneer Natural Resources Co. and Pars- more than 6.2 MMbbl/d, 1 MMbbl/d lower ley Energy Inc. sent a letter to the Texas than March levels.” Railroad Commission in which they asked In addition, “while the U.S. looks likely for “fairness” in production cuts as part of a to be seeing a production drop of 1.0 MMb- plan to help stabilize oil prices worldwide. bl/d, it is unlikely to occur before the end of Without such action, the independent sec- the third quarter,” added Citi. tor, currently comprising 74 firms, might As lost demand deepens, much will de- see 64 of their number fall by the wayside, pend on these market forces in determining leaving just 10 producers with strong bal- an approximate time for reaching tank tops. ance sheets, according to Pioneer CEO Forecasts vary, but some say storage could Scott Sheffield. The remaining 64 would be be brimming as soon as the end of May.

May 2020 • HartEnergy.com 11

A&D TRENDS OIL SOAKED

elcome to Thunderdome, raggedy “We expect the second half of 2020 to man. Turns out the oilpocalypse show an implied stock draw, in contrast to Wisn’t a brutal fight to fuel up Mad the record-breaking oversupply of the first Max’s V8 Interceptor. In this twisted reality, half of 2020,” Hittle said. “That will sup- there’s plenty of crude. Just no toilet paper. port and lift prices significantly. The market Adding to our new surreal existence, the will recognize this once the storage builds COVID-19 pandemic has sidelined profes- slow this quarter and start drawing down in sional sports and forced the cancelation of the second half.” the Scripps National Spelling Bee, leaving Will it be enough? Goldman Sachs ana- ESPN to air a spelling bee rerun. (Spoiler lyst Damien Courvalin said in an April re- alert: a kid won.) port he doubted so. Despite a rally in pric- DARREN BARBEE, Other things in short supply: M&A, capi- es after the OPEC+ agreement, WTI could SENIOR EDITOR tal and common sense. sink back to $20/bbl. Transactions activity, which was already “Ultimately, the size of the demand shock muted to begin the year, went into radio si- is simply too large for a coordinated supply lence as the pandemic and the oil price war cut, setting the stage for a severe rebalanc- sent oil tumbling to its lowest level in 21 years. ing,” he said. Enverus said in April that deals will likely re- Roger Diwan, vice president of financial start in earnest after crude prices stabilize. services at IHS Markit, likewise said the That future price is likely to be low. Asset supply cuts resolve the price war (for now) packages on the market have already fallen and spare the U.S. from a “catastrophic to about $5 billion in expected value, En- price scenario” that would have wiped out verus said. And with debt maturity dates many E&Ps. ticking closer, the industry’s next great “But this improved scenario will not flood may be distressed assets. change the fact that the production decline Some have celebrated the OPEC+ deal to unfolding in the United States will be in the cut production by nearly 10 million barrels same range as the forced shut-ins or cuts a day to end a resoundingly dumb price war. agreed [to] by Russia and Saudi Arabia,” Chief combatants Saudi Arabia and Russia Diwan said in a April 13 report. decided to play chicken without realizing Regional benchmarks and wellhead pric- they, too, were in the pot. Still, credit and es will continue to show further discounts all-around kudos to OPEC+, which pre- and are likely to force shut-ins above and vailed in forcing itself to agree to its own beyond the supply agreement, Diwan said. terms of surrender. Declining production of 3.7 million barrels Many people are noting that President per day in the U.S., Canada and other pro- Donald J. Trump said on Twitter that he was ducers reflect these “distressed economics.” involved in the OPEC+ negotiations “to put In the here and now, energy companies’ it mildly.” default risk is rising. As of April 13, the en- With the pandemic still rampaging world- ergy sector’s default rate was 9.9% follow- wide, however, the oil and gas industry re- ing the bankruptcy of Whiting Petroleum mains at the mercy of the virus. As one Twit- Corp., according to Fitch Ratings. The de- ter user noted in April, demand destruction fault rate could reach 17% by year-end. may be a solid name for a rock band, but by E&Ps on Fitch’s watch list collectively every other measure it’s uniformly awful. hold $18.3 billion in debt, and most have up- Paul Sankey, managing director at coming interest payments in the next 60 days. Mizuho Securities USA LLC, wrote in a Chesapeake Energy Corp., California Re- commentary that the demand destruction sources Corp., Denbury Resources Inc., Unit “is so dramatic that supply management is Corp. and Bruin E&P Partners are among moot for the month of April. … This over- companies facing potential defaults. hang will take years to work off. The OPEC Diwan, speaking about the differentials meeting gave you that answer, setting cuts between global benchmarks and physical through April 2022.” prices, said the disparity speaks to “dual re- But Ann-Louise Hittle, vice president of ality of hope and despair.” Macro Oils at Wood Mackenzie, said that This may well be a year of reckoning for even if the OPEC+ deal is poorly imple- the industry. But to paraphrase Winston mented, it would still make a substantial Churchill, never flinch, never weary, never difference in the market. despair. Or as Max would put it, “survive.”

May 2020 • HartEnergy.com 13 EVENTS CALENDAR The following events present investment and networking opportunities for industry executives and financiers. These dates are effective as of April 15, and many are changing due to the impact of the coronavirus.

EVENT DATE CITY VENUE CONTACT 2020 Offshore Technology Conference Canceled: May 4-7 Houston NRG Park 2020.otcnet.org Louisiana Energy Conference May 27-28 New Orleans online louisianaenergyconference.com CIPA Annual Meeting June 4-7 Santa Barbara, Calif. TBA cipa.org AAPG Annual Conv. & Exhibition June 7-10 Houston George R. Brown Conv. Center ace.aapg.org/2020 IPAA Annual Meeting Canceled: June 29 Newport Beach, Calif. Pelican Hill ipaa.org Unconventional Resources Tech. Con. July 20-22 Austin, Texas Austin Convention Center urtec.org/2020 Petroleum Alliance of Okla. Annual Meeting July 27-30 Las Colinas, Texas Four Seasons thepetroleumalliance.com Western Energy Alliance Annual Meeting July 29-31 Tabernash, Colo. Devil’s Thumb Ranch Resort westernenergyalliance.org Summer NAPE Aug. 12-13 Houston George R. Brown Conv. Center napeexpo.com EnerCom The Oil & Gas Conference Aug. 16-19 Denver Westin Denver Downtown theoilandgasconference.com The Energy Summit Aug. 17-19 Denver Sheraton Downtown Denver coga.org TIPRO Summer Conference Aug. 19-20 San Antonio Hyatt Hill Country Resort tipro.org Energy ESG Conference Sept. 1 Houston Omni Galleria energyesgconference.com DUG Permian/DUG Eagle Ford Sept. 8-10 San Antonio Henry B. Gonzalez Conv. Center dugpermian.com DUG Midcontinent Sept. 22-24 Oklahoma City Cox Convention Center dugmidcontinent.com DUG Haynesville Oct. 13-14 Shreveport, La. Shreveport Convention Center dughaynesville.com A&D Strategies and Opportunities Oct. 27-28 Dallas Fairmont Hotel adstrategiesconference.com Executive Oil Conference/ Nov. 3-4 Midland, Texas Midland County Horseshoe Pavilion executiveoilconference.com Midstream Texas DUG East/Marcellus-Utica Midstream Dec. 1-3 Pittsburgh David L. Lawrence Conv. Center dugeast.com Privcap Energy Game Change Dec. 1-2 Houston Houstonian Hotel energygamechange.com Veterans In Energy Luncheon Dec. 3 Houston The Westin Memorial City impactfulveteransinenergy.com 2021 IPAA Private Capital Conference Jan. 21 Houston JW Marriot Houston ipaa.org NAPE Summit Feb. 8-12 Houston George R. Brown Conv. Center napeexpo.com CERAWeek by IHS Markit Mar. 1-5 Houston Hilton Americas-Houston ceraweek.com DUG Bakken and Rockies Mar. 25-26 Denver Colorado Convention Center dugrockies.com Monthly ADAM-Dallas/Fort Worth First Thursday Dallas Dallas Petroleum Club adamenergyforum.org ADAM-Greater East Texas First Wed., even mos. Tyler, Texas Willow Brook Country Club getadam.org ADAM-Houston Third Friday Houston Brennan’s adamhouston.org ADAM-OKC Bi-monthly (Feb.-Oct.) Oklahoma City Park House adamokc.com ADAM-Permian Bi-monthly Midland, Texas Midland Petroleum Club adampermian.org ADAM-Tulsa Energy Network Bi-monthly Tulsa, Okla. The Tavern On Brady adamtulsa.com ADAM-Rockies Second Thurs./Quarterly Denver University Club adamrockies.org Austin Oil & Gas Group Varies Austin Headliners Club [email protected] Houston Association of Professional Landmen Bi-monthly Houston Houston Petroleum Club hapl.org Houston Energy Finance Group Third Wednesday Houston Houston Center Club [email protected] Houston Producers’ Forum Third Tuesday Houston Houston Petroleum Club houstonproducersforum.org IPAA-Tipro Speaker Series Second Wednesday Houston Houston Petroleum Club tipro.org

Email details of your event to Bill Walter at [email protected]. For more, see the calendar of all industry financial, business-building and networking events at HartEnergy.com/events.

14 Oil and Gas Investor • May 2020

“A sizable majority of respon- dents expect borrowing bases to decrease by at least 20% in response to the recent freefall in commodity prices, and 45% of respondents expect even deeper cuts, of 30% or more,” the firm Banks contend with to what they thought last fall. said in early April. deep impact on Haynes and Boone law firm in “In contrast, the largest share borrowing; price decks Houston had to conduct its 11th of respondents, 40%, in the annual survey of borrowing base firm’s fall 2019 survey said they People search for certainty in expectations more than once in expected borrowing bases to times of turmoil, but predictions, response, first getting answers decrease by only 10% during the polls and surveys about oil price between Feb. 24 and March 7, redetermination season.” decks and borrowing bases fluc- then again between March 8 and Producers entered this downturn tuated throughout February and March 25. relatively well-hedged, the firm March as experts grappled with The 207 respondents included said, “raising a question about rapidly changing conditions due to E&P executives who made up whether producers will keep these the COVID-19 pandemic and the 46% of the answers, while finan- hedges in place to preserve cash oil price crash. Both factors have cial providers such as lending flow, or immediately monetize had a deep impact on what E&Ps banks and private-equity firms them to enhance liquidity.” and their lenders expect compared were 34% of the total. Producers are expected to use cash flow from operations as % Of Respondents That Expect Borrowing Bases To Change their primary sources of capital In Spring 2020 As Compared To Fall 2019* in 2020, followed by debt from 30 alternative capital providers as the Overall responses next likeliest source of capital. “When compared to the fall 25 Lender responses 2019 responses, survey partici- pants who see private equity as Borrower responses 20 a source of E&P capital have dropped by nearly 50%,” said Kraig Grahmann, head of Haynes 15 and Boone’s energy finance prac- tice group. In a separate survey, the law firm 10 asked leading banks about their oil and gas price decks to be used for 5 borrowing bases or reserve-based loans. Haynes and Boone first asked EOG Resources (EOG) participating banks in mid-February 0 40% 30% 20% 10% No 10% 20% 30% 40% and reached out to them again in or greater decrease decrease decrease change increase increase increase or greater decrease increase Where Producers Plan To *The responses above were provided from March 8-25 (after the commencement of the Russia–Saudi Arabia oil price war and Source Capital From acceleration of COVID-19 concerns in the U.S.). In 2020* 60 Joint Ventures Equity From Debt From Overall responses With Private-Equity Capital Markets Capital Markets Firms (Farmouts, 2% 4% 50 Lender responses Drillcos, etc.) 17% Other Borrower responses 4% 40 Debt From Banks 17% 30

Debt From 20 Alternative Cash Flow Capital Providers From Operations 20% 10 28%

0 Equity From 40% 30% 20% 10% No 10% 20% 30% 40% Private-Equity Firms or greater decrease decrease decrease change increase increase increase or greater 8% decrease increase *Respondents could select more than one option. We collected *The responses above were provided from Feb. 24 to March 7 (prior to the commencement of the Russia–Saudi Arabia oil price war 578 responses. The figures in the chart above indicate the and acceleration of COVID-19 concerns in the U.S). percent of total responses for each option.

Source: Haynes and Boone Source: Haynes and Boone

May 2020 • HartEnergy.com 17 March—after the announcement of aggregate 2020 oil-hedge vol- If oil prices fail to recover by year- of price cuts by Saudi Arabia. This ume among publicly traded North end, 2021 could prove even more allowed the banks the opportunity American E&Ps are set at an effec- challenging for E&Ps than 2020. to revise their price decks that had tive hedge price above $50 WTI. “The oil market really needs to been submitted prior to the crash. Most oil-weighted E&Ps have find the path to recovery by the end Some of the key takeaways hedged between 25% and 90% of of the year because the whole sec- included: anticipated oil production for the tor is just more exposed to market • The average base case for the year. Enverus estimates the value prices going into next year,” said oil price post-crash is 15.6% of these financial-derivative assets McConn. “There are a lot of E&P lower than the fall 2019 base (in conjunction with gas and NGL businesses that fundamentally do case; and hedges) exceeds 10% of respective not work at $30, so most compa- • The average base case for gas enterprise values for the majority nies will be very reluctant to hedge post-crash is 12.3% lower of E&Ps. at such prices.” than the fall 2019 base case. “Most North American E&Ps —Blake Wright “The firm initially sent out sur- have some sort of policy to hedge vey questions in mid-February but at least some of their volumes for then reached out again to industry a certain period, but each policy is Oil price plunge professionals in early March to ask unique,” said Andrew McConn, an to crush E&Ps’ free- them if they wanted to revise their analyst with Enverus. “Some refrain cash-flow goals predictions in light of the OPEC from hedging altogether, opting for price war and growing concerns complete exposure to market prices. The ability for E&P companies about the coronavirus. The latter There is an argument for doing that. to generate free cash flow is responses were far more pessimis- But most wish to mitigate at least expected to be severely ham- tic,” Grahmann said. some of their exposure to the main pered by the plunge in oil prices, Twenty-one banks responded. risk-facing E&Ps—commodity according to a recent Rystad The post-crash mean oil price they prices. And those hedge programs Energy report, which projects cited was $32/bbl for the base case. are exactly for times like this— free cash flow will drop to zero Their pre-crash mean for the base to insulate companies from big if oil prices remain at $30/bbl. case was about $48. By 2023, they market shocks, which are always a “This is probably where now expect the mean to be $42. possibility.” we are heading in the coming “The rapid deterioration in For example, U.S. independent months, which will be extremely market conditions that started on Devon Energy Corp. has hedged difficult for E&P companies,” March 8, 2020, had an immediate about 80% of its estimated 2020 Per Magnus Nysveen, Rystad and deep impact on predictions crude production at an average floor Energy’s senior partner and head about future borrowing capacity,” price of nearly $45 WTI. Smaller, of analysis, said during a webi- Grahmann said. Buddy Clark, Permian-focused Laredo Petroleum nar on March 18 discussing the co-chair of the firm’s energy prac- Inc. currently has 100% of its esti- findings of the report focused tice, noted the significant drop mated 2020 oil production hedged on the coronavirus’ impact on in value of oil and gas collateral with 7.2 MMbbl swapped at over oil markets. since commodity prices fell. He $59 WTI and 2.4 MMbbl swapped After a double whammy deliv- also noted that the turmoil might at about $63 Brent. ered by COVID-19 and a price give bankers an excuse to postpone Apache Corp., which had no war between Saudi Arabia and the borrowing base redetermination hedges in place for 2020, has added Russia, global oil prices have season, although he gave no time near-term oil hedges to protect 2020 lost half their value in March. frame for the delay. cash flows from further price dete- On March 18, WTI crude fell —Leslie Haines rioration. Those deals were made at a staggering 24% to $20.37/ less favorable terms, mid-$20 WTI bbl—its lowest level since Feb- for fixed swaps through September ruary 2002. Hedge protection on over 110,000 bbl/d in addition to U.S. shale producers are likely good for some, three-way collars over the balance to face tough times ahead, with not for others of the year covering over 40,000 growth trajectory expected to bbl/d. A similar hedging strategy for close if WTI does not return to A market flooded with cheap Brent crude was also consummated, $40, according to the report by oil coupled with the demand-de- covering lower volumes. the research firm. stroying coronavirus is forcing “If you hedged two months ago “With WTI below $30 per unprecedented headwinds on E&P you’re in a much better position barrel or even lower, by the end companies and exposing those not than two weeks ago,” McConn of the year, we clearly see about protected by hedges on produced said. “I think it is fair to say that 1 million barrels shaved out volumes. Hedging offers a degree the vast majority of companies are from U.S. shale production,” of protection in volatile oil and gas going to be very reluctant to hedge Nysveen said. markets, providing a source of reli- at today’s strip. But even with the Lower free cash flow of E&P able liquidity assisting operators, strip reflecting $30 oil for the rest companies will also negatively some of which are adrift in truly of the year, there is still downside impact investment levels this uncharted waters. risk. It can go lower.” year. Given an average Brent oil According to a joint report by However, the Enverus/RS Energy price of $40/bbl in 2020, global the recently-united Enverus and RS report also reveals hedged oil vol- investments will fall by 8%. Energy Group teams, 2.5 million umes decline by 85% after 2020. North America’s shale industry

18 Oil and Gas Investor • May 2020

Total Upstream Free Cash Flow From Public E&Ps but produced only $3.7 billion, For Various Oil Price Scenarios well below target and about $1 bil- lion below the company’s 10-year 350 annual average.” $40/bbl $30/bbl At its investor day conference 300 Base case 297 in March, Exxon Mobil lowered its annual asset sales target from $5 billion to $3 billion per year 259 250 through 2025. Yet even that goal may be unrealistically high in 221 219 today’s market, the group said. 200 “Exxon Mobil’s failure to meet

$B its cash targets for asset sales, par- 150 152 ticularly at a time of low oil prices, 158 contributes to the company’s 131 130 poor cash flow. This is a signifi- 100 cant contributing factor to Exxon [Mobil]’s deteriorating stock per- 63 formance,” said IEEFA financial 50 48 54 68 analyst Kathy Hipple, lead author 31 of the note. 7 Exxon Mobil isn’t alone in 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 its divestment plans, but the risk Source: Rystad Energy is that any sales, if they occur at all, may garner substantially less will take the hardest hit, with summer, above the remaining than anticipated, the report said. investments falling by 25% capacity for crude and products in “Further, in the current environ- in 2020. the entire supply chain. ment where many companies are Global final investment deci- “As such, production must halt reducing capital expenditures, less sions for conventional projects when oil prices fall below a field’s money will be available for acqui- during the first half of the year are marginal cost of production, sitions. With weak, or potentially also expected to be delayed. which ranges from $10 to $25 per no, asset sale proceeds, Exxon In light of the current market barrel for fields globally,” accord- Mobil will increasingly be forced conditions, the firm’s revised out- ing the report. to borrow to cover its dividend look suggests that about $80 billion —Faiza Rizvi payments and capital expansion worth of capex projects will be plans,” Hipple said. sanctioned in 2020, stooping down Over the past decade, the com- to 2016 levels. The situation is not Analysts are skeptical pany’s free cash flow has only expected to improve until 2021. Exxon Mobil can covered two-thirds of the divi- Rystad predicts the coronavirus’ perform as promised dend. “Just last year, Exxon Mobil impact on oil markets will worsen paid $15.3 billion to shareholders, as world economies continue to You might assume that Exxon while generating only $5.4 billion lock down in hopes of preventing Mobil Corp., being the largest in free cash flows—leaving a $9.9 the spread of COVID-19, with public U.S. oil company, and one billion deficit that the company global oil consumption expected that has paid a dividend for 37 made up from other cash sources, to drop by almost 10 MMbbl/d in straight years, would be mostly including $5.4 billion in new long- the coming months. insulated from the oil price crash, term borrowing and $3.7 billion in The figure by Rystad takes into but think again. The Institute for asset sales.” account drastic travel restrictions, Energy Economics and Financial Credit analysts increasingly cite flight cancellations and self-quar- Analysis (IEEFA) is skeptical, Exxon Mobil’s cash flow chal- antines, which are being heavily saying the major’s efforts may lenges as an area of concern. exercised in Europe and now in fall short. —Leslie Haines the U.S., as more cases of infected And in late March, Moody’s, patients are being reported, which gives Exxon Mobil an Aaa Nysveen explained. If travel rating, cited rising debt concerns How prepared are restrictions and quarantines con- when putting the company on neg- you for oil and tinue, the impact on oil demand ative outlook. Despite turbulence gas price crisis? will be more severe during the in the bond markets, the company next few months, he added. borrowed an additional $8.5 bil- Well-hedged oil and gas companies The report also underlined that lion to support its capex and divi- are best prepared to endure this the actual impact on oil prices will dend strategies. downturn in the near term, but the be determined by global storage “Even before this year’s oil price longer the low price environment capacity, with the flood of oil sup- dive, Exxon Mobil’s planned assets continues, the greater the likelihood ply from Saudi Arabia multiplied sales faced a challenging market,” that many in the industry won’t by the upcoming demand destruc- according to the IEEFA report. “In survive, an analyst said. tion. Implied stock builds could 2019, the company anticipated $5 “The hedges that are in place amount to as much as 1 Bbbl by billion in proceeds from asset sales, between $50 and $60, that is

20 Oil and Gas Investor • May 2020 meaningful,” said Bernadette [Co.] and you’re sitting on a Saudi Arabia not being able to Johnson, vice president for stra- pile of cash, you can weather solve this very quickly,” Johnson tegic analytics at Enverus, during this storm longer, even if you’re said. “It’s game theory. If you pull a webinar on March 12. “That not as well-hedged,” she said. the trigger too soon, even though does provide some protection for “If you have a lot of debt to roll you’re covered, then this is resolved the first part of the year. It’s not over, and your market cap just quicker than people are thinking, going to save all these operators, crashed by 50%, 90%, that’s a then you’re at a disadvantage rela- certainly, and there are operators significant challenge that a lot tive to your competitors.” [in the Enverus analysis] that are of these operators will have to But don’t get your hopes up not hedged.” overcome.” about a rapid rebound. But almost all of the hedges in The plunge in price doesn’t “Prices are not going to recover place for the 63 operators stud- make it easy. Only a few areas in quickly,” she said. “We’re having ied begin to expire at the end of the Permian Basin and the Bak- a hard time seeing a lot of upside this year. ken Shale have breakevens that in 2020.” “Post-2020, that hedge pro- work at the current price level Those who still believe the tection starts falling off a cliff,” and those, Johnson said, are fairly shock of the March 9 meltdown Johnson said. “Even for the oper- well drilled out. will fade quickly will be forced to ators that are well-hedged, it’s So far, she said, shale isn’t embrace reality by June, Johnson relatively short term, and the lon- dead because the market is said, and then take drastic steps. ger that these low prices persist, working the way it is supposed For those in the oilfield ser- the more balance sheets that are to work. Prices are low, so oper- vice (OFS) sector, well, duck in trouble.” ators are pulling back. When and cover. Who should worry? Johnson prices recover, they will return “The OFS market was having boils it down to three questions: and add rigs quickly, which is a tough time before the price • What is your debt-to-EBITDA what happened during the last collapse, just with the pullback ratio? recovery in 2017. in activity,” she said. “We were • How well hedged are you? But is that the best strategy for running about 1,200 rigs in the • How much debt do you have an operator? That depends. U.S. back in November of 2018. to roll over? “If you decide to pull back right By the end of 2019, we had cut “If you are a Chevron [Corp.], now as a U.S. operator, you’re that number by 25%.” if you are a ConocoPhillips essentially betting on Russia and Less activity means less drilling,

May 2020 • HartEnergy.com 21 less need for services, pullback in In the past, the Bernstein ana- for improvement for smaller com- rigs and pullback in crews. That lysts, led by Bob Brackett, sug- panies” in total production and was already happening. gested that small- to mid-cap general and administrative costs “This really just exacerbates Permian M&A “was a tough way via M&A. And looking at price to that,” Johnson said. “If you look to win,” and the large-cap theme 2021 estimated cash flow, “there historically at what happens when was preferable. is an opportunity to buy up the prices first collapsed several years “That clearly worked for hold- cheaper players,” the firm said. ago, it really is OFS that usually ers of [Anadarko Petroleum Corp] Consensus EBITDA CAGR takes the hit first.” in 2019,” according to the report. shows that even some of the There are exceptions: Water- Anadarko Petroleum was acquired cheaper names could grow handling companies in certain areas by Occidental Petroleum Corp. in a quickly—the assets could be valu- of the Permian Basin may still do stock-and-cash transaction, which able to a suitor. well. For most, however, tough closed August 2019. How can smaller players best times have arrived. But the Bernstein analysts position themselves given Permian The longer-term outlook for also said that going forward, the M&A trends? “As a smaller player 2022 to 2023 is brighter, though. investment case for large caps who could be an acquisition target, Long-term demand trends for “must rest on intrinsic, stand- showing production is one of the both oil and natural gas are alone business models, versus an most important elements.” increasing in the Enverus fore- M&A premium.” This is based on Sellers should seek to be above cast. In that picture, shale plays analysis of 2019 full-year-results in having more productive, devel- can come back into money, and for the integrateds. oped acreage, while capable you can have rig counts return, Bernstein looked at 36 public buyers would like to buy underde- Johnson said. Permian E&P names last year and veloped acreage and unlock value, In an odd twist, this setback noted that of those: according to the report. could be just what the oil and • Three companies went bankrupt Additionally, while it is attrac- gas industry needs. (EP Energy Corp., Approach tive to sell to a major in terms of “This might be the type of Resources Inc. and Halcón average price per acre, “A smaller event that helps shake loose cap- Resources Corp.); producer would benefit from sell- ital markets,” Johnson said. “If • Three were acquired (Anadarko ing to a mid-cap or private E&P.” you think about it—a lot of these Petroleum, Jagged Peak Energy The Bernstein analysis showed assets—what was the challenge LLC and Carrizo Oil & Gas that selling to a larger public before? Not a lot of transactions Inc.); and company offers 3.4x the spread happening, not a lot of money in • Four were acquirers (Occidental between dollars per acre as com- the space.” Petroleum, Parsley Energy Inc., pared with selling to a private-eq- That could make it a good Callon Petroleum Co. and WPX uity-backed or private company. time to get back into energy if Energy Inc.). In the Midland Basin, pub- you’re on the sidelines, she said. The firm’s analysis showed lic companies are contributing Johnson believes traditional that in 2019 the average deal size about 80% of the production, investors will wait and see, but of 9,500 acres was little changed “but there are still opportunities to others might perceive a signif- from the year previous. However, buy smaller players,” the analysts icant change in the market: the the median deal size fell signifi- noted. The publics hold an even wide spread between bid and ask cantly, to 1,300 acres, “and 90% greater share of production in the isn’t so wide any more. Now you of deals were below 25,000 acres.” Delaware Basin. might see some transactions get The Jagged Peak and Felix With ownership in the Permian done, she said. Energy acquisitions were among still diffused, and with crude price —Joseph Markman the largest deals in acreage terms pressures looming, the analysts in 2019. expect continued consolidation Developed, producing acre- and acreage swaps. 2020 M&A outlook: age continued to hold sway with —Susan Klann Analyzing Permian a premium of 45% over that of Basin consolidation undeveloped. As has long been the case, acquirers are seeking portfo- Oil crash poses At the height of the U.S. shale lio synergies via consolidation. extinction risk for boom, buying almost anything The Bernstein analysts iden- some shale producers Permian-related seemed like a tified WPX Energy, Occidental good investment. As the boom Petroleum and Halcón Resources With bankruptcy looming over slowed, the Permian Basin (now known as Battalion Oil energy companies in the wake of retained a star rating. But today Corp.) as top targets for acquisi- plummeting oil prices and soar- even the Permian requires a tion in the Permian Basin, while ing bond yields, executives across focused approach—how can also noting there is still upside for the shale sector are deliberating investors play it today? some smaller names. new ways of survival. Overall, the outlook for M&A “Consensus EBITDA CAGR Although the long-term impact in the Permian Basin has shifted, shows that even some of the on demand prices is still unclear, according to a recent report from cheaper names could grow the unprecedented uncertainty of Bernstein Research updating the quickly—the assets could be the upstream sector is a strong firm’s thoughts on deal making valuable to a suitor,” according to indication that companies must opportunities in the basin. the report. Bernstein sees “room act quickly in order to survive

22 Oil and Gas Investor • May 2020 the storm, according to Basil Additionally, Karampelas sees “It’s really making it through Karampelas, managing director no solace for gas producers either the initial critical period,” he said, and head of the Houston office at as the already-depressed natural gas adding that liquidity will be the advisory firm SierraConstellation prices have fallen to their lowest coin of the realm in the current Partners LLC. level in years. environment. “Companies need to “The prices of crude have col- “We have gone from an adjust- focus on what steps they need to lapsed to a point where it’s hard ment period to what could end up take operationally, financially and to imagine any of the producers— being as an extinction event partic- strategically to maintain liquid- even the most successful ones ularly for oil and gas producers that ity until the current environment in the Permian—being able to are not well-capitalized,” he said. improves. Near-term liquidity generate substantial cash flows,” Karampelas expects the next will provide stabilization that can Karampelas told Hart Energy. three to six months will be “very hopefully allow companies to The current state of the indus- turbulent” for the industry. make informed decisions about try is very different compared to “We are already beginning to see their business without worrying the price collapse in 2016, when of some bankruptcies and restruc- about an extinction event,” he said. a lot of companies were able to turings, which is going to create a Oil and gas producers will survive because of their hedging lot of uncertainty and a real strain need objectivity in terms of program. In contrast, he said the on the system,” he said. deciding a path forward. recent crash of the energy market A large part of the industry will “There is no room for any is a twofold problem—low prices go into a “financial intensive care emotional attachment to assets for sustained period of time and unit” over the next few months, he or projects,” he said. “Compa- the grind down to the current said. As a result, this will require nies need to look gimlet-eyed at price level, which is volatile, negotiations between creditors, sup- the reality of where they are and making hedging expensive. pliers and customers to at least sta- what works in this current envi- “If you think of the world as a bilize companies to a point where ronment. Being able to be objec- simple two-by-two matrix, with they can be restructured. tive and decisive will pay large one dimension being price and the In order to survive the downturn, dividends for companies.” other being volatility, we are in the Karampelas said it’s crucial that oil Producers will also need to low-price, high-volatility quadrant and gas companies focus on three get creative, which Karampelas which is the least desirable for an themes—liquidity, objectivity and added is a necessity created by E&P company,” he said. creativity. the current situation.

May 2020 • HartEnergy.com 23 “Whether it means offering The energy consultancy in terms of shut-ins and future a discount to get aged accounts expects 37% of the rig fleet will activity as hedging enters the receivable paid or doing ‘blend be laid down, representing a drop mix, which clouds the true eco- and extend’ structures with ven- of nearly 280 rigs from January nomic response to what markets dors in order to stretch out pur- 2020 levels. are trying to force.” chasing and payables in order to The U.S. oil rig count saw its He pointed out that the firm has maintain vendor relationships, biggest weekly drop since March seen single-digit realized prices creativity can be a tremendous 2015 in the week to April 3 when regionally and at the wellhead help,” he said. drillers cut 62 oil rigs, according across the Lower 48. With existing stretched balance to Baker Hughes Co.’s report. The “Prices are already starting to sheets and lower margins, the cuts brought down the total count push shut-in level economics,” price collapse will see refinanc- to 562. he said. “You’ll start to see that ing and the restructuring of busi- Wood Mackenzie forecasts the really show up in supply declines ness models, where headcount rig count will bottom out at about starting in the summer months.” cuts and bankruptcies will be 480 in the third quarter and then Determining when and where inevitable, according to a recent stabilize. However, that “will not shut-ins happen, however, is dif- report by Wood Mackenzie. arrest U.S. supply decline but ficult to forecast. Companies must drive efficien- [would] stop acceleration of the “It’s not simply going below cies to extract the same or similar decline,” Coleman said. cash costs that drive a lot of production for lower investment, The outlook was delivered as those decisions,” Coleman said. defer the sanction of new proj- operators followed through on “There’s a lot of regulatory or ects and reduce activity levels plans to drop rigs and completion ancillary considerations around it.” and costs including short-cycle crews to save money. Unknowing These include leaseholder investment, exploration and oper- when the battle for more market agreements, abandonment fees, ating costs, the firm said. share by Russia and Saudi Arabia and the ability to sustain some Several oil majors including along with lower global demand cash cost of production from a bal- Exxon Mobil Corp., Royal Dutch growth due to coronavirus will ance sheet perspective, he added. Shell Plc and Total SA announced improve to lift commodity prices, As for exit rates, Wood Mac- significant spending cuts to pro- capex cuts have been ongoing. kenzie anticipates a 900,000 bbl/d tect their balance sheets from the By the firm’s estimates opera- exit rate decline for December oil price crash. Karampelas noted tors are reducing capex by 30% 2020 compared to December 2019 two reasons why oil majors are on average. This is on top of ini- along with a 1 MMbbl/d decline making these capex cuts, includ- tial 2020 guidance indicating a from the expected peak, which ing maintaining some level of 10% spending drop compared to Coleman said the firm believes “attractive dividend.” 2019 levels. occurred in February. “Secondly, and more impor- “Analysis from our corporate “Looking forward to 2021, tantly, I believe that there is coverage shows that year-on- the exit rate December 2020 to going to be a tectonic shift in year spending cuts of 41% are December 2021 is roughly an terms of oil majors moving into required across all cost categories additional 500,000 [barrels per smaller and quicker payback including dividends to be cash day] as we do expect price recov- period, focusing on projects that flow neutral at $35/bbl in 2020,” ery into the back half of 2021 to have higher near-term visibility according to Wood Mackenzie. marginally return rig additions and quicker payback and smaller Some companies—including back to the Lower 48 and arrest capital investment per project, Occidental Petroleum and Dia- the rate of decline,” Coleman so they can be more nimble and mondback Energy Inc. among said. “Certainly not returning the flexible to deal with the volatil- others—have already returned to space to growth, but at least slow ity, which will last for at least the the cutting room, Coleman said. the rate of descent of the decline next year if not longer,” he said. Lowering costs from efficiency curves, for a lot of this supply.” —Faiza Rizvi gains or squeezing more from —Velda Addison oilfield service margins, like the price downturn of 2014 to 2016, E&P sector to seem unlikely this time, he added. Where will the face declines “Even looking at things on a excess glut of following cost cuts half-cycle basis, less than 10% US oil go? of assessed resource in the Lower Immediate moves by U.S. oil and 48 space breaks even below $35 Excess supply has sparked a new gas players to slow activity amid WTI,” Coleman said. “On a dilemma among U.S. oil produc- unfavorable market conditions are full-cycle basis, none of it breaks ers already battered by an unprec- expected to materialize as accel- even below $35 WTI.” edented demand loss due to the erated decline in U.S. Lower 48 “The message here is that spread of the coronavirus. supply by June or July, according incremental investment and cap- Despite North America’s stor- to analysts. ital deployment in the U.S. at age system already nearing its “From a rig prospective you’ve today’s prices is very much out limit, the oil market crash has already started to see significant of the money,” Coleman said. plunged prices for physical deliv- laying off of rigs,” John Coleman, “Now, that gets further compli- ery of several key crude grades principal analyst for Wood Mack- cated when you think about how to the lowest levels in decades. enzie, said on a recent webinar. producers are going to respond The result: Pipeline operators in

24 Oil and Gas Investor • May 2020

the U.S. have begun asking pro- to Blankenship is the right thing discovery, building on the success ducers to voluntarily cut back to do. of their Maka Central-1 find. production. “Producers are making the right Drilled to a depth of about “Oil prices have come down decision by cutting 30% to 40% 6,300 meters by the Noble Sam to $22 per barrel but at the well- of capex,” he said. “Even though Croft drillship, the well hit head itself you’re looking at $10 some producers are hedged out hydrocarbons in multiple stacked per barrel or less,” Michael J. 75% but the remaining 25% is not Cretaceous-aged Campanian and Blankenship, corporate partner at hedged and those are in negative Santonian targets. Winston & Strawn LLP, told Hart margins right now.” The companies said test results Energy. “What’s happening now According to Blankenship, indicate the shallower Campanian is when the producers are pump- U.S. shale producers need to also interval has 13 meters of net gas ing out oil, they are looking for reevaluate their hedges and debt condensate and 30 meters of net storage space since they cannot load to understand whether it oil pay. The deeper Santonian sell in the market.” makes sense to produce. interval contained 36 meters of The situation of the energy “[Producers] need to under- net oil-bearing reservoir. market—aggravated by the Sau- stand if they’re not in the best The news sent shares of di-Russian price war—is more area within the Permian, Bakken Apache up by more than 23% severe than people had antici- or any area of the country, it’s to $4.97 in trading early April 2, pated, Blankenship added. going to be hard because there signaling a positive for the com- Storage capacity is being are no buyers of crude,” he said. pany that is facing tough times in quickly sold out, and as a result “On the flipside, gas producers U.S. shale. pipeline operators are asking are stronger because gas produc- “Based on a conservative esti- producers of certain wells to cut tion will go down as the wells mate of net pay across multiple back production. The U.S. Energy are shut-in and we could see gas fan systems, we have discovered Information Administration said prices go up in 2021.” another very substantial oil April 1 crude inventories in the To relieve some economic resource with the Sapakara West-1 U.S. rose the last week of March stress of producers that are forced well,” John J. Christmann, Apache by 13.8 MMbbl to 469.2 MMbbl, to shut in oil wells due to lack of CEO and president, said in a news which was the biggest one-week storage capacity, the U.S. Energy release. “Importantly, our data rise since 2016. Department on April 2 announced indicates that the Sapakara West-1 In early April, pipeline opera- a solicitation to immediately well encountered a distinct fan sys- tors also began to ask suppliers make 30 MMbbl of the Strategic tem that is separate from the Maka to scale back output. Both Plains Petroleum Reserve’s oil storage Central-1 discovery we announced All American Pipeline LP and capacity available to U.S. oil in January this year.” Enterprise Products Partners producers. The Department of Suriname is among the most- were reported by Bloomberg Energy also intends to make an watched exploration hotspots of having sent letters requiring additional 47 MMbbl of storage in the industry. Industry players customers to prove they have capacity available thereafter. willing to pursue offshore explo- a buyer or place to offload the Several other countries are ration, given today’s challenging crude they are shipping. Blan- struggling with storage capacity. market conditions, could be at kenship said he expects more According to industry reports, the beginning of another string pipeline operators to join Plains global oil inventories are esti- of discoveries. Exxon Mobil and in asking for output reductions. mated to be increasing at the partners have made 16 discov- In a similar development, rate of 25 MMbbl/d and storage eries on the Stabroek Block off- Parsley Energy Inc. and Pioneer capacity in pipelines, refineries, shore Guyana, which is next door Natural Resources Co. called on tank farms and vessels at sea is to Suriname. the Texas Railroad Commission rapidly filling up. Apache and Total’s latest find (RRC), which regulates energy With excess supply and slack- comes about three months after for the state, to hold an emergency ing demand, major oil-producing Apache shared news that the meeting and order oil production countries like Nigeria, Brazil, Maka Central-1 well encoun- cuts, no later than April 13. Ecuador, Angola and Canada tered oil and gas condensate Ryan Sitton, a member of the have only a few weeks of storage in the Campanian and Santonian Texas RRC, said on Twitter that available before pipeline systems intervals. pipeline companies are running out back up and production has to Apache said it has identified at of storage space for oil as coronavi- be curtailed, Reuters recently least seven play types and more rus-related lockdowns have caused reported. than 50 prospects in the area it demand to plunge. During a webi- —Faiza Rizvi described as a thermally mature nar on April 1, he also pointed out play fairway. The discoveries that the market is 21% oversupplied are located on the 1.4 mil- and if the current oversupply rate Apache, Total score lion-acre Block 58, which is near continues, global oil storage will be win with discovery Exxon Mobil’s Haimara gas and full in 72 days. offshore Suriname condensate discovery well off- U.S. shale firms have been shore Guyana. responding to the crisis by slash- Apache Corp. and partner Total “The results are once again ing the number of drilling rigs, SA said April 2 the Sapakara very encouraging and confirm reducing workforce and cutting West-1 well offshore Suri- our exploration strategy in this capital spending, which according name has made a significant oil region,” Kevin McLachlan,

26 Oil and Gas Investor • May 2020

senior vice president of explora- curtailed activity, the number market, the situation could be tion for Total, said in a separate of well completions in the U.S. worse for OFS providers, the firm statement. is expected to drop by 40% in said, with 30% expected layoffs. Plans are now for the drill- 2020, Audun Martinsen, head of The oil and gas industry ship to search for hydrocarbons energy service research at Rys- is facing a historic slash in northwest and southeast of tad, said during a webinar on demand, as experts forecast Sapakara West-1, looking for March 27. crude consumption could fall as oil in upper Cretaceous targets On the supply chain side, Mar- much as a quarter next month in the Campanian and Santo- tinsen explained that well-related because of global lockdowns nian intervals. Apache said the services—which will experience as the coronavirus pandemic reservoirs appear to be inde- 70% to 80% budget cuts—will continues to spread. Aviation pendent from the Maka and feel the most pain. This includes and passenger vehicles—which Sapakara discoveries. First up land and offshore drillers, drilling constituted 34% of global oil will be the Kwaskwasi prospect, tools and services, pressure pump- demand in 2019—are the pri- about 10 kilometers northwest ing and completion services. mary drivers of the global oil of Sapakara West-1, Apache In a battle for market share, demand crash. said. Keskesi, the fourth explo- margins of the pressure pumping Page added that several coun- ration prospect on the block, sector will also drop by 20% this tries in North America, Europe will follow. year. Consequently, the average and Southeast Asia have imposed —Velda Addison well cost could go down by 10% stricter measures, resulting in a in all the major basins of the U.S., large reduction in traffic. At this according to Rystad Energy fore- rate, oil demand was expected Service providers casts. to possibly drop by 16 MMbbl/d to bear brunt Other sectors such as subsea, in April. of oil market crash equipment construction and main- However, the demand could tenance services are expected by bounce back relatively quickly The global oilfield service (OFS) Rystad to steer the downturn in once restrictions are lifted. sector is expected to slash spend- a better way and run through On the supply side, OPEC+ is ing by $100 billion this year as long-term agreements. However, expected to ramp up production oil prices continue tumbling to payment and execution will be by 3.5 MMbbl/d in May com- historic lows with the U.S. shale delayed, Martinsen noted. pared to February levels, which market being hit the hardest, Rystad also predicted more according to Page is a “dramatic according to a Rystad Energy than 1 million OFS jobs increase given the crash in global analyst. could be cut this year as proj- oil demand.” The increase in Many E&P companies have ects are deferred and delayed, supply will be driven by factors unveiled budget cuts to cope with onshore services bearing such as Libyan production com- with the slump in oil prices— the brunt. ing back online and Saudi Arabia the bulk of which has been An estimated 5 million peo- increasing production. made by U.S. shale operators. ple are employed globally in the In the U.S., if WTI could recover On average, shale companies OFS sector. Contractors are pre- and maintain at $30/bbl, Page said have revised budgets down by dicted by Rystad to scale down oil production will begin seeing a 30% this year. As a result of the by at least 21%. In the U.S. shale significant decline by September. He predicts more than 1 MMbbl/d of U.S. production will be shaved off compared to 2019 levels. How- ever, if the price drops to $20/bbl, the production decrease will be more dramatic and could begin as early as June. If the low-price levels continue until 2021, U.S. oil pro- duction will further decline by 1.9 MMbbl/d, he said. In conclusion, the imbalance between overall crude supply and demand paints a very bearish picture, Page said. “From February through July, we see significant builds in overall crude supply and crude demand, which we consider to be the ‘mother of all market sup- ply surpluses,’” he said. “There are significant downside risks in the second quarter with 5.8 MMbbl/d supply surplus, which is a significant build in stocks.”

SOURCE: LARRY1235/SHUTTERSTOCK.COM —Faiza Rizvi

28 Oil and Gas Investor • May 2020

SPECIAL REPORT: THE PATH FORWARD THE E&P SURVIVAL GUIDE Amid a pandemic and a disastrously timed OPEC+ supply war, executives, analysts and consultants advise hedging strategies, keeping a close watch on markets and, potentially, rebuilding business plans from the ground up. seeming to be pretty accurate. Just think about how our movements have changed for all of us.” ARTICLE BY n April, the streets of the world’s greatest cit- Industry leaders, consultants, analysts and DARREN BARBEE ies emptied, offices and businesses shuttered, executives say maneuvering through the crisis AND Iand humans huddled in their homes. The will require looking beyond the immediate af- VELDA ADDISON quiet grew, and the earth seemed to stand still. termath of the price crash, which led to slashing It was the worst possible outcome for the oil capex and layoffs. and gas industry, which depends on all man- Harold Hamm, chairman of Continental Re- PHOTOGRAPHY BY ner of movement—car and truck travel, airline sources Inc., said the oil and gas industry has STEVE TOON flights, deliveries, logistics—for customers. By plenty of practice with business cycles and that mid-April, as the coronavirus pandemic blazed the survival instincts of producers will kick in. “I through Europe and the U.S., the virus claimed think cutting back as much as you can, as quickly 130,000 lives and restricted the movement of as you can and preserving cash and your liquid- more than 300 million Americans. A supply war ity is very important,” he said. “And that’s what between Saudi Arabia and Russia only helped everybody will strive to do.” to further suppress oil prices. Jeffrey Currie, an analyst at Goldman Sachs, Whether weeks or months of shelter-in-place wrote on March 30 that carbon-based industries orders—and lessened energy demand—lay such as oil production have historically served as ahead, the implications for the oil and gas indus- the cornerstone of social interactions and global- try are dire. The dog-eared E&P survival guide ization—and those must be shut down to defend for the year ahead has once more been dusted against the virus. off, but there’s no chapter for this. General- “Oil has been disproportionately hit, likely ly, operators were responding rapidly through more than 2x economic activity, with demand capex cuts, preparing for chaos and leaving all this week down an estimated 26 million barrels options on the table. And it may not be enough per day or [about] 25%,” Currie said. this time. Unlike other industries, oil and gas producers The swiftness of the March-April oil shock are fighting a two-front war: demand destruction is unlike any that producers have faced before. by the pandemic and the OPEC+ price war that In a matter of eight weeks, demand for oil was has already unleashed a glut of oil on an already crushed, and prices skittered from $60/bbl to supersaturated market. the low $20s. An angry Hamm said he is working with U.S. The effects have been felt throughout all Sen. Jim Inhofe, R-OK, to place sanctions on the sectors of the economy, including hospitali- two countries for potential excessive dumping ty, entertainment, travel and leisure. By early of oil into global markets. It’s unclear whether April, traffic through Transportation and Safety a late-breaking agreement by OPEC+ to curtail Administration checkpoints fell 94%—mean- production by nearly 10 MMbbl/d would alter ing 2 million fewer people traveled compared Inhofe’s response. with the same time last year. Over New York, “The ironic thing is the U.S. [military] is over California and Texas, satellites tracking traffic there [the Middle East] actually … protecting showed declines of at least 50% each, according their physical and national security interests at to Rystad Energy. In the U.S., jet fuel use is pro- the time that they choose to do this and under- jected to fall by as much as 70% and gasoline mine ours,” Hamm said. by 50%, according to Regina Mayor, KPMG’s Hamm said a countervailing duty of as global and U.S. energy sector leader. much as $25/bbl could be imposed, though the Estimates for crude oil demand are growing in- American Petroleum Institute is generally op- creasingly bearish, said Mayor. Models showed posed to tariffs. Hamm said that Saudi Arabia demand falling by “20 to 25 million barrels per and Russia miscalculated “the ire of everyone day, globally,” Mayor said. “And those are now here in this country” as they drove supplies up and prices down. WTI/Brent Price Comparison ($/bbl, 1Q20) “The Saudis … didn’t just ramp up their pro- $70 duction to two and a half million barrels,” he said. $65 “Actually, what they did was ramp up production and empty their tanks. So, they wanted double $60 the impact on the market, and they’ve done that.” Even without the added pressures from the $55 price war, Rystad forecast on April 1 that global $50 demand in 2020 would contract by 6.4% because of the pandemic—about 2.5 billion barrels fewer $45 than in 2019. $40 E&P executives, analysts and advisers urged upstream oil and gas producers to adjust to the re- $35 ality that the pain will be long term. Even a truce $30 between the oil price war between Saudi Arabia WTI Brent and Russia “is a little bit akin to spitting in the $25 wind,” said Ian Nieboer, managing director at RS $20 Energy Group. Nieboer said what’s to come for upstream

1/2/20 1/9/20 1/16/20 1/23/20 1/30/20 2/6/20 2/13/20 2/20/20 2/27/20 3/5/20 3/12/20 3/19/20 3/26/20 oil and gas producers amounts to a “buffet of Source: Bloomberg bad choices.”

32 Oil and Gas Investor • May 2020 May 2020 • HartEnergy.com 33 34 Oil and Gas Investor • May 2020 SHUT OUT

ermian Basin operator Triple Crown Resources LLC is keeping watch, principal analyst at Wood Mackenzie, said during an April 2 webcast. ready to weather the pandemic storm and the oil price war, CEO Ryan “I think it’s not going to be as simple as high-cost regions are going PKeys said. But the way forward for most E&Ps will be treacherous. to be the ones that shut in. It’s going to happen across the board, and Several analysts predicted that operators may shut in wells as a it’s going to be on an operator specific basis, based on how much pain pandemic drastically undercuts demand for oil. they can sustain.” “My team is prepared and knows exactly what to do and at what Regina Mayor, KPMG’s global and U.S. energy sector leader, said prices or physical constraints, down to the individual well,” Keys said. her clients are looking more toward deferring wells or slowing produc- “I don’t think many E&Ps are doing that, so I think the inevitable pro- tion without harming production curves. duction curtailment—whether by force majeure or by economics—is “Shutting in production is a tool of last resort,” she said. “That’s not going to be a disaster for many operators.” to say that you won’t see some [operators] do it. I just don’t see that Several analysts predicted varying degrees of shut-in production as being a big lever that ends up coming into play.” as prices fall and crude oil storage becomes scarce. Rystad Energy However, the market was signaling by late March that low prices predicted that a third of U.S. storage capacity will be filled in April. could go beyond laying down rigs. “Shut-ins are coming, and they are likely to be big,” Enverus said Bernstein Research noted that oil prices in the low $20s require in an April 8 report. “significant shut-ins to avoid inventories overflowing.” At prices of In Texas, Pioneer Natural Resources Co. and Parsley Energy Inc. $25/bbl, low-producing vertical wells with high unit costs are uneco- petitioned the Texas Railroad Commission (RRC) to impose regulations nomical, Bernstein analyst Bob Brackett wrote in a March 27 report. curtailing oil production by May. A hearing on the matter was set for About 120,000 such wells are found in the Permian, with about a quar- mid-April. Any production curtailments would be significant as Texas ter owned by Occidental Petroleum Corp., Apache Corp. and Pioneer is the nation’s largest producing state, accounting for 41% of U.S. oil Natural Resources. production in 2019 and 25% of natural gas. In early April, Ryan Sitton, one of three RRC commissioners, said So-called proration, first implemented on a voluntary basis in Texas some Permian producers were “beginning to get offers at $6 per bar- in 1927, would limit state oil production based on market demand rel” net, after differentials and transportation costs. that causes physical waste. Pioneer and Parsley argue in a motion for Keys said that at wellhead prices of $5/bbl few Permian wells would a hearing that the RRC should determine whether oil is being wasted generate profitable margins, “and about half of the production in the or is in reasonably imminent danger of being wasted. The companies basin would be getting negative margins. So negative cash flow.” cited a lack of storage and low oil prices to suggest as much as 7 mil- “When I talk about shutting in, there are a lot of people who tell me lion barrels per day of oil production could be shut-in or not produced. I shouldn’t be telling them what to do,” Keys said. “That’s not what I’m For shale producers, decisions to shut in production will likely saying. If someone operates their assets at negative margins—thereby involve a complex equation including price, long-term well perfor- causing irreparable damage to their balance sheets—for long enough, mance, lease commitments and regional price and demand sensitivi- out of stubbornness or ignorance, that’s obviously their choice. But I’d ties, Goldman Sachs analysts said in an April 3 report. have to ask them the same thing if they were punching themselves in Analysts at Morgan Stanley and Wood Mackenzie have said they the face: why are you intentionally hurting yourselves?” have already seen signs of wells being closed. Keys said that if enough operators continue producing assets at “We’ve already seen confirmed cases of that occurring in the Eagle negative margins, the rest of the industry will suffer. Ford [Shale] that some of my clients have said to us and is most likely “We all need to remember we are producing a commodity,” he said. happening to some small degree in other regions,” John Coleman, “I think over the past six to eight years, we collectively forgot that.”

Taking a toll employment rate is expected to exceed 10% Since the beginning of humanity, germs in the second quarter, reflecting 9.9 million have taken their toll. But “we have developed unemployment claims reported from March resisting power; to no germs do we succumb 27 through April 2. The CBO “expected the without a struggle,” H.G. Wells wrote in “The effects of job losses and business closures to War of the Worlds.” be felt for some time” with an unemployment The same could be said of oil companies rate of 9% by the end of 2021. and down cycles. But after years of cutting Mayor said her clients are overly pessimis- costs, bankruptcies, price wars and Wall Street tic as storage fills and demand dwindles. apathy, the mood among executives was grim “The mood is very grim, and it’s grim in April. Some suggested M&A would sim- across the board: upstream, downstream, in- ply speed up consolidation already underway. dependent, integrated,” she said. “I don’t see Others said they would monitor and react to really anyone seeing this as an opportunity.” the new developments day by day. And a few So far, Mayor said, companies have been en- advocated a hard reset. acting short-term measures, including slashing But Hamm wonders how long the economy capital spending and operating expenses and “Cutting back as can remain at a standstill. shoring up liquidity and access to debt. much as you can, “Whether it lasts 60, 90 days, whatever, be- “Some are better able to do that than oth- as quickly as you fore people go back to work, our economy, in ers,” she said. “I think some have started to can and preserving my opinion, cannot afford to be shut down like take on workforce reduction and others have cash and your liquidity it is today for over three months,” he said. “I sacrificed the almighty dividend.” is very important,” just don’t see that being possible.” Producers instinctively plowed down previ- Harold Hamm, The nonpartisan Congressional Budget Of- ous spending plans, with Tudor, Pickering, Holt Continental Resources fice (CBO) on April 2 reported that the un- & Co. anticipating an overall 50% cut in oil and chairman, said.

May 2020 • HartEnergy.com 35 be enough to deal with the fact that we went from a $60 price environment to the low $20s in the gas capex. Among companies covered by Cow- span of eight weeks,” Mayor said. en analysts, 2020 capex was down by 20%, or Companies in the best condition to survive about $9 billion. should reshape their operating structure, cost ba- After oil prices tumbled in March, The Wood- sis, their portfolio strategy and generally rebuild lands, Texas-based Earthstone Energy Inc. re- from the ground up. sponded with a two-thirds cut to capex to a mid- “They don’t have the luxury of doing that right point of $55 million, down from $165 million. now, but this is going to be with us for the next 12 The company plans to drop its single rig in the to 18 months at the earliest before we even start second quarter and limit completions to three to begin to come back.” wells already in progress. Assuming $30/bbl WTI and existing service costs, the company said Cuts, vol. 2 it expected to generate free cash flow. A few companies, including Diamondback Robert Anderson, the newly appointed CEO of Energy Inc. and Occidental Petroleum Corp., Earthstone, said survival—regardless of how low announced a second round of operational WTI sinks or rises—comes down to managing changes—in the same month. More were ex- debt, revolver use and a hedging strategy. pected to follow. “[E&Ps] have to Earthstone’s hedging strategy utilizes swaps, Others, such as WPX and EOG Resources, start literally from hedging 18 to 24 months out at 65% or more of preached patience and flexibility. a clean sheet of its production forecast. The company doesn’t use Kenneth Boedeker, EOG Resources’ senior paper because just debt to acquire acreage. vice president of exploration and production, trimming off the “With low debt, strong operations and low told investors at the virtual Scotia Howard edges and even G&A, for a small-cap producer, we are well sit- Weil Energy Conference that, if warranted, cutting into the uated to handle prices even into the low teens,” the operator can flex down its planned 2020 muscle isn’t going Anderson said. “We averaged about $13.50 per capital spending program below the 30% cut to be enough to boe for all-in cash costs in 2019. This includes announced in March. The company already deal with the fact all cash costs to run our business. Without being dropped its capex plans to between $4.3 billion that we went forced into shutting wells in due to constraints and $4.7 billion and added that the revised bud- from a $60 price we can’t control, we would expect to continue to get still offered strong returns at $30 oil. How- environment to produce. We will have 11 wells drilled and wait- ever, with the price per barrel sinking further, the low $20s in ing on completions so, when prices improve, we the company may adjust the plan again. the span of eight can quickly resume capital spending and bring “We have a midpoint of $4.5 billion at this weeks,” said on new production.” point, and we have a significant amount of Regina Mayor, Oklahoma-headquartered WPX Energy Inc. flexibility in our plan to get there,” said Boe- KPMG global cut $400 million, or about 25%, of its capital deker. “In terms of plan C, we continue to have and U.S. energy budget. At the time, the company planned to a significant amount of flexibility in our plan sector leader. maintain oil production of about 150,000 barrels and in our operations both in rig count and in per day for the rest of the year. frac crews. If these prices persist, we have the “We’re seeing capex budgets being revised flexibility to go ahead and flex our capital plan down by 30% from original guidance,” Linda even further down. We’re watching prices day- Htein, senior research manager for Wood Mack- to-day, but we’re not knee-jerk reacting to any enzie, said on a webcast in late March. Among change in price.” these are shale player EOG Resources Inc., which The initial funding cut spared most develop- cut its capex by 30% and shifted from guidance ment programs in the Permian and Eagle Ford. of double-digit production growth to roughly flat EOG also said it would move forward with oth- compared to last year. Others, such as Permian er infrastructure projects that would help the Basin operator Pioneer Natural Resources Co. company on the other side of the price slump, cut its budget by 45% and its rig count by half. including possible gas gathering and water proj- “That sounds dramatic, but we’ve actually ects. However, all projects will be reviewed if seen more dramatic cuts than this,” Htein said. further cuts are needed. “Apache, for example, had eight rigs running in “If we continue to cut then what we’ll see is the Permian, and they have plans to drop all eight we may reduce some of those plans in other of them.” areas as well as cut in the Eagle Ford and the Mayor warned that the world that emerges Permian,” said Boedeker. “Our sacred cow is re- from the coronavirus may be radically different. turns. We’re going to go wherever we can gen- One senior executive told Mayor in late March erate returns at those oil prices.” that oil prices may eventually sink into the single At year-end 2019, EOG had over $2 billion in digits before rallying. cash on the balance sheet and around $1 billion Longer term, E&Ps will need to fundamental- in debt maturities due in 2020. ly reevaluate their entire operating structure, she “We have a significant amount of flexibili- said. “We’re recommending folks start rethink- ty both operationally and financially to meet ing from the ground up, reprioritizing the entire whatever pricing environment we see in the portfolio,” including which basins and projects future,” Boedeker added. “We’ve learned from are viable and whether regional offices still make past downturns how to manage through these sense, she said. and how to structure our contracts to give us “I think they have to start literally from a clean the maximum flexibility to react to substantial sheet of paper because just trimming off the edg- price reductions like we’ve seen over the past es and even cutting into the muscle isn’t going to few weeks.”

36 Oil and Gas Investor • May 2020 May 2020 • HartEnergy.com 37 Beyond cutting, the options get more pain- ful or more profound. Companies are already WTI In Contango grappling with whether to shut in producing On April 1, the spread between the May and November futures prices was almost $10/bbl. wells, gauging a Texas proposal for oil quotas, $32 and how much more to cut and how deeply. Longer term, laying down rigs might be an $30 option but isn’t viable or realistic. $28 “Cutting to zero capex certainly will allow you to generate free cash flow, but the loss in $26 EBITDA and borrowing base availability due to falling volumes becomes problematic after $24 a period of time,” said Robert Turnham, pres- ident and COO of Goodrich Petroleum Corp. $22 Coping with decline rates also becomes $20 problematic. May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 However, there are some “interesting dy- Source: Globex namics” on the gas side in the Lower 48—less associated gas from oil plays as producers slow Anderson said Earthstone can produce oil down activity, according to Wood Mackenzie. into the low teens and still be confident in That could bode well for Goodrich, an inde- covering its costs. pendent with assets in the Haynesville, Tusca- “A glut of oil and storage filling up sounds loosa Marine and Eagle Ford shales. Nearly all like it is happening in real time. This virus has of its production is natural gas. created a drop in demand that we have nev- “Lower volumes in Permian and elsewhere er seen before,” he said. “We are taking this obviously take associated gas out of the sup- one day at a time and, as a small producer, ply mix, which will benefit natural gas pric- we don’t have access to meaningful storage. es,” Turnham said. “We likely won’t see the If we get to the situation of having to reduce prompt months move to acceptable prices production or flat out shut-in wells, we will until COVID-19 is behind us, global growth in go through an orderly process to do so.” GDP resumes and LNG overhang is eliminat- ed, but you are already seeing higher natural Borrowed time gas prices in the back of the curve reflecting Triple Crown Resources LLC CEO Ryan this dynamic.” Keys said he expects to see the needs of com- Higher gas prices could incentivize new pany balance sheets driving M&A. He also drilling in dry gas plays, particularly in the suspects companies will suffer after borrow- northeast region and the Haynesville, Htein ing base redeterminations, which have the said, helping to balance the gas market in 2021. potential to complicate E&Ps’ debt positions. In all, the U.S. shale industry could do more “By the time we get to fall redetermination to remain competitive in uncertain times. Re- season, there will be a lot of assets from dis- ducing fixed costs and continued consolidation tressed and Chapter 11 companies being auc- to “reduce redundant costs” across companies tioned off,” Keys said. “Some banks with big come to mind for Anderson. enough portfolios have decided they’re going “As we have seen over the past couple of the ‘smashco’ route after they end up owning years, there are too many companies with the assets.” too much G&A [general and administrative Other E&Ps may survive one or two re- expenses],” Anderson said. “We need to cre- determination seasons, “but they’re basical- ate scale to be competitive and reduce the ly slowly melting ice cubes with no chance fixed costs across the industry and lower the to recover. Those guys need to merge with costs of operations. Scale does drive down the someone in all-equity deals.” overall cost of the business, and we plan to be Bankruptcies are already brewing with a consolidator and continue our cost-efficient Denver-based Whiting Petroleum Corp. de- operations.” claring bankruptcy April 1. Reuters report- Generating competitive free-cash-flow ed the same day that Callon Petroleum Co. yield to pay down debt and right-size balance hired advisers to restructure its more than $3 sheets is essential, according to Turnham. The pandemic billion in debt. Callon declined to comment Then, “companies will be paid again for will be behind on the report. growth and inventory.” us soon and The Baker Hughes Rig Count continued to “The pandemic will be behind us soon and combined with a precipitous drop, with 64 rigs falling in the combined with low commodity prices demand low commodity U.S. between March 27 and April 3. will snap back at a time when supply growth prices demand Keys said much of the debt owed by com- has stopped,” Turnham said. will snap back panies will trade at distressed or junk levels In the meantime, the industry must work at a time when that is still viable by proved developed pro- through the supply overhang until prices re- supply growth ducing assets at strip pricing. That will open cover. It’ll be “tough sledding for a while but has stopped,” said the door to capital willing to risk a Chapter 11 the decisive, fundamental moves that we are Robert Turnham, bankruptcy to own good assets—or ride an oil all making will right the ship,” he said, recall- president and recovery to high dividends. ing advice from a prominent Wall Street exec- COO of Goodrich “I would love to have a lot of capital to de- utive to “look over the valley to the other side; Petroleum Corp. ploy right now,” he said. there are better days ahead.” M

38 Oil and Gas Investor • May 2020 SPECIAL REPORT: THE PATH FORWARD FULL REVERSE

Market forces are at competing odds, with a silent virus killing global demand for oil and foreign antagonists pushing more volumes into the supply pipeline. How does it end, and who wins—or just remains standing?

ARTICLE BY n March 9, the U.S. Energy Informa- the boom, part of the fun. But this downcycle JOSEPH MARKMAN tion Administration (EIA) decided to is not akin to 2016, 2008, 1991 or 1973. It is Odelay release of its monthly Short-Term fueled by fear of an invisible killer, stoked by Energy Outlook. It had to—the world its data a market conflict by foreign antagonists. This PHOTOGRAPHY BY depicted had gone to hell. time is different, out of control, perhaps harsh- STEVE TOON A sharply different forecast appeared two er, and many E&Ps will be unable to survive. days later. The price of WTI, which in Jan- “I’ve seen a lot of stuff go on in the oil mar- uary was expected to average $64/bbl for ket in the past 35, 36 years that I’ve been fol- the year, would average $43/bbl in 2020, the lowing it, and I’ve seen a lot of things happen EIA said. Others would chime in later in the in the global economy, and I’ve never seen month. Barclays Plc predicted $28/bbl for anything remotely like this, to the degree of WTI; Dutch bank ING saw $20/bbl for global uncertainty like this,” Craig Pirrong, profes- benchmark Brent. sor of finance at the University of Houston’s The collapse of OPEC+ on March 6 aimed a Bauer College of Business, told Investor. battering ram at crude oil markets. On March 9, “That’s what really sets this episode apart it struck fiercely, tearing away 24.6% of WTI’s from some of the grim episodes that we’ve price. It struck again on March 16 (10.5%) and experienced in the past.” again on March 18 (24.4%). The oil and gas industry has always em- Volatile times braced its roller coaster existence. Boom-and- A truce between the Russians and Saudis bust is part of the lore, part of the drama and, might be conceivable, but negotiating with a for those who can outlast the bust to soar with pandemic is not an option. Until the spread of ficient to cover operating expenses. The range in the Dallas Fed’s first-quarter energy survey COVID-19 has been arrested, efforts to move stretched from $23/bbl in the Eagle Ford Shale toward recovery are essentially futile. to $36/bbl in nonshale basins. The average “The old adage, ‘low prices will cure low across the basins was $30/bbl. prices,’ is just not working,” Peter Fasul- On average, E&Ps said they needed the price lo, co-founder and principal at En*Vantage to be $49/bbl to profitably drill a well. That av- Inc., told Investor. “That adage relies on two erage across the regions ranged from $46/bbl things: Once low prices have occurred, you to $52/bbl, so if oil prices top out in the $40s, get a bounce back in demand because prices as Pirrong suggests might be the top of the stimulate the economy. People start consum- range, it is an early signal that drilling could, ing more because prices are low, and it throt- at best, be limited for the foreseeable future. tles back supply. But the problem is, until the “It’s a pretty bleak outlook,” Pirrong said. virus is controlled, and we have a handle on it, “Essentially, everybody in the industry is go- demand’s not going to bounce back. Gasoline ing to take a big hit, and that’s already reflected may be selling at $1.50 at the pump; it doesn’t in stock prices, but the most vulnerable are the mean I can buy it and travel while current lock- relatively leveraged E&P players, particularly downs are in place.” in the U.S. shale. They just don’t have the bal- “Everybody in By late March, both WTI and Brent were in ance sheets to survive.” the industry is steep contango, meaning that the November He anticipates a dramatic decline in U.S. going to take price was well above the May front-month drilling activity that will hit the oilfield service a big big hit ... price. For WTI, the spread was about $10/ firms hard. High levels of unemployment can but the most bbl. That provides incentive for traders to buy be expected as well, particularly among E&Ps. vulnerable are up crude and pump it into storage, Pirrong the relatively said. Typically, that volume would spark an The coming shakeout leveraged upward price trend, but the stranglehold that Demand was entirely inelastic to price in E&P players, COVID-19 has placed on the economy sty- March, Fasullo said, which put tremendous particularly mies any significant movement. He expects pressure on E&Ps to constrain supply. Making a in the U.S. commodities markets to convulse over the next very bad situation worse, Saudi Arabia, Russia shale. They just three to six months. and UAE are making plans to ramp up produc- don’t have the “The market is also signaling that there is tion. They, along with traders, are scrambling balance sheets just a huge amount of volatility, and we could to secure ships to transport crude or store it as to survive,” see, given this uncertainty, a dramatic change the global surplus grows. U.S. exports—which said University in either direction,” Pirrong said. “We could go had been the solution for booming U.S. crude of Houston back up into the $40s. The basic point is that production—are currently, for the most part, professor Craig there is so much uncertainty that we’re talking greatly compromised. That’s because rapidly Pirrong. about a historically wide range around current rising freight costs along with the global surplus prices and current futures prices.” have narrowed the price spread between Brent He does not really expect prices to sink to and WTI to under $4/bbl, strangling export eco- the teens, although he offers a 5% chance that nomics. With U.S. oil demand contracting and they could. How about single digits? That’s exports sure to be threatened, storage becomes unlikely, Pirrong said, but if the Saudis and the only option to handle excess crude. the Russians continue to pump and flood the “As we put more crude in storage—which is market, and the demand collapse driven by the limited—the challenge gets back to the E&P virus persists simply because the virus persists, companies,” he said. “How fast can they throt- and that ocean of oil fills up storage then, in tle back? In a free market environment, throt- theory, crude prices could descend into the sin- tling back production can be very uneven. gle digits. But he doesn’t consider it likely. Some companies are financially stronger than Driving the crisis is too much supply from others, so some companies continue to pro- U.S. unconventional fields, particularly the duce. Some companies are more hedged than Permian Basin, and plunging global demand. others, so they can continue while other com- En*Vantage expects U.S. producers to shed 1 panies can’t; some companies just have to pro- MMbbl/d of their March average production of duce to pay down debt.” 13 million barrels per day (MMbbl/d) by the The great U.S. oil-producing machine has had close of the second quarter. It won’t be enough massive forward momentum through 2019, and because domestic demand will decrease by 4 although it was expected to slow in 2020, it can- MMbbl/d, En*Vantage said. not stop quickly or easily even in this awful en- Global demand averaged about 100 MMbbl/d vironment. Fasullo likened it to the time it takes in 2019. The IEA and IHS Markit predicted to stop a supertanker. So, any additional crude demand will decline a staggering 20 MMbbl/d on the market will exacerbate the low-price di- during the second quarter. Goldman Sachs fore- lemma. The inevitable result is a slew of the oil “What you’re cast an 18.7 MMbbl/d plunge. patch’s weaker players forced into tough deci- going to see as sions about their future viability. soon as we get What’s the damage? “What you’re going to see as soon as we get out of this: who But prices don’t need to crater into the teens out of this: who are the winners, who are the are the winners, to elicit pain. In late March, the Dallas Feder- losers?” Fasullo said. “Who’s going to get ra- who are the al Reserve determined that 35% of 107 E&Ps tionalized, whose properties may get bought. losers?” Peter surveyed were conducting business in basins You may see the new world order of E&P com- Fasullo said. where the price had fallen below a level suf- panies after this is all over with.” M

40 Oil and Gas Investor • May 2020 SPECIAL REPORT: THE PATH FORWARD OFS: LOWER-FOR- LONGER SCENARIO

As E&Ps jam the brakes on capex spend, the largest U.S. oilfield service providers respond in unison, cutting costs where they can and laying down equipment where they must.

ARTICLE BY arge oilfield service companies are plan- ters for a two-month period in a move to help BLAKE WRIGHT ning for the worst in 2020 as the indus- weather the storm. The company’s capex will Ltry faces the dual threat of a commodity be significantly lower than the originally an- PHOTOGRAPHY BY price collapse and COVID-19. Executives from nounced $1.2 billion. Loeffler cited the 2015 to STEVE TOON Schlumberger Ltd., Halliburton Co. and Baker 2016 capex level of $800 million not being out Hughes Co. are all in agreement that the market of the question for this year. situation is fluid and trending south and that “We’re going to be very thoughtful about activity levels across the U.S. and the world are pricing,” added Loeffler. “It was already at a being impacted. fairly challenging level for the industry to re- As a result, many service providers are ally justify any reinvestment. I think this will looking at decisive and hefty spending cuts only put more stress on that. At the end of the with plans to concentrate remaining capital day, it really doesn’t make much sense for us on operations that generate cash flow as the to burn up our equipment for sub-scale re- headwinds stiffen. turns. It will be a very different view of North “These market conditions are prompting America, and I believe it will be happening in us to accelerate our position in product lines, the short term.” accelerate our position in ‘scale-to-fit’ and Baker Hughes also is preparing for a ‘pretty accelerating laying down equipment and un- meaningful’ downturn as it looks to accelerate fortunately separating some of our resources cost cutting initiatives and scaling the business and employees,” Schlumberger CEO Olivier as needed. The company’s North American Le Peuch told investors at the recent Scotia business is about 40% production related op- Howard Weil Conference. “We don’t necessar- ily need to restructure. The restructure was al- ready pending. It is not an easy ride, I must say, but I think we are doing everything we can.” Schlumberger can flex its capital spending plans lower, if warranted, down as much as 30% below last year’s spend of around $1.6 billion. Le Peuch added that in case of an extreme sce- nario the company would be looking for a way to exceed that cut and keep operating. “The industry is facing an unprecedented dual impact on the demand and supply side, which none of us have ever witnessed over the course of our professional lifetimes,” said Hal- liburton CFO Lance Loeffler. “While the du- ration and magnitude of the downturn is still relatively unknown and continues to evolve, know that Halliburton will be swift with our actions. We don’t have presumptions on a sharp recovery at this point and will take ac- tions with that view in mind.” Halliburton is seeing a rapid reduction in activity across North America and a 60% to 65% overall decline assumption in rig count is being modeled for the last quarter of 2020. In mid-March, the company furloughed about 3,500 employees at its Houston headquar-

May 2020 • HartEnergy.com 41 prices,” analysts said in a note. “Therefore, reducing cash burn is the goal. Eventually, necessary service activity will normalize; however, there is no clarity as to when this would occur. While this is a cyclical industry, at today’s activity levels some companies may not get to the better times.”

Specialists under pressure Analysts with Wood Mac- kenzie have also signaled an acceleration to the downturn in the U.S. oil service sector, with increasing capital discipline by operators impacting demand for equipment and labor in 2020. “In the U.S. Lower 48 mar- ket, we are already seeing ma- jor pricing concessions,” said Mhairidh Evans, principal an- alyst in Wood Mackenzie’s up- stream supply chain research team. “Some pressure pump- ers have reduced prices by as much as 20%, while rig rates have dropped by about 15%.” Pressure pumper BJ Ser- vices was already facing a “While this erations—artificial lift and production chemi- soft market for services ahead of the oil price is a cyclical cals—and 60% drilling and completions. crash due to many operators transitioning to a “Well completions are going to be coming ‘living within cash flow’ business model. The industry, down,” said Judson Bailey, vice president of contractor has implemented executive and at today’s investor relations for Baker Hughes. “E&Ps are organizational salary adjustments, suspend- going to be cash-constrained. Our lift business ed certain stipends and discretionary benefits activity will come under some pressure. Our comple- such as 401k and is continuing to reduce and levels some tions side doesn’t have pressure pumping. It’s adapt its workforce where required. BJ has companies rotary steerables, completion tools, etc. I would enacted temporary furloughs on the portions expect those to, at least initially, fall in line with of its workforce immediately impacted by cli- may not get the overall drilling and completion trends.” ent changes. to the better Like its competitors, the contractor can scale “Clients are certainly suspending proj- times.” its planned 2020 capex based on activity. A ects,” said BJ Services CEO Warren Zemlak. 20% to 30% reduction in spending is some- “That’s probably been the more immediate thing that is ‘doable,’ according to Bailey. and significant impact. This market continues —Raymond If it’s any consolation, operators realize they to throw new challenges at us. Given the ero- need oilfield service companies to survive. If sion of pricing over the past couple of years James & one player goes down, it becomes a bit harder I think that, quite frankly, there isn’t a whole Associates for the industry to remain competitive. lot to give.” “We need service companies to stay in busi- Contract driller Nabors Industries has cut its ness or else we cannot get our goals accom- planned 2020 spending plan from a midpoint plished,” Earthstone Energy Inc. CEO Robert of about $360 million to just under $300 mil- Anderson said, adding the company tends to lion due to the rapidly deteriorating industry work with smaller oilfield service companies landscape. The contractor is planning for a with cultures similar to its own. “We also don’t prolonged impact of the coronavirus and has try to squeeze the last dollar out of the service already been notified of operator’s plans to lay company. If we can’t make money on a proj- down rigs in the immediate future. ect, then we both go home. So, we try to get “We are planning and assuming that it is everyone focused on the economics.” going to be a fairly rugged downturn,” said Raymond James & Associates forecast U.S. Nabors CFO William Restrepo. “For planning upstream spending would fall by 50% year- purposes we’re assuming it is going to be fairly over-year. long with an impact on pricing and volume.” “There are some restrictions to how quickly Nabors has also implemented broad salary re- activity can fall, but what is clear is that the ductions across the company (20% for certain U.S. oilfield needs to effectively come to a management and 10% for certain other employ- stop. It remains unlikely that noninvestment ees) as well as a suspension of its dividend. M grade credit markets will open up to oilfield services without a significant rebound in oil Velda Addison contributed to this article.

42 Oil and Gas Investor • May 2020

EXECUTIVE Q&A THE MASKED OILMAN

We’re taking a departure from the normal here. But what’s ‘normal’ right now anyway? And what will be normal next quarter? So, we asked.

INTERVIEW BY inding an oil and gas producer with a cor- tainly avoid the calamity we’re looking at in NISSA DARBONNE porate message to share with Oil and Gas May where the price of oil goes to zero. FInvestor’s readers at press time was like Investor Yeah, snooping on ship traffic on ILLUSTRATION BY trying to find a thermometer during a global VesselFinder.com, it’s incredible the number ROBERT D. AVILA pandemic. The interview that had already been of oil tankers parked—just sitting there—out- done was based on a world that was $60 WTI. side the Houston Ship Channel. To see it in That had become the stuff of yore—so yore person too from the shore, you know some- that millies could even finally play the meme thing is wrong. game “I’m gonna tell my kids one day __.” In Oilman Supply is probably 15 million barrels this case, accurate would be “I’m gonna tell per day above demand. Where are you going my kids one day about when hand sanitizer to put the oil? There is no place to put it. The was a form of currency.” forecast of tanks being topped out and nowhere So find an industry executive who had some- to pump the oil, particularly in the Permian, thing to say anonymously? makes all the sense in the world. This longtime wildcatter—now solely a pri- That’s what the anxiety I had was derived vate oil and gas investor—has seen five decades from. That was prior to the hopeful announce- of industry booms and busts. Here’s his take on ment by President Trump [of working too on the business as it stood the first week of April. cutting back on world supply]. While the remarks aren’t controversial— Nominations have already been made for unrestrained profanity was allowed, but he April—unless force majeure plays out. All didn’t even use any, which was disappointing bets are off when people start invoking force because hearing some without being the one majeure and that will probably happen. saying it would have been refreshing—he sim- But there is a very near-term reality that oil ply preferred to let his comments represent no cannot be transported to the Gulf Coast be- particular person. cause there’s just no room for it. They likely represent the thoughts of any oil I think cooler heads will prevail between the and gas investor. Russia-Saudi pissing match. The unfortunate Here’s his take. demand destruction of the coronavirus is so Investor How do you really feel about things? incredibly unprecedented in our industry. It is Oilman About the coronavirus? The destruc- unprecedented under every banner you could tion of demand? OPEC+ not cutting back? put it. Investor Yeah, all of it. The demand-versus-supply diversion is just Oilman The reaction of Saudi Arabia to Rus- mind-boggling. sia’s noncompliance obviously occurred prior Investor Speaking of oil having nowhere to to any demand destruction that is related to the go, the Texas Railroad Commission [RCC] is coronavirus, so I think that situation is unrelat- talking about pro rationing again, but what’s ed to everything that has happened. the point if the oil can’t go anywhere anyway? It’s been dwarfed by the demand destruction, Oilman My understanding is it’s more to ensure and it’s not the objective the Saudis were aim- an equitable decrease in production as opposed ing for. So that’s why I think there is hope there to the haves having the ability to produce and may be some OPEC++ [OPEC and Russia and the have nots not. Those haves have contracts the U.S.] reaction that may limit current supply. and relationships and whatever you want to Some estimates are of demand destruction call it—probably a strong-armed opportunity of 25 million barrels per day. I would think and that’s probably overstated, but still. anybody would agree 15 million barrels The Exxon Mobils and the largest indepen- per day is almost a certainty of what’s been dents of the world will probably have a better destroyed. opportunity to move their barrels than Mom OPEC++ is not going to change the dynamic and Pop and anyone in between Mom and Pop of the commodity price, but I think it will cer- and the largest independents.

44 Oil and Gas Investor • May 2020 May 2020 • HartEnergy.com 45 of credits. Those that are the most putrid are cer- tainly going to be coming under more scrutiny. “OPEC++ is not going to change Among those, there’s going to be a reason- the dynamic of the commodity price, able number that, upon discussion with the company and the bank group, will conclude but I think it will certainly avoid the with that “You are potentially in some element calamity we’re looking at in May of default, but we certainly don’t want your keys because this may be a short-term event. where the price of oil goes to zero.” The oil price isn’t going to come back up over- night. But there is a light at the end of the tun- That’s my understanding of why we would nel, and the [coronavirus] task force has given consider enacting a proration schedule—to us some reason to believe there is a light at the just make it an equitable reduction in vol- end of the tunnel.” umes and not having some companies get to I think the banking community will hold produce their full productive capabilities and its nose on those credits they deem slightly some not getting to produce any of it. in default but don’t deserve to be foreclosed Investor Not doing that would push the small- upon or even considered in the bucket to be er ones out. foreclosed upon. Oilman Right. Investor The FDIC messaged in the past week Investor And all markets are better when that it wants lenders to focus on customers there is more competition and not less. “at this time of need” and not worry so much Oilman Right. And that’s what the RRC was about the usual standards. It seems, though, created upon. It was created to control the en- that some operators had already gotten a few tire stage of production. passes. Will some syndicates walk away from Now it certainly wasn’t designed as a car- these? tel in theory, but it does create a level playing Oilman Yes. You have those. field—for the entire industry in the state to be Then you have those that are in a bad situa- treated as a singular entity and there be no fa- tion but are taking action and have active rela- voritism. tionships with lenders. Look at Callon [Petro- Investor What’s your forecast for Chapter 11 leum Corp.], for example. filings? One for if OPEC+ does nothing; two, They’re a public company. They’re not in the if they do something. Is it too late for some bucket of hundreds or probably thousands of operators no matter what? small private companies. Oilman OPEC++ because we have to be in- But I think the story is similar: They just volved in that as well. OPEC and Russia are knew “This isn’t going to work. We are over-le- not going to cut 15 million barrels per day so vered. And we are going to restructure.” we can produce flat out. I think that is what There are those types of situations—self-im- has been put forth, and I don’t blame them posed, but I’m sure the creditors were involved. whatsoever. But, it’s correct that, if all the covenants Now, how we as an industry [in the U.S.] were strictly adhered to in the spring redeter- would cut back is a more challenging exer- mination season, it would be so bloody and for cise; we aren’t nationalized. no real solid reason to force these companies But assuming we could come to some abil- into default. ity—such as the prorationing approach by The last thing you want is the banks and the RRC—to cut, hypothetically, 2.5 million trustees to take the keys to these companies. barrels per day to be part of the overall 15- The system would just crater and all because million-barrel-per-day cut, it would take a of an event that was out of their control. visible strain off the companies that are chal- Now, yes, some companies have been in vi- lenged with their debt. olation of covenants for many determinations It probably will not physically change the and have gotten waivers. The banks have held math the lenders are embarking on with their their nose on these credits for maybe a year individual credits, and a lot of that is happen- or more. Those are the ones they are going to ing in real time in spring redeterminations. say to “You were teetering in the past and now But there would be a psychological ad- you’re on your back. And there’s nothing we vantage to the lenders to be more lenient can do about it.” if there was a light at the end of the But those who have been working with their tunnel and it wasn’t a train. banks and staying within compliance and not Investor And if it doesn’t happen? pushing their borrowing base, those guys are Oilman If we do see massive shut- going to get the treatment you described—a ins—massive curtailments forced “Wink-wink, I’m going to hold my nose” or upon the industry—it just adds “We’re going to kick the can. We’re not going another element of uncertainty to to foreclose on everyone in violation of their the lender’s calculus that creates covenants because that’s just not a smart thing less likelihood that they will to do.” hold their nose. Investor OPEC++ wasn’t possible in 2015 to I know there is a hierarchy 2016 when it would have been seen as anti- being construed as we speak trust. But now it seems it would be defended within each bank as to as a necessary wartime act. which are the more putrid Oilman Yeah, or force majeure. Here’s an act

46 Oil and Gas Investor • May 2020 of God, literally. I’m not blaming it on God. But it is an act of God that is out of everyone’s control, and we don’t have anywhere to put “There is a hierarchy being construed these barrels. as we speak within each bank as to So we as a worldwide oil community are making the rational decision to keep these bar- which are the more putrid of credits. rels in the ground until we have the demand Those that are the most putrid are restoration that will allow us to produce them. I’d be hard pressed to think Congress will certainly going to be coming under look at a shut-in situation for domestic produc- more scrutiny.” tion as a violation of antitrust. It’s just a fact of life that we just don’t have anywhere to put concludes we can “get back” to work and we these barrels and we as a collective group— work for three months and we haven’t seen a Saudi Arabia, Russia, everybody—need to act resurgence in cases? accordingly. That to me is the best-case scenario and in Investor Come to think of it, national-level my view—and I’m an optimistic person—I proration could be effected with the old “new think by the fourth quarter your demand is not oil, old oil” technique? Albeit for a different fully restored but you’re close. reason than why it existed in the 1970s. Worldwide, we’re not going to be flying as Oilman Yeah. And that’s something that is just much, but I think we will be driving as much practical. or maybe even more. So I think there is reason Investor What would go first? to believe that—with the scenario that most of Oilman There are two buckets. There are the the forecasts by the scientists are reasonably wells that are commercial at $20 WTI less accurate—by the fourth quarter we are in a rel- the differential. You would go well by well by atively normal demand situation for oil. well and lease by lease by lease and determine Investor If there is any glimpse of a pair in whether you’re losing money and shut those this hand, natural gas should have a better sec- wells in if you are. That’s Bucket #1. ond-half 2020, with the decline in associated But that’s not a very big bucket in a 13-mil- gas production? lion-barrel-per-day situation. Oilman Absolutely and don’t discount the fact So you really have to go to the next bucket. that the prompt month is $1.60. The Marcellus It starts with the recently completed wells that and Haynesville have basically gone to main- you can choke back and that doesn’t do any tenance mode—if not decline mode. There is damage. You’re curtailing near-term produc- really very little drilling going on for dry gas— tion that you probably want to curtail anyway much less the total collapse of oil drilling. because you’re selling it at $10. So yeah, there’s not an analyst out there to- Then you start to get into the 2 or 3 or 6 year day who isn’t calling plus or minus $3-or-bet- olds that are near-wellbore depleted. They, in a ter gas for 2021. I think that’s a fair statement. lot of cases, have high water cuts, and they’re And I don’t know why it wouldn’t be that way. probably on gas lift and/or rod pump. So, yes, there is a lining there in the indus- They are the most at risk for reservoir dam- try—that those with gas-driven revenues are age if they’re shut-in. They would have prob- looking at a situation next year that should be lems that would cause bringing them back on very positive. to be both expensive and potentially have low- Investor What else should readers understand er rates than when they were shut in. about the oil-price situation? Those are the ones that have the most risk. Oilman What I’m hopeful for is that the work- I have no idea whether we as an industry force isn’t compromised. Not just our industry could curtail, say, 2 million barrels per day but the U.S. workforce in all industries. I want and not put those riskier wellbores at risk. That this statement to apply to all. would be an exercise that would be very inter- I mean compromised such that they’re not esting to do, and I’m sure operators are doing going to come back to that industry for what- it in a one-off basis. ever reason. In the past, people have been laid But, whether OPEC+ agrees or not, we prob- off for reasons related to circumstances within ably have to do it. the industry that were somewhat self-inflicted. Investor If between now and year-end nothing Those workers have a lot of times been gets worse and things start to get better, when reticent to return to the industry. It’s a “fool might the industry be robust again? me once, shame on you; fool me twice, shame Oilman It’s not a $64,000 question; it’s a on me.” $64 zillion question because nobody knows. So people at times have not come back to There are so many variables. It’s not a $64,000 the industry because they don’t want to put up question; it’s a $64-zillion question because with getting laid off again. nobody knows,” and the entire world economy I hope we will be able to restore all of our is dependent on some sense of normalcy in or- industries and a workforce that is necessary to der to see meaningful recovery.” There are so pick all the pieces right back up and move on. many variables. Or it will be a much slower recovery for the How do you define “better?” Has the task overall economy. force projection of deaths followed the curve People being able to get back to work at the and by early summer they are nominal? And same job they had is what I’m very hopeful new cases are nominal? And the government for. M

May 2020 • HartEnergy.com 47 DEBT MARKET TRENDS DWINDLING DEBT OPTIONS

Debt markets are bifurcated, with questions arising over E&Ps’ ability to pay upcoming maturities.

ARTICLE BY double black swan event, combining the and unused space is quickly filled as the mar- CHRIS SHEEHAN, CFA coronavirus crisis and a crude oil price ket demand for oil declines. Awar between Saudi Arabia and Russia, Obviously, in the current environment, re- has put heavy pressure on balance sheets of vised budgets have been predominately de- much of the energy industry. Capex budgets signed to avoid any outspend and increase in have been slashed as crude prices have col- debt. But resetting a budget hinges on key vari- lapsed. Debt levels are under heightened scru- ables. With revised capex cuts set mainly on a tiny. As several observers have commented, the $30 to $35/bbl WTI, budgets would still spend name of the game is “survival.” 120% of organic cash flow at strip, which has a Few claim a real handle on the price of crude, $22 prompt month and nearly $25 for the bal- but prices have trended lower, with an expected ance of 2020, according to a March 19 Morgan oversupply pushing WTI prices down as far as Stanley report. $20/bbl as of mid-March. Any success from a The above illustrates the urgency of scaling return to the bargaining table by Saudi Arabia back capex to hold down debt. This trend has and Russia might help slow the pace of invento- seen some producers retreat from a goal of ry builds, but the bigger factor for crude prices modest growth to one of maintenance mode, is COVID-19-related demand destruction. or holding production flat, and then a move Some analysts predict a path for crude prices to survival mode allowing for declines in out- to the teens or single digits, as crude and prod- put by year-end. In a late March survey, Bar- uct storage levels approach maximum capacity clays estimated a 37% drop in capex by large SOURCE: LIGHTSPRING/SHUTTERSTOCK.COM

48 Oil and Gas Investor • May 2020 and small and mid-cap producers in 2020 ver- sus 2019. of legacy unsecured notes without guaran- Bifurcated debt markets tees. Nabors’ two tranches, yielding 7.25% Capital markets can do little to shore up bal- and 7.5% at par, traded down into the 80s pre- ance sheets. Equity markets have collapsed OPEC. The Transocean issue, priced to yield and, in any case, have been shut to upstream 8% at par, fared worse and slid into the 70s. energy for months. Debt markets are bifur- Post-OPEC, the discounts have deepened, cated, with energy credits trading at deep dis- with the bonds trading in the 30s and 40s, counts for all but the highest-quality issuers. respectively. For companies facing a need to refinance debt in the next few years, there is a “daunting debt Wave of bankruptcies wall” as maturities approach, according to an “I think it’s inevitable that we’re going to S&P Global report. have another wave of bankruptcies,” observed In addition, the outlook is for commer- Gary Stromberg, a principal and head of high- cial banks to tighten significantly their re- yield energy research at PGIM Fixed Income, serve-based lending (RBL). an investment arm of Prudential Financial. According to Tudor, Pickering, Holt & Co. New issuance has come to a halt, with the en- (TPH), there could be a “brutal redetermina- ergy sector of the high-yield market “effective- tion season” this spring, with the “best case ly closed,” and the market “really punishing” scenario” being banks using oil and gas price existing bonds in secondary trading. decks based on the forward strip. Coupled with Obviously, the breakup of the OPEC+ meet- the high-yield debt market being closed, this ing without an agreement has only helped to means “many E&P names will trigger cove- hasten the slide in the energy high-yield market. nants on revolvers and will face high hurdles “I don’t want to say OPEC is unraveling,” to tackle maturities as they come due.” said Stromberg. “But, clearly, not being able to For those companies carrying relatively high continue the cuts they had in place is extremely leverage or facing near term maturities, the outlook is dim. Concho Resources (CXO) Generally speaking, spreads in the high- yield energy sector have widened dramatically $1,200 1.8x and now exceed by over 400 basis points the levels prevailing in February of 2016, when 1.6x $1,000 WTI fell to just over $26/bbl. In response to 1.4x the widening of spreads in the corporate sector of the broader economy, Federal Reserve pol- $800 1.2x icy has been expanded so it can purchase cor- 1.0x porate debt—but only if rated BBB- or higher, $600 which excludes high-yield bonds. $M M 0.8x Data from Bloomberg Barclays illustrate the

sharp turn lower in the high-yield market. For $400 0.6x Net Debt/EBITDA example, Laredo Petroleum Inc. took advan- 0.4x tage of a brief window in January to tap the $200 high-yield market. It priced two bonds, with 0.2x maturities in 2025 and 2028, at par to yield 9.5% and 10.125%, respectively. Prior to the $0 0.0x OPEC meeting, the bond traded down mark- 2020 2021 2022 2023 2024 2025 edly, to levels below 60, with yields well in 2019 Cash FCF Debt Due Net Debt/EBITDA excess of 20%. Source: Tudor, Pickering, Holt & Co. In late March, in the wake of the OPEC ConocoPhillips (COP) meeting, the bonds were trading in the mid-30s to yield 35%. $6,000 1.0x “A name like Laredo could not come to 0.9x market today, and that’s the case with a lot of $5,000 E&Ps and drillers,” said one market observer. 0.8x Stronger names, such as Parsley Energy 0.7x Inc., rated BB, and WPX Energy Inc., with a $4,000 BB- rating, has not fared well but held up bet- 0.6x ter. Parsley priced a senior note due in 2028

$MM $3,000 0.5x at par to yield 4.125%, while WPX priced a 0.4x

senior note due 2030 at par to yield 4.5%. Net Debt/EBITDA $2,000 Both bonds traded down to the low 90s pri- 0.3x or to the OPEC meeting. After the meeting, 0.2x the bonds traded at 57 to yield 13% and 51 to $1,000 yield 13.75%, respectively. 0.1x The oilfield service sector has been hit even harder, where senior unsecured guaranteed $0 0.0x notes had been issued by Nabors Industries 2020 2021 2022 2023 2024 2025 Inc. and Transocean Ltd. These rank ahead 2019 Cash FCF Debt Due Net Debt/EBITDA Source: Tudor, Pickering, Holt & Co. May 2020 • HartEnergy.com 49 weak credits during the last mini cycle.” How- ever, the fact that credits had improved—even “The market is really as spreads in the sector had surpassed levels punishing these last seen in early 2016—“tells you how weak the high-yield energy market really is.” companies, given the oil The Barclays High-Yield Energy Index in- price outlook and the cost dicated a spread over U.S. Treasuries of about 700 basis points in early 2016. Recently, the outlook of these levered spread widened still further to as much as companies,” said Gary 2,200 basis points. “The market is really pun- Stromberg, principal and ishing these companies, given the oil price outlook and the cost outlook of these levered head of high-yield energy companies,” said Stromberg. research at PGIM Fixed In evaluating high-yield bonds, more strin- Income. gent metrics are often being used, noted Stromberg. On proved developing producing properties, some investors are no longer us- ing PV-10 metrics, but rather PV-12 or PV-15 bearish for the market.” And with Saudi Arabia valuation. No longer is any value accorded to putting over 2 million barrels per day (MM- proved undeveloped properties or to acreage in bbl/d) on the market, coupled with demand an assessment of collateral. destruction of 3 to 4 MMbbl/d due to the coro- “That’s a major change in the markets that’s navirus, “if you start adding it all up, the world happened over roughly the last year,” he said. becomes awash in crude very quickly.” Compared with the severe market conditions Hefty cuts to borrowing bases in 2015 to 2016, the high-yield credits today For E&Ps facing near-dated maturities, the “are actually in better shape,” according to option of using a bank borrowing base to pay Stromberg. “We weeded out a lot of the really down senior notes or to provide liquidity has likely dimmed, according to Stromberg. “We Devon Energy (DVN) understand the banks are using much lower $1,600 1.4x prices in this spring redetermination season, and our expectation is that you’ll see pretty $1,400 1.2x hefty cuts to those borrowing bases,” he said. $1,200 In addition, a number of E&Ps risk failing 1.0x to meet the covenants of their bank facilities, $1,000 said Stromberg. If in breach of a covenant, “the banks have in the past provided relief if $800 0.8x

$MM they think it’s a short-term issue. But in this type of market and what we’re seeing with the $600 0.6x commodity markets, the banks are going to be $400 much less willing to give relief on covenants.” Net Debt/EBITDA 0.4x What other options are available to produc- $200 ers—at a cost? 0.2x $0 One possible avenue is a first lien term loan, “but it’s going to be expensive,” cautioned -$200 0.0x Stromberg. 2020 2021 2022 2023 2024 2025 “The problem is that, if you are at Libor plus 2019 Cash FCF Debt Due Net Debt/EBITDA 250 basis points on your borrowing base— Source: Tudor, Pickering, Holt & Co. which is where a lot of these E&Ps are—first Diamondback Energy (FANG) lien energy bonds may have a 10% coupon,” he $1,200 said. So you’re taking a company that already 3.0x has trouble potentially serving interest pay- ments at recent low oil prices, and now you’re $1,000 2.5x adding a much bigger interest burden on it.” One potential area for optimism, said Strom- $800 berg, was the likelihood of a rebound in natural 2.0x gas prices. “I have a more bullish, medium-term view of $MM $600 1.5x natural gas,” he said. “We’re going to see the rig count for oil come down. That does two things: It brings the oil supply down in the U.S., and a $400 1.0x Net Debt/EBITDA lot of the associated gas produced from Permian wells will also fall off. So, in a market where $200 0.5x natural gas supply is declining in the U.S., and assuming a normal winter next year, you could see prices snap back a little quicker with gas.” $0 0.0x 2020 2021 2022 2023 2024 2025 Over the longer term, however, market forc- es are “going to starve capital out of the sys- 2019 Cash FCF Debt Due Net Debt/EBITDA tem,” which will ultimately be good for the oil Source: Tudor, Pickering, Holt & Co.

50 Oil and Gas Investor • May 2020 and gas sector, according to Stromberg. But in the meantime, “companies are going to strug- EOG Resources (EOG) gle to find capital,” he warned. “We’ve had a perfect storm of the corona- $2,500 0.9x virus hitting the largest demand source for 0.8x oil, transportation, at a time when OPEC has $2,000 been holding 2 million barrels per day off the 0.7x market and has effectively been losing market share to the U.S. And Saudi Arabia has made 0.6x $1,500 a very difficult decision to stop losing market $MM 0.5x share,” he said. 0.4x $1,000 Coming surge of ‘fallen angels’ 0.3x Rating agencies recently downgraded Occi- Net Debt/EBITDA dental Petroleum Corp. to junk, burdened by $500 0.2x $38 billion in debt following its acquisition of Anadarko Petroleum Corp. While defaults 0.1x may shrink the high-yield market, “everyone $0 0.0x is now focused on the coming surge of ‘fall- 2020 2021 2022 2023 2024 2025 en angels,’” which by Stromberg’s estimate 2019 Cash FCF Debt Due Net Debt/EBITDA could top $50 billion. “Investors have plenty to Source: Tudor, Pickering, Holt & Co. do,” but at oil prices below $30/bbl, “not many companies can break even.” Marathon Oil (MRO) Funding issues for energy producers have $1,200 4.0x reached a truly critical point—the point of sur- 3.5x vival—according to Matt Portillo, CFA, man- $1,000 aging director of E&P research for TPH. “It’s all about survival,” he said. “The key is being 3.0x able to survive and not destroy your balance $800 2.5x sheet between now and the recovery. It’s really about who lives and who doesn’t in the current $MM $600 2.0x environment.” A narrower filter of names able to access 1.5x $400

debt markets has been long in the making, ac- Net Debt/EBITDA cording to Portillo. 1.0x The energy sector was “constructed around $200 the view you’d always have access to a liquid 0.5x capital market and you could constantly roll $0 0.0x your debt forward,” he said. “But most up- 2020 2021 2022 2023 2024 2025 stream E&Ps were so focused on growth, cou- pled with assumed access to capital, that they 2019 Cash FCF Debt Due Net Debt/EBITDA never solved for trying to generate free cash Source: Tudor, Pickering, Holt & Co. flow. For years they didn’t generate enough fourth quarter of last year to the fourth quarter free cash flow to pay back the principal they of 2020. This is based on an estimated 50% owed on their debt.” cut in capex for its coverage in 2020. For As high-yield investors shifted their focus 2021, as industry hedges roll off for oil from away from a net asset value model and toward 2020 levels, it expects a further 17% cut in a corporate free-cash-flow model, reticence capex, resulting in a 5% to 6% drop in year- grew in terms of continuing to fund some com- over-year production. panies, especially among smaller cap names, As production slides, prospects for generat- according to Portillo. “That’s why I think you ing free cash flow frequently diminish, espe- started to see the high-yield market bifurcate in cially for smaller companies. a big way in 2019. And that’s caused a seizing up of access to capital last year,” he said.

From bad to worse “The key is being able An already bad situation has gone “from bad to survive and not to worse” with the twin shocks on demand and supply from the coronavirus pandemic and the destroy your balance market share war between Riyadh and Mos- sheet between now and cow, said Portillo. “A lot of the upstream sector will go into a bit of a death spiral if we stay at the recovery. It’s really recent prices, because as they cut to cash neu- about who lives and who trality, output starts to decline, EBITDA starts doesn’t,” said Matt Portillo, to decline and E&Ps are still not generating free cash flow.” CFA, managing director, As capex is set closer to cash flow to avoid E&P research, TPH. adding debt, TPH estimates U.S. oil produc- tion will decline by 10% to 11% from the

May 2020 • HartEnergy.com 51 to bottoming—is made up of two parts: large- cap value stocks and well-positioned Perm- Noble Energy (NBL) ian mid-cap names. The former is comprised $700 4.0x of Devon Energy Corp., Marathon Oil Corp. and Noble Energy Inc., and the latter of Di- $600 3.5x amondback Energy Inc., Parsley Energy Inc. and WPX Energy Inc. 3.0x $500 “All those names have plenty of liquidity and will be able to make it through the cycle,” said 2.5x Portillo. As noted earlier, Parsley and WPX $400 took advantage of a debt window being open $MM 2.0x earlier in the year. “Although they were at the $300 upper bounds of the leverage metric, there was 1.5x a clear line-of-sight to compression of that $200 Net Debt/EBITDA EBITDA multiple. And they got fantastic rates 1.0x on the debt they issued.” $100 0.5x For the large-cap value names, Devon and Marathon, Portillo pointed to both producers $0 0.0x having substantial cash positions and, as a re- 2020 2021 2022 2023 2024 2025 sult, no real liquidity or maturity issues of con- 2019 Cash FCF Debt Due Net Debt/EBITDA cern. In Noble Energy’s case, he pointed to the Source: Tudor, Pickering, Holt & Co. significant free cash flow under long-term con- tract from its Leviathan project in the Mediter- Parsley Energy (PE) ranean Sea as one of several factors allowing $1,200 2.5x the company to “navigate through the cycle.” On the other side of the coin are the many companies that face “major concerns in the $1,000 2.0x near term on liquidity and leverage,” accord- ing to TPH. The reality is that “the industry, for $800 the most part, doesn’t work below $50/bbl,” 1.5x observed Portillo. $MM “The distress is going to accelerate,” he com- $600 mented. “The banks have tried to be as lenient 1.0x as they possibly can over the last few years in $400 order to work with the industry. Unfortunate- Net Debt/EBITDA ly, the collapse in the asset market is starting 0.5x to cause losses to accelerate on a number of $200 the credit facilities and the high-yield and un- secured bonds in the market. And we don’t see $0 0.0x the asset market improving any time soon.” 2020 2021 2022 2023 2024 2025 Are there any rays of light if you look out far 2019 Cash FCF Debt Due Net Debt/EBITDA enough beyond the clouds? Source: Tudor, Pickering, Holt & Co. Assuming U.S. oil production declines during the next two years and demand reverts “The punchline from investors is that real to a normalized level in 2021, “a lot of the distress is likely to hit E&Ps that don’t or- spare capacity in the OPEC+ countries basi- ganically generate free cash flow to pay back cally gets eaten up,” said Portillo. “And we’re their debt over the next three or four years,” starting to see major project deferrals in areas said Portillo, citing feedback from institutional like the Gulf of Mexico and internationally. investors. As a result, “anyone with a debt ma- For 2022 and beyond, the market is facing a turity wall coming due before 2024 is likely to very tight amount of spare capacity globally.” find itself in real distress as it relates to both equity and debt investors.” One-directional trade Before the collapse in crude prices, a rule of In a debt market characterized by steep sell- thumb was that “the market really didn’t have offs and heightened volatility, relative value is much appetite to finance extensions of debt lost amid an almost one-way wave of selling, maturities if leverage was over 1x to 1.5x net according to Ray Lemanski, managing director debt-to-EBITDA at $50/bbl WTI,” said Porti- and head of credit strategy at KeyBanc Capital llo. Some greater latitude may be afforded to Markets Inc. larger, financially stronger producers, but in- “Nobody is looking for relative value right terest in rolling over debt would not extend be- now among the oil and gas names, whether it’s yond 2x by EBITDA Concho Resources Inc. the debt or the equity names,” said Lemanski. for even core names, he added. “There isn’t a lot of differentiation. Investors Names that are viewed by TPH as core hold- aren’t saying, ‘I like this over that.’ People are ings make up a relative small group: Cono- selling what they can. And, right now, every- coPhillips Co., Concho Resources, EOG Re- thing is pretty much one-directional.” sources Inc. and Pioneer Natural Resources Co. Lemanski recently conducted a study in A second group of more “risk-on” produc- which he assigned high-yield E&P bonds to ers—names to visit as the market looks close one of three categories. The largest category by

52 Oil and Gas Investor • May 2020 far was one titled “stressed/distressed,” which made up over 75% of the total and comprised issuers trading on a yield-to-worst of 13% or more. These are ones where the issuers face “much more significant credits issues and the “The best indicator of market is losing confidence in them.” market trends for E&P The first of the two other categories is termed “market rate” and comprises issuers issuers is to look at the that should be able to refinance in a more nor- price of the bonds and the malized type of market, typically on a yield-to- worst of around 8% or lower. The second was yields as we go forward,” those whose refinancing depended on some said Robert Lemanski, improvement in the credit or commodity envi- managing director, KeyBanc ronment, typically associated with an upturn in oil and gas prices. Capital Markets Inc. To see some stability in bonds issued by the E&P sector, “the first thing that has to happen is the bond prices in the secondary market need to bottom out—and that’s not happening,” caught in 2014 to 2016,” said Lemanski. How- he said. “Everybody’s been hit, including the ever, when the Saudis moved in late 2014, we midstream and, to a lesser extent, the pipeline weren’t facing an external shock affecting the companies. And it’s another tremendous body demand for oil as we are experiencing today. blow to the folks in the oilfield service sector,” So I think it’s potentially worse.” he added. The problem is that “so much of the recov- “The best indicator of market trends for ery in capital spending in the U.S. has come E&P issuers is to look at the price of the from the oil and gas industry,” he observed. bonds and the yields as we go forward,” said “And that is going to grind to a halt for a while. Lemanski. “Look at them across the board, I’m not sure we’ll see much more issuance for look at them by basin, look at them by rating quite some time in 2020,” said Lemanski category, and see if there are trends that you What would be the leading indicators of a can discern, and then you can make a bit of a functioning high-yield energy market? broader call. Looking at each individual name “First, we need to get some general market right now isn’t really telling you very much.” stability, apart from oil and gas,” said Lemans- For example, looking at a universe of over ki. “In addition, there is an awful lot of oil that 15 names in the Permian Basin, only three we need to work off. Even our lower-cost pro- were trading at stressed/distressed levels, ac- ducers are struggling at current levels to sur- cording to Lemanski. By contrast, in Appa- vive and make money. You have to have some lachia, bonds were trading at yields ranging sort of resolution of the problem so you don’t from 15% up to over 20%. And in the Bakken, have this enormous amount of oil overhanging a number of E&Ps, both public and private, the system.” were trading at yields that were north of 30%, And at some point “you’ll see the stronger he said. or the more liquid credits, usually in the top tier, test the market successfully. Then others Basins that ‘lead you out’ will follow on, perhaps from not as high a tier In terms of trends, “the basins or sectors that as the first to test the market. And full recov- were more favored before this happened will ery of the sector is when first-time issuers are be the ones that will lead you out. And the ones able to successfully tap the market at not an that were less favored will remain so and will enormous spread to existing names trading in recover less quickly,” he advised. “You’ll see the market.” M buyside analysts start to come out from under their desks and point to relative value between Pioneer Natural Resources (PXD) one name and another. That’s not taking place $1,200 0.8x right now.” In the interim, the issues that are “front and $1,000 0.7x center from a credit standpoint” for E&Ps are 0.6x the outcome of redeterminations of RBL facil- $800 ities from banks and the steepness of the un- derlying price decks, according to Lemanski. 0.5x $600 The near-term price assumption will be sub- $MM $30/bbl, and the question then relates to how 0.4x $400 steeply the commodity curve is assumed to 0.3x move up in the out years, he said. $200 Net Debt/EBITDA Compared to 2014 to 2016, when WTI fi- 0.2x nally hit a low of $26/bbl, are funding sources more or less resilient? $0 0.1x “In general, the banking system is a lot bet- ter capitalized than at that time. And the banks -$200 0.0x have become somewhat more conservative 2020 2021 2022 2023 2024 2025 in their RBL exposures than when they were 2019 Cash FCF Debt Due Net Debt/EBITDA Source: Tudor, Pickering, Holt & Co. May 2020 • HartEnergy.com 53 COMPANY TURNAROUND ROUGH RIDERS

Locked up in an MLP bankruptcy for nearly two years, Maverick Natural Resources has new management and a business model aimed at the relentless pursuit of free cash flow.

ARTICLE BY print, Day 1, March 18. WTI spot price, began to adjust to the new commodity prices DARREN BARBEE $20.48. Total savings identified, $4.1 mil- in March, it has identified millions in savings Slion—18% of goal. while preserving its sources of cash flow. In mid-March, Maverick Natural Resources It’s the way Heinson insisted on rebuilding was like every other E&P in the Lower 48— Maverick from the remnants of Breitburn En- boxed in by OPEC, a pandemic and buried un- ergy Partners LP, a former MLP that entered der an avalanche of bad news that in roughly bankruptcy protection with about $3 billion in two weeks had drained the value of oil by 56%. debt. Nearly two years later, in 2018, Maverick While other E&Ps rapidly slashed billions of emerged from the courthouse with about $105 dollars from their drilling programs, Maverick million in debt and a sprawling set of odds- didn’t have that option. The company lacks a and-ends assets from one coast to the other as robust capex program, forcing it to find sav- well as the Midwest and the Permian Basin. ings elsewhere. But the Houston company is Breitburn, like other MLPs that rose up in practiced at taking tight turns. This is, after all, the shale boom, was a giant aggregator, con- a company of remnants, created by someone suming complex assets in a seemingly unend- else’s decisions and miscalculations during an- ing cycle of acquisitions meant to increase cash other bad time for the oil and gas industry. flow. Following the 2014 downturn, MLPs fell By the time the company was ready to find apart in the low-price environment, leading to places to cut, CEO Chris Heinson said the billions of dollars in bankruptcies and a dias- company’s executives had been independent- pora of oil and gas assets. ly watching the news and taking actions he Working with corporate improvement spe- didn’t direct. That’s the way it was intended cialists at consultancy Alvarez & Marsal, Mav- to work. erick’s turnaround was swift and stunning. Af- “I’ve told the organization their job, re- ter four months of analysis and internal stress gardless of the environment, is to create free tests, Maverick emerged even leaner from cash flow,” Heinson said. Since the company bankruptcy—while generating more revenue.

Maverick Natural Resource’s Postle Field operations in the Midcontinent are among a variety of assets, including conventional wells and horizontal shale development, that the company had to knit together and make profitable following Breitburn Energy’s

bankruptcy. RESOURCES NATURAL SOURCE: MAVERICK

54 Oil and Gas Investor • May 2020 Maverick's Day-Over-Day Savings During 2020 Crisis $70.0 Daily Savings ($MM) Cumulative Savings ($MM) $60.0

$50.0

$40.0

$30.0

$20.0

$10.0

$0.0 18-Mar 19-Mar 20-Mar 23-Mar 24-Mar 25-Mar 26-Mar 27-Mar 29-Mar Source: Maverick Natural Resources

Breitburn had used restructuring advisers to to tackle,” Heinson said. “Decisions, partic- “It is a perverse make “what you’d think of as the typical cost ularly during the extended bankruptcy, were thing, but it reductions,” Heinson said. Maverick’s target quite constrained. They had to be routed for is better to be was a 20% reduction in lease operating expens- special approval all the way up to the bank- hands off and to es (LOE) per barrel of oil equivalent (boe). ruptcy court, which is incredibly crippling. allow more trust, But Heinson also wanted to create a new It gets professionals into this state where more decisions. company with employees who weren’t merely they’re just frozen, and the effort it takes to get The natural excellent operators but could also direct them- a decision made ends up becoming not worth temptation you selves. The resulting two-week long exercises the trouble.” must resist is were strenuous and anxiety-inducing. With the sprints, the goal was to shake things to direct the “They are intense,” Heinson said. “They’re up—creating a culture that dispensed with em- actions of the intense by design.” ployees asking for permission to take action and organization The company called them sprints. freed up managers reluctant to make decisions below you,” said before seeing every scrap of available data. Maverick Natural Running flat out The model isn’t new and is relied upon Resources CEO Sprint, Day 3: March 20. WTI spot price, among Silicon Valley technology companies. Chris Heinson. $19.48. Total savings identified, $11.85 mil- “What we do is not uncommon,” Heinson lion—53% of goal. said. “It is uncommon in oil and gas.” In one of the remote areas where Maverick Heinson, an avid reader, said he took cues operates, the company was faced with paying from the writings of the economist Peter high rates for power, a part of oil and gas in- Drucker, whose most influential works were dustry life when dealing with electricity co- written in the 1940s and 1950s. ops or highly-regulated providers. “He has a whole school of thought associat- A group of Maverick employees self-orga- ed with clarifying what leaderships’ jobs are nized and brainstormed on how they could pay and what management’s role is and what the less or renegotiate a lower rate or find a cred- workforce is all built around,” Heinson said. ible alternative to purchase power on the grid. Heinson wanted to empower employees One plan would use microgenerators to pow- and tearing down impediments, particularly at er operations from Maverick produced fuel. lower levels of the organization, and create a Another idea would send power from another workforce that was unafraid to make decisions state into the area by building a major trans- on the fly, without seeking approval. mission line over a river. “It is a perverse thing, but it is better to be After generating credible alternatives, Mav- hands off and to allow more trust, more deci- erick’s group was able to win concessions—a sions. The natural temptation you must resist is strategy the company has adopted elsewhere. to direct the actions of the organization below “It was real, credible actions that these you.” teams are independently taking that no one in Maverick’s sprints were designed to wring senior management ever thought of,” Heinson every dollar of savings out of the company but said. “But they would not accept that the util- to also jolt the staff out of any sense of com- ity prices coming out of these restricted areas placency. and co-ops could not be changed even though The first of the company’s three sprints was I will say in most of these areas that is actually decidedly unproductive from a cost-savings the rule.” standpoint, Heinson said. The breaking of bad habits is grueling, vig- “You have to do the most unpleasant things ilant work. The command-and-control struc- first. The first sprint, reducing field labor, had ture in place at Breitburn, like that at most a much smaller impact than the next couple.” E&Ps, became more deeply engrained after But the sprints were also a way to rewire the its May 2016 bankruptcy. The path workers nervous system of the company so that execu- took to reach decisions deepened into ruts as tives would engage in taking calculated risks. Breitburn’s reorganization dragged on in a The entire company, including the account- 21-month saga. ing staff, field operations, engineering and the “The first [thing] we needed to change was receptionist, ran the sprints tighter in a large the culture, which is a very difficult problem common area.

May 2020 • HartEnergy.com 55 At the time, Maverick held roughly 600,000 net acres and 7,600 net wells spread out across Exceeding Cash-Flow Goals Amid 2020 Crisis the Permian, Oklahoma, Wyoming, Florida, Wyoming (GR) Michigan and other several other states. The Wyoming (BH) company now operates roughly 5,000 wells. ArkLa Then came the company’s data, which, when Midwest analyzed, gave a sobering picture of a compa- S. Florida ny that had been in stasis for far too long. Jay Campbell, a managing director at Permian Alvarez & Marsal, said the firm created eco- Total nomic models, mapping out costs for wells, Jay based on a variety of factors such as water Postle hauling costs. California “When we did that, we saw that there were 0% 100% 200% 300% 400% 500% 600% 700% wells that were producing large amounts of Source: Maverick Natural Resources water and almost no oil,” he said. “The well was basically under water, literally, from a fi- To break habits, “you focus on intensity. nancial standpoint and an actual standpoint. You focus on creating stress. And you have They were just water wells.” to sustain that for a long enough period that it The company’s historic mindset was that a becomes their practice,” he said. “And that’s well could not be shut in because every barrel what you’re left with.” of production mattered. However, shutting in Maverick Natural “Every day, the metric that we were looking the well would cause a relatively minor loss of Resources to hit was an LOE per boe target … which cre- production and realize an economic gain from emerged from ates an incredible amount of focus and pres- reduced hauling costs. bankruptcy in sure on the results,” he said. Working with fellow managing director Lee 2018, reorganized As Maverick eyed its LOE targets, the new Maginniss, Campbell began piecing together financially but way of working began to take hold. a picture of a company that turned out to be still in disarray. the worst performer in every basin in which A review into Anchored to reality it operated. the company’s Sprint, Day 7: March 24. WTI spot price, With its first 90 days complete, a new man- holdings in the $21.03. Total savings identified, $19.88 mil- agement team arrived, headed by Heinson, the Permian Basin, lion—89% of goal. former COO of Sanchez Energy Corp. Camp- Oklahoma, After a close look at some of Maverick’s bell said Maverick’s team made it clear that Wyoming, wells, some clearly didn’t make sense—or, only economic barrels mattered. Florida and other more importantly, oil. From the outset, Maginniss said Heinson states found a In the 90 days after Maverick emerged from was not only open to what the data showed company replete bankruptcy in February 2018, the company’s but aggressive about understanding the com- with wasteful new backer, EIG Global Energy Partners, tasked pany’s top-quartile peers. Maverick’s team practices. Alvarez & Marsal with rightsizing the company. were “relentlessly figuring out … what are SOURCE: MAVERICK NATURAL RESOURCES NATURAL SOURCE: MAVERICK

56 Oil and Gas Investor • May 2020 other operators doing differently that we could think about adopting that to some de- gree,” Maginniss said. Maverick’s team was also open to taking concepts from other industries and “how those examples could apply to us, even if it wasn’t an E&P,” he said. After benchmarking showed how Maverick compared to other operators, Campbell re- called that the management team didn’t argue with the data. “They basically said, ‘If those are the facts, what do we do about it?’ And I think that mindset has served them well because … they move forward and figure out how to address it,” he said. Heinson said his reaction was to “anchor ourselves in reality.” Heinson insisted on a level of granular data so his team could un- derstand as much as possible about the com- pany’s operations. “It was a sobering wakeup call,” he said.

“But you know, we did find interesting RESOURCES NATURAL SOURCE: MAVERICK things.” In some cases, for instance, labor costs were Stop the bleeding Following a rapid out of step with peer operators. Sprint, Day 12: March 29. WTI spot price, drop in oil prices, “The average cost per employee in one par- $15.48. Total savings identified, $52.93 mil- Maverick Natural ticular area was something like $30,000 or lion—238% of goal. Resources ran $40,000 more than the average,” he said. Over the phone, Heinson hesitated, ponder- what it calls Alvarez & Marsal’s benchmarking showed ing whether to answer a question about Maver- “sprints” to that top quartile performance would require ick’s process for setting new cash flow targets reduce expenses the company to reduce its LOE per boe for each of the company’s nine business units. and increase by 20%. In March, Heinson set new goals for Mav- cash flow by After Maverick’s first sprint was complete, erick’s 200 employees as it responded to the $22 million. Maverick continued to seek improvements in coronavirus pandemic and the oil price war. The company its LOE costs. Oil prices had been ravaged, and the compa- ultimately The autonomy that the company was build- ny was again on the hunt for savings while increased cash ing helped bridge regional differences in an improving its free cash flow by a target of flow by nearly organization that has conventional wells, hor- $22 million. $53 million. izontal shale development and nitrogen flood From March 18 through March 29, the com- enhanced oil recovery. Further sprints identi- pany ran what it called a “stop the bleeding” fied actions that could be taken to create val- sprint. Maverick’s plans included shutting in ue and, finally, to start planning how to make 785 wells. One division also found health, changes. safety and environmental savings across the “In the end, you are left with this menu of business. Other changes across the organiza- actions that your organization can take which tion, like its sprints in 2018, are ones Heinson allowed us to be strategic with our decisions.” may never know about. The task seemed daunting considering the Heinson relented. His free cash flow tar- organization had already gone through bank- gets? “I make them up. What I try and do is ruptcy, conducted layoffs, renegotiated ven- come up with a number that is sufficiently dor rates and cut other costs. large enough that I make all my managers After four months, and three rounds of nauseous,” he said. company sprints, the company had found ini- He conceded he was being somewhat fa- tial savings of 23% LOE per boe. Maverick cetious. But in general he doesn’t delve into has made the changes while squeezing an ad- data models, instead relying on what he calls ditional $45 million in EBITDA from opera- “reasonableness checks” involving some ana- tions. lytics and an awareness of discrete actions he “You’re going to ask me, ‘Well how in the knows will eliminate larger costs. world did they do that?’ But, well, I have “It is really important that you don’t no idea.” over-science your targets because as soon as By fourth-quarter 2019, Heinson said the you start doing that, you’re putting an artifi- company had reduced LOE by 32% while im- cial constraint on the organization,” he said. proving EBITDA 33%. “And you’ve eliminated the organization’s “It gives you the idea of the magnitude of ability to positively surprise you.” change that is actually possible if you identi- At the end of the sprint, the company’s nine fy where the value creation is appropriate and business units each bested Heinson’s free- that you can really energize and empower the cash-flow targets. Overall, the company esti- whole of the organization to work on these mated improving free cash flow by nearly $53 things,” he said. million. M

May 2020 • HartEnergy.com 57 GULF OF MEXICO THE WATER’S FINE

Historic service cost lows and fewer barriers to entry could trigger investment back into the U.S. Gulf of Mexico … even at $30 oil.

ARTICLE BY he double whammy of excess oil supply was drilled there more than 80 years ago. In- BLAKE WRIGHT and the coronavirus has done a num- vestment in the region has ebbed and flowed Tber on crude oil prices, which in turn with the shifting tides—be it the splash of has prompted E&P companies to slash capi- deepwater royalty relief which spurred a ro- tal spending plans for 2020. Larger indepen- bust exploration phase in the region during the dents like Devon Energy Corp., Noble Energy 1990s, or the Deepwater Horizon incident in Inc. and Pioneer Natural Resources Co. have 2010 that ground activity to a halt. chopped spending plans by a third to almost The place producers find themselves today half so far, mainly around their unconventional are truly uncharted waters—a perfect storm resource plays and deferring exploration pro- of oil price destruction due to oversupply and grams. This trio has something else in com- oil demand destruction related to most of the mon. Over the past decade and a half, each world operating remotely due to the threat of exited a dark horse, long-lived asset play that COVID-19. has shown increasing signs of its resilience in The situation is dire, but like all crises, it can LLOG Exploration these most recent trying times—the U.S. Gulf be viewed as equal parts danger and opportu- Co.’s Who Dat of Mexico. nity. Cautious opportunity. facility in the Gulf As an oil province, the U.S. Gulf has been “Operators will have to be more selective of Mexico came referred to as the ‘Dead Sea’ by many—and with reduced budgets,” said Justin Rostant, on stream in many times over. The region has been through principal analyst with Wood Mackenzie. “I December 2011. many peaks and troughs since the first well expect companies will cut 2020 budgets and PHOTO COURTESY OF LLOG EXPLORATION CO. OF LLOG EXPLORATION PHOTO COURTESY

58 Oil and Gas Investor • May 2020 even some 2021—wherever they can as they become more disciplined with their reduced investment capital. “Breakeven prices for projects we expect- ed to FID [final investment decision] in 2020 range from Brent $38 to $45/bbl, so they are still attractive in the long run, but I now ex- pect some to be delayed as operators try to slow down their near-term spend. Where you will likely see a bigger impact is in explora- tion wells drilled. Companies with rig con- tracts in place will reduce exploration activity and focus on development wells or lower risk exploration wells near infrastructure that can be tied back and brought online quickly to generate revenue.” Today’s crisis is yet another marker in the timeline, but one that could hold a silver lin- ing for cash-rich, less risk averse operators at a time when service costs are depressed, even for the most elite equipment. “Rig rates used to be in the $600,000 per day range at its peak for a deepwater rig,” said Rostant. “In 2018, we saw day rates as low of $150,000, but current rates are closer to $220,000. These lower rates are a huge con- tributor to the overall costs coming down in the deepwater Gulf of Mexico. “The other thing that you’re seeing as well is the technology on the rigs; the high-spec rigs have always improved the efficiency and how fast they can drill wells. Back in 2014, we had an average five days per thousand feet from a drilling rate standpoint. By 2019, it was touch- ing two and a half days per thousand feet. So again, part of that’s due to the high-spec rigs coming into the Gulf of Mexico.” The current outlook may take rates even low- er. Pundits see that the combination of E&P capex cuts and the impact of COVID-19 on the ability to get personnel and equipment and ser- vices to and from offshore rigs will soon put downward pressure on utilization. If the U.S. Gulf goes into lockdown due to increasing lo-

gistics complications, the fleet will go idle and CO. OF LLOG EXPLORATION IMAGE COURTESY warm stack the units in the region. According to a recent report from Westwood Global, the Denizen of the deep An artist result will be likely an increase in force ma- LLOG took its first steps in the deepwater rendering of jeure declarations, which can lead to contract U.S. Gulf in 2002 with a series of wells in the LLOG renegotiations or, in some cases, terminations. the region’s flex trend area just beyond the Exploration Co.- The Trump administration is looking into a shelf’s edge. Since that time, almost 100% of led deepwater possible aid package for oil and gas produc- the company’s investment dollars have been Buckskin ers, including those offshore. A group of law- pumped in the Gulf’s deep waters. LLOG has development in makers sent a letter to the White House asking drilled 296 wells in the U.S. Gulf since 2002 the U.S. Gulf. the president to reduce or waive collections of with 104 of those being in deep water. From production royalties from the federal waters 2010 forward, the operator has concentrat- of the U.S. Gulf. The move followed Trump’s ed solely on the region’s deepwater theater. decision to purchase 30 million barrels of oil Several of the private company’s peers were from producers for the U.S. Strategic Petro- leaving the region around the same time as leum Reserve. it went all-in, taking their capital and putting A mid-March U.S. Gulf lease sale attracted it into the burgeoning shale plays around the only half the bids of the previous fall auction. U.S. Lower 48. So, why didn’t LLOG join the The sale took in $93 million in high bids, the exodus and come onshore with its peers? lowest tally in four years. While the offerings “It can be difficult to acquire acreage in the did not attract much new investment, the leg- unconventional play as a fast follower,” ex- acy independents in the region, such as W&T plained Rick Fowler, COO of LLOG. “Also, Offshore Inc., Houston Energy LP and LLOG to execute effectively in the unconventional Exploration Co., participated scoring multiple play requires a different staff and culture. lease blocks at bargain prices. LLOG’s breakeven costs in the deepwater

May 2020 • HartEnergy.com 59 said. “We tend to keep our budgets flat, which allows us to drill more wells when commodi- Gulf of Mexico compare favorably to the un- ty prices are low, which can drive down costs conventional plays.” of services. At the moment, LLOG has one The operator has a number of deep Gulf deepwater rig under contract, the Seadrill West discoveries that are in various stages of de- Neptune, which we expect to continue work- velopment including its Buckskin project, ing throughout 2020.” which achieved phase one production in June At press time, LLOG had the rig conducting 2019 and where additional drilling is planned. completion operations following a sidetrack at LLOG also has redevelopment plans ongoing its J Bellis Field in Green Canyon Block 157. J at its Who Dat Field originally brought on- Bellis is a three-well subsea tieback to the En- line in 2011. The project includes drilling new Ven Energy Corp.-operated Brutus tension-leg wells in and near the field. platform one block to the east. The company has sanctioned its Praline sub- LLOG has been offered opportunities in oth- sea development, which will tie into the Pom- er offshore provinces, but according to Fowl- pano fixed platform in Mississippi Canyon er, the company prefers to explore in the area Block 29. Praline is a Pliocene-aged subsalt oil where it is most familiar with the rocks and discovery located in Mississippi Canyon Block fluids. Additionally, U.S. Gulf infrastructure, LLOG Exploration 74. Additional discoveries moving toward de- access to services and regulatory environment Co. COO Rick velopment include Leon (Keathley Canyon offer key advantages. Fowler said the Block 642), Moccasin (Keathley Canyon “LLOG continues to see plenty of opportuni- company has not Block 736), Shenandoah (Walker Ridge blocks ties in the deepwater Gulf of Mexico so we’ve been tempted 51 and 52), Spruance (Ewing Bank Block not been tempted to look elsewhere,” he added. to look outside 877), Taggart (Mississippi Canyon Block 816) the deepwater and Yucatan (Walker Ridge lock 95). Competitive with the shales U.S. Gulf for “LLOG has been somewhat contrarian Kosmos Energy Ltd. is an international additional drilling throughout our history, and historically we’ve player but sees much of its 2020 production opportunities. added the most value to our company during growth coming from the strategic exploitation periods of low commodity prices,” Fowler of its deepwater U.S. Gulf assets that reside in

LLOG Exploration Co. performing development work at the Buckskin project in the deepwater Keathley Canyon area of the Gulf of Mexico. PHOTO COURTESY OF LLOG EXPLORATION CO. OF LLOG EXPLORATION PHOTO COURTESY

60 Oil and Gas Investor • May 2020 the play’s more active regions. The company refers to the assets as its “advantaged portfo- lio” for several reasons—No. 1 being how it and is another Miocene amplitude in tieback stacks up against other basins around the U.S. range of the Devil’s Tower spar. and globally for both quality and lower carbon “All of these prospects share similar finan- emissions. The operator estimates its deep- cial characteristics, tieback to existing infra- water U.S. Gulf operations casts off about 7 structure resulting in high return, fast payback kilograms of CO2 per barrel of oil equivalent. projects,” said Inglis. Kosmos rates the Permian Basin at around 16 Kosmos’ U.S. Gulf portfolio depth boasts kilograms of CO2 per equivalent barrel. 23 prospects across 71 blocks or approxi- “I want to point out the competitiveness mately 375 million barrels oil equivalent of of the deepwater Gulf of Mexico versus the net unrisked resource in total. According to Permian,” Andrew Inglis, chairman and CEO the company, the opportunities amount to of Kosmos, told investors in late February. over five years of future drilling inventory at “Based on an expert third-party analysis of three to four wells a year. public data, carbon intensity is twice as high in the Permian compared to Gulf of Mexico. The contrarian The advantage stems from the natural aquifer Where some folks see liability, others drive, which requires no gas or water injection, see opportunity. When Werrus Energy was Werrus Energy an abundance of existing and available infra- formed in 2017, the private energy fund and founder Sergei structure, no routine flaring and no fracking,” investment management company sought to Pokrovsky picked he said. invest in low-cost energy products, mainly up a pair of Kosmos’ infrastructure-led exploration (ILX) across North America. shallow-water portfolio is designed to give it quick access to The company dipped its toe in the Austin blocks in a 2019 new reserves utilizing existing hardware and Chalk, Canada’s Montney Shale and the salt- U.S. Gulf lease subsea technology. The company participated in water disposal business in Appalachia with sale and could an ILX venture at Gladden Deep in early 2019, small but targeted investments. Then, under be looking to which resulted in a discovery with recover- its subsidiary, Werrus AquaMarine, it did add additional able resources expected to be around 7 million something few have done over the past de- acreage soon. barrels of oil equivalent gross. That might not cade—it entered the shallow-water U.S. Gulf seem like a lot of oil, but when you can install of Mexico, snatching up 100% working inter- a single subsea well and hook it into an existing est in a pair of undeveloped blocks. The move pipeline that flows back to a nearby floating pro- was curious given the mass exodus out of the duction platform, the economics are attractive. region over the past several years. A third-quarter 2019 ILX well at the Nearly Many majors have shed their shallow- Headless Nick prospect in Mississippi Canyon water portfolios in favor of bigger game fur- Block 387 was successfully drilled, encounter- ther offshore or to invest in the shale gale of ing 85 feet of net pay in the Middle Miocene the past decade in places like the Permian Ba- objective. That well was brought on stream via sin. Larger independents also fled the region. subsea tie-back to the LLOG-operated Delta Companies like Devon Energy, Pioneer Natu- House floating production unit. ral Resources and Noble Energy, once main- “We see growth coming from the ILX op- stays in the U.S. Gulf, sold out of the space portunities,” said Inglis. “We’ve seen growth to tackle the shales and/or perceived greener actually in the Gulf of Mexico. When we pastures internationally. took the asset on, it was doing slightly less “I want to be as diverse as possible,” said than 25,000 barrels a day. We’re forecasting a Sergei Pokrovsky, founder and managing di- range up to 28,000 barrels a day for this year. rector of Werrus Energy. “I don’t want to put That’s come from the tieback of the initial all my eggs in the same basket whether it’s successes that we have in Gladden and Nearly purely upstream, shale or whatever. I’m in Headless Nick. So these things are relatively the business of managing risk first and fore- fast time to production. So in terms of the me- most. The barriers to entry (in the Gulf) have dium term, the growth is going to come from come way down. Services prices are de- ILX success. We’ve got a three-well program pressed to the point that I don’t think they can in the second half of 2020 [planned] in the get any lower.” Gulf of Mexico.” Werrus AquaMarine spent less than $350,000 The three-well program comes from five combined on Main Pass Block 295 and South high-graded prospects and is slated to kick Timbalier Block 267. Both blocks are situated off around mid-year. Two of the prospects, in less than 250 feet of water, and neither block Spencer and Tiberius are located in Keathley has any structures associated with them. Canyon and are in tieback range of the Occi- “When I entered the Gulf, part of my search dental Petroleum Corp.-operated Lucius spar criteria was that I only wanted to consider as- platform in Block 875. sets I could access with a jack-up,” explained Spencer will test a Pliocene prospect while Pokrovsky. “A proved hydrocarbon system Tiberius will test a deeper Wilcox prospect. in that block was another. That means that Additional prospects include Zora and Honey there should’ve been some penetration there Ryder, which are Miocene amplitudes adja- that showed oil. I wouldn’t go purely into the cent to the company’s Odd Job Field in Mis- greenfield. There’s not too many of those left. sissippi Canyon Block 214. Highland Rim Also, I needed to be more on the liquid side. is located in Mississippi Canyon Block 864 Another thing was, I wanted to limit myself to

May 2020 • HartEnergy.com 61 ment in finding new projects. The shelf of the Gulf of Mexico lost its mojo and attractive- ness. A lot of people just rushed away from it “The shelf of the Gulf of Mexico lost and left a lot of good things behind.” its mojo and attractiveness. A lot of There and back again people just rushed away from it and For over three and half decades, W&T Off- left a lot of good things behind.” shore has been a fleet of foot operator in the U.S. Gulf, adding reserves both by acquisi- tion and the drill bit. However, in 2011, the —Sergei Pokrovsky, company took a position in the then burgeon- ing Permian Basin of West Texas. The 21,900 Werrus Energy gross acres entry cost the company $366 mil- lion. At the time of the deal, W&T founder and CEO Tracy Krohn called it a “new focus area that offers the potential for substantial additional exposure that’s kind of out of my long-term growth and attractive full-cycle control. So I wanted to find the blocks without economic returns.” After four years of drill- additional liabilities. I wanted a clean slate.” ing, pumping and trying to generate positive Main Pass 295 will likely be the location cash flow out of the properties, the oil price of the first Werrus AquaMarine well. It has a dropped. The project was stuck in neutral, known hydrocarbon system with deeper bonus and W&T sold the assets for $376.1 million. potential. “We didn’t do any one thing to bring the In 2013, Apache Corp. (together with two company down by going out to West Tex- other partners) drilled its Heron well on the as, but it wasn’t optimal for us,” recalled block reaching a total depth of 19,555 feet. Krohn. “Things could have gone differently, but Partner Energy XXI reported up to 100 feet net the truth is, we just spent a lot of money. oil pay, of which a substantial proportion is in When you think of the money we spent and three relatively shallow sands (between 8,405 what we got in return, West Texas just doesn’t feet and 9,110 feet), immediately underlying a cash flow.” salt overhang. After that, the company returned to the U.S. While Werrus is most interested in the much Gulf exclusively, an area Krohn knew could shallower oil pays, it is well aware of the addi- be cash-flow positive by continuing to work tional bounty that lies below salt. and rework the company’s substantial shallow “There is an interesting subsalt play there, and deepwater footprint. but that’s not something that I’m going af- “Reserves are generally bigger,” Krohn said ter right now,” said Pokrovsky. “I know that of his attraction to the U.S. Gulf. “Cash flow it’s there. I know what to do with it, but it’s is usually better. It takes a while if you’re do- going to take more capital. I look at Main ing a greenfield project, it takes a while to get Pass 295 as a good launching point because things on production, but the good news is we there’s plenty of low-hanging fruit that could have a pretty good footprint across the Gulf be economical.” of Mexico. So there is a lot of infrastructure The company is fully funded to drill the ini- already in place. Having that is very helpful. tial well; however, it is in discussions with a Having a large vault of intellectual property is potential co-investor to take a 25% stake in the quite valuable as well. A lot of the guys that project. Werrus is in negotiations with a rig are with us have been out in this basin for a contractor to move a jack-up onto Block 295. very long time. We’ve got a lot of data. Those The goal is the get the well down prior to this are the ties that bind us to the Gulf of Mexico. year’s hurricane season, which kicks off on I think it is an excellent place for us to be.” June 1. However, there is no pressure to get it The company has remained active in the done prior to then. If a deal cannot be struck acquisition arena. Last December, it struck a in time, the company will likely wait until late deal with ConocoPhillips Co. to purchase the fall to drill. oil-weighted Magnolia Field in the Garden “I don’t have any pressure, either from in- Banks area of the deepwater Gulf for $20 mil- vestors or from the overall market right now, to lion and assumption of property liabilities. In go and do something, to go and spend money,” October 2019, the field was producing 2,300 said Pokrovsky. “But I do need to spend this net barrels of oil equivalent per day (82% oil) money to take us to the next level.” to the acquired stake. If the well is successful and a commer- Today’s commodity price challenges has cial development is green-lit, Werrus would prompted the operator to slash its 2020 spend- move forward with a newbuild production ing plans by more than 70% from a range of platform—a rarity in the shallow-water $15 million to $25 million from its prior level Gulf these days—which could kick-start a of $50 million to $100 million. At the mid- slow, deliberate move to increase its foothold point of the revised budget, the company ex- in the region. pects to remain cash flow positive at or above “I would consider expanding and maybe $25/bbl of oil and $1.50 per thousand cubic getting a couple more blocks at that point,” feet of natural gas. said Pokrovsky. “There have been cycles in W&T’s drilling plans in 2020 for the region the past several years of clear underinvest- will be slowed but not halted entirely. M

62 Oil and Gas Investor • May 2020

BAKKEN SHALE THE BAKKEN TAKES A HIT

Between a historic oil price crash and resource maturity, some say the Bakken may have only five or six good drilling years left. What’s the opportunity now?

ARTICLE BY his year we can celebrate the remarkable million barrels per day (MMbbl/d). It fell to LESLIE HAINES contributions that the Bakken Shale has about 920,000 bbl/d during the price crash Tmade to the U.S. energy picture since the that endured in 2015. It had recovered to 1.54 first horizontal wells were drilled to the prolific MMbbl/d in November 2019—setting an all- formation. But at the same time, it is now one time record. of the most mature of the shale plays: More “The Bakken play was getting old, but we than 14,300 horizontal wells have been com- did that [record] simply with technology. We pleted in the Bakken-Three Forks formations. had to make the Bakken a $50 oil play and not Even before the price of WTI sunk to an un- a $70 oil play,” said Ron Ness, North Dakota nerving 20-year low in March, people were Petroleum Council president. The group rep- already wondering how and where the play resents companies operating about 95% of the can evolve in the near term. For the past two or production in the state. One example of the way three years, the rig count has remained steady better technology keeps this play going: At its at about 50 to 55 rigs—and each modern rig Foreman Butte area, Whiting Petroleum Corp. can do the work of three previously. Permits to put on production 17 wells last year, and it said drill were averaging 55 to 60 per month before “they have consistently outperformed offset the oil price crash but are trending down now. wells by over 2.5 times over the first 90 days.” Officials recently presented data on estimat- “Operators have proven they can make the ed revenue from oil and gas to North Dakota Bakken work at an average market price of lawmakers who are preparing the state’s next $52.98 in December 2019,” Ness told Investor. budget. They estimated about 95 well comple- The $64,000 question now is: Can they make it tions a month, or 1,140 completions, although work if prices remain below $30? they are revising those projections now. Lynn Helms, director of the Department of In late 2014 before the so-called OPEC Minerals Resources, told North Dakota legis- Thanksgiving Surprise, production was 1.32 lators that oil production could max out within five years as companies run out of core drill- Bakken Sweet Spot Map ing inventory. He said roughly 20% of drilling activity already is taking place outside of core Bakken locations. “The end of (core area-drilling) is on the horizon; we can see it from here,” Helms told the Legislature’s interim Government Finance Committee. Bakken production has always been ultrasen- sitive to oil price, especially given its long dis- tance from markets and the pipeline bottlenecks seen in recent years. At press time, the 12-month strip for WTI was about $20/bbl, but the price of Bakken sweet crude at the hub in Clearbrook, Minn., was around $13/bbl. From Clearbrook the crude flows south to Cushing, Okla. A Dallas Fed survey conducted in mid- March of 107 E&Ps (not just for the Bakken but in all plays) indicated that 65% of respon- dents said they need WTI to be at or above $23 to cover operating expense for existing wells, never mind for drilling. To drill a new well that is profitable, the average response Source: HPDI, 1Derrick, Bernstein estimates was $49/bbl.

64 Oil and Gas Investor • May 2020 Dropping rigs Now, low oil prices will again hasten a pro- duction decline, because much of the produc- tion is in the hands of financially distressed companies that won’t drill as much to replace output, such as Whiting and Oasis Petroleum Co., or in the hands of smaller private opera- tors that mostly own Tier 2 acreage with well results that will not be as good as in Tier 1. In March, the largest public Bakken opera- tors announced reduced completion activity for 2020. Continental Resources Inc., one of the largest acreage holders and producers in North Dakota, said it will cut its Bakken rig count from nine to three for the rest of 2020. Hess Corp. is cutting from six down to one. Beleaguered Whiting (which filed for Chapter 11 bankruptcy protection in April) has three, but it cut its 2020 capex by 30%. It also just drew an additional $650 million from its credit facility to weather the storm, but at the same time it is still moving ahead to expand capacity at its Robinson Lake oil gathering facility by 2021, to take an additional 20,000 bbl/d. Oasis Petroleum has guided to two rigs. Helms and Ness told the legislative com- mittee that the state’s oil production will peak at around 1.8 MMbbl/d in five years, up from the current 1.5 MMbbl/d, some 250,000 bbl/d higher than its previous, late-2014, peak. But as operators, investors and government officials look to the Bakken’s future, these es- timates could be thrown out the window due to two factors: technology advances we can’t pre- dict today and the price of the commodity itself. “Great resources can always withstand great challenges,” said Ness, the day after oil fell off a cliff in mid-March, hitting $20/bbl. “Every producer is always strategizing; they’ve been through this before. They do have challenges and difficult decisions to make.” In mid-March when he spoke, Platts report- ed that Bakken crude for May delivery traded

about $6/bbl below the price of WTI, for a net SOURCE: HESS CORP. value of about $16/bbl—the lowest price on record for the front-month crude, Platts said. lyst Bob Brackett concluded in a report, “Only Year-to-date Williston Bakken crude was aver- 1,100 remaining drilling locations are eco- aging about $45.60/bbl, down some 70% since nomical at or below $50/bbl WTI. New Year’s Day. “That figure increases to 6,600 locations for Free cash flow in most every oil play will WTI at or below $60. And, 6,600 wells would be zero if oil remains at $30/bbl or below, ac- cover only the next six years of production cording to Rystad Energy on March 18. And under our supply model and assumes optimis- troubling, respondents to the Fed survey said if tically that no other hiccups occur. We ulti- oil is at $40, only 25% of the companies could mately need higher oil prices for the remaining remain solvent one or two years. locations to be ‘in the money.’ “Our findings are consistent with our expec- Remaining locations tation regarding a mature play like the Bak- Near-term problems will endure throughout ken. Most locations with low breakeven prices 2020, possibly through at first-half 2021, but (i.e. most productive ones) have already been setting aside any considerations about damag- drilled. For instance, while about 60% of all the ing oil prices, what does the future opportuni- locations with breakeven below $40 have been ty set look like? The 2013 assessment by the exploited, 8% of all wells with breakeven great- USGS estimated 7.3 billion bbl of undiscovered er than $70/bbl have been brought online.” yet technically recoverable oil in the Bakken. Bernstein Research looked at data and maps Tier 1 vs. Tier 2 from Enverus Drillinginfo that show where Experts contend that transferring technical most wells have been drilled to date and where advances and drilling longer laterals to fringe the most prolific wells have been located—the areas outside the core has worked well to in- so-called Tier 1 acreage. Bernstein E&P ana- crease well results since 2014. We spoke with

May 2020 • HartEnergy.com 65 ly have been trending upwards since 2014,” Corapcioglu said. “This is due to operators Companies Owning Tier 2 Acres* getting more efficient with their drilling and completion programs: drilling longer laterals, Kraken Oil & Gas LLC 44,000 optimizing their completion techniques, the White Rock Oil & gas LLC 32,800 use of proppant and fluids for their fracture Cobra Oil & Gas Corp. 18,500 designs, etc.” Salt Creek Oil & Gas LLC 8,500 Midstream progress MAP Energy 2,000 The Bakken was among the first plays “to Bakken Resources Inc. 1,000 benefit big-time from the shale revolution, ex- periencing a 400%-plus increase in crude oil *None have acreage in Tier 1 areas. All are privately held. Source: Enverus Drillinginfo production in the first half of the 2010s,” RBN Energy said. “The play has had more than its share of challenges, however, including a seri- Enverus to find out more about what defines ous lack of takeaway capacity that spurred the the core: Tier 1 locations with a low breakeven first rapid deployment of modern-day crude- price and good oil recovery per well, or EUR. by-rail, followed by a rig-count collapse and The company has built different type curves major production decline after the mid-decade for specific areas within the Bakken, all nor- crash in oil prices. malized to certain well lengths and completion “Producers have been planning for contin- techniques, according to Hakan Corapcioglu, ued production growth in 2020, though many senior energy market analyst, strategy and an- may be reassessing those plans in light of [the alytics, in Denver. recent] coronavirus-related price slide. In any “So some wells’ EURs may be down-nor- case, production growth is only possible if malized, and some may be up-normalized. there’s sufficient gathering infrastructure in And these are not company specific, but rather place,” said the RBN report. we’re trying to look at the basin and these type Consulting firm East Daley Capital said in curve areas more holistically. a February report that the Bakken will be af- “The average Tier 1 oil EUR is around fected by expansions on the Dakota Access 620,000 barrels (bbl) and Tier 2 oil EUR is Pipeline and the Bridger Pipeline set to come around 445,000 bbl,” Corapcioglu told Investor. online in 2021. “But as I mentioned before, there will be indi- Bridger Pipeline vice president Tad True told vidual wells that are way above these numbers. Investor that he’s been “amazed at the ingenui- “For the IRR piece, if I were to run an aver- ty” of his customers to make the Bakken work age IRR for Tier 1 and 2 at $50 oil and a $3 gas at different oil price levels. price, it comes out to about 36% IRR and 17% “I would say a lot of them have a lot more IRR, respectively. These numbers, of course, can room to grow in the core by going back to their and will vary from operator to operator and on pads and drilling more on some spacing units. an individual well basis. And IRR numbers are The core is an enormous geographic area of tied to commodity prices, so the returns will be some 70 miles, and we have gathering systems much less under the conditions we are in today.” in that area. On any given day we run 200,000 If the play is quite mature, with most of bbl/d, and we’ll be expanding to 400. This is the Tier 1 locations already drilled, then how the largest expansion we’ve done on Bridger. are EUR statistics trending? “They actual- “I’m confident the Bakken is still going to grow.” Remaining Locations In The Money Flaring of natural gas continues in North At Oil Price Points Dakota, but producers and midstream compa- nies have been working overtime to build ad- 123,635 ditional gas processing infrastructure, said an Used Pontential RBN report. “About 670 million cubic feet a day [MMcf/d] of new processing capacity was added in the second half of 2019, another 400 MMcf/d is coming online in the first quarter of 2020 and still more will follow later this year and in 2021.” The Petroleum Council’s Ness said he’d be a fool to predict oil prices now, but he was confident markets and operators will adjust as they always have in the past. “The best thing to 14,981 17,042 cure low oil prices is low oil prices,” he said. 5,425 3,403 “We’ve just got to roll with the punches, but 351 792 we’re going to see a contraction, no question. We will recover, but it’s a function of how long and how big is the fight to get us there. “At the end of the day we’re still producing $40-$50 $50-$60 $60-$70 $70-$80 $80-$100

Below $40 about 1.5 MMbbl/d. Dollar for dollar, it’s still Above $100 the best play. We need demand—producing Source: Enverus, Bernstein estimates more oil at $25 is not the answer.” M

66 Oil and Gas Investor • May 2020

BAKKEN SHALE TURNS 20 BORN IN THE BAKKEN

U.S. tight rock oil production exceeded 9 million barrels per day in March, according to the U.S. Energy Information Administration. The story began 20 years ago in Richland County, Mont., with a prospector, two wildcatters, Halliburton and a bold venture: land a lateral in the middle Bakken—and frac it.

ADAPTED FROM ntil 2000, the Williston Basin’s Bak- rock. The play was declared dead in a 1996 re- “THE AMERICAN ken Formation had been a bailout port by the North Dakota Geological Survey. SHALES” Uzone. When a well targeting another “Without a change in current circumstanc- BY NISSA DARBONNE formation wasn’t going to pay, the Bakken es,” it reported, “such as a new way to stim- was tapped for what little the super-tight rock ulate Bakken Formation reservoirs or the dis- would give up. The investors might recoup covery of a new area with rock and/or reservoir some of what they spent. properties similar to the (productive) fairway, Burlington Resources Inc. had tried tap- completions in the Bakken Formation will be ping the formation with horizontals in the late made only for salvage .... 1980s and into the early 1990s. It had some “There will always be a few completions in initial indication of success in a sweet spot in the Bakken Formation but, in those wells, the western North Dakota. Bakken will be completed as bail-out zones.” But it had been landing the laterals in the That same spring, over in Montana, pros- upper Bakken—a shale member—and hadn’t pector Dick Findley and operator Bob Robin- been fracking them. The wells dried up fast son did just that: They bailed out in the Bak- while trying to move oil out of nearly solid ken—in the middle member—in Montana in

Dick Findley named the prospect Sleeping Giant. “It turned out to be correct,” he said. At right, the Burning Tree State 36-2H, now owned by Enerplus Corp.,

is on pump. OIL & GAS LLC SOURCE: KELLY

68 Oil and Gas Investor • May 2020 Mustang Field when an underlying Nisku, aka Birdbear, target didn’t work out. The dolomitic middle Bakken is tight, but Smith had been in touch over the years with not as tight as the shale members above and Bobby Lyle, the founder of Dallas-based Lyco below. The rock in that vertical well, in par- Energy Corp. ticular, had behaved unusually, though, even Findley, Robinson and Lyle met. They leased while it was being drilled. 50,000 acres and reentered 10 verticals in the “About 40 minutes after we penetrated it,” trend to check the log data. Lyco had 75% Findley said, “we got bottoms up and had a working interest and carried Findley and Rob- 400-unit gas increase. And we encountered inson, as Sleeping Giant LLC, for their 25%. about a 10-foot drilling break, which indicat- Lyle said, “It was a fair deal, and we liked ed porosity. the people and the concept. We thought it was “I didn’t think there was any porosity to worth the risk and that, if it worked, there was speak of in the middle member. That seemed potentially a lot of oil there.” pretty unusual.” Nine reentries were attempted in 1997 and He put it aside, though. Dawn was coming. a tenth in early 1998. In general, they proved “I was going to blame it on the early morning. Findley’s theory that the middle Bakken would I hoped that my mind was just fuzzy.” produce from one end of the northwest/south- Back at the hotel in Sidney about a dozen east trend to the other. The late Bob miles from the well, “I don’t know how long I Lyle believed that the sweet spot—just 10 Robinson, owner was asleep, but my eyes popped open,” he said. to 15 feet thick—of the roughly 30-foot zone at the time of the “I was thinking, ‘Wait a minute. Oil isn’t in would have to be produced horizontally, though, Sleeping Giant the shale’ like most people thought, including and these laterals would have to be fracked. prospect of Kelly myself. ‘It looks like, in this area, the oil is in That would be costly—at least $1.75 million Oil & Gas LLC, the middle member.’” each. “We didn’t have any money to really test asked Findley to The pair bailed out in it. They made their this idea,” Lyle said. look into how money back. “So I called Dick Cheney.” far this porosity But the well, Albin FLB 2-33, kept flowing. He and Cheney, chairman of Dallas-based trend might Robinson phoned Findley, telling him, “You Halliburton Co. at the time, were both on be, resulting in know, this just isn’t declining. Do you think the Southern Methodist University board of Sleeping Giant we have someplace to develop this?” trustees. LLC. Findley wasn’t optimistic. It was an anom- Lyle said, “I told Dick what we wanted to aly, he thought. But he looked. Where else do and asked if Halliburton was interested in might an Albin FLB 2-33 work? participating.” North of Albin, logs of old wells that went At the time, Halliburton was developing through the Bakken didn’t show much poros- a unit to invest in E&P projects in which it ity and wasn’t as high in resistivity. Looking could deploy new technology. It was a busi- south, however, old logs were showing the ness development proposition that was hoped middle Bakken to have very persistent porosi- to jumpstart more oilfield activity—thus, more ty—between 8% and 12% in a long trend. oilfield contracts. “It took me a couple of days; there were may- Some weeks later, Lyle received a call: be 20 to 25 wells I could look at. Every one of “They said, ‘We think this will work.’” them had porosity and high resistivity for oil.” But oil prices were falling. A barrel had After Findley plugged each well into his map, pushed past $25, but estimates of Pacific Rim it began to show a consistent northwest/south- demand growth had been inflated, prompting east trend—an ancient shoreline. “It looked like the “Asian contagion” market fallout. Mean- it was 40 miles long and 4.5 miles wide.” while, OPEC was slow to cut back on its output. He called Robinson. “I think we found a gi- A barrel fell to as little as $11 in December ant oil field,” Findley told him. Robinson was 1998. Regional spot prices were even less. skeptical. “He said, ‘I kind of doubt that.’” The Halliburton group asked Lyle, “What do But the pair began leasing. They would need you want to do?” He replied, “I’m not drilling a lot more money. “It was going to take a cou- a well up there with oil at $8.75 a barrel.” ple million dollars to buy all the leases avail- Halliburton agreed. Meanwhile, it and Lyco able on this trend, and Bob didn’t have that engineers continued to draft the fracked-lateral kind of money nor did I.” plans. The initial ideas involved making select Findley had given the prospect a name: perforations along the wellbore and pushing a Sleeping Giant. He said, “You get pretty des- massive amount of water and sand into the rock. perate when you start naming prospects after “You would just pump into those perforations so many years. along the entire lateral length all at once and “It really did look like a giant oil field that try to control the placement of the sand by the was just waiting to be developed. So I called it placement of the perforations,” Findley said. Sleeping Giant.” While they waited, oil improved, exceeding $26 in December 1999 and heading to $30. Partners, money The price was the best since 1985. Lyle said, In the 1980s, Findley had met Cameron “Finally, we started drilling the test well.” Smith, a New York-based oil and gas investor who matched operators with private capital via The lateral his Cosco Capital Management LLC firm. He Burning Tree State 36-2H was placed about and Robinson gave Smith a call. 17 miles northwest of the now four-year-old

May 2020 • HartEnergy.com 69 And, then, they waited. Would the well, like the old horizontals in the upper Bakken in Albin FLB 2-33. The middle Bakken there was North Dakota and the verticals in the middle at about 10,000 feet below the surface. Bakken dolomite outside of Findley’s porosi- The decision was made that the lateral ty-trend fairway, just fizzle out? should be driven along the top half of the Lyle said, “We didn’t want to run out and roughly 30-foot section, just below the upper get all excited about something that, overnight, Bakken Shale. The drilling crew would need was going to (begin producing) water. to keep the bit in that small window. “We were cautiously optimistic.” Lyle said, “Today … the task seems pretty On May 26, 2000, Burning Tree State 36- simple. However, at the time, what we were 2H came on with an official IP of 196 bbl on doing had never been attempted. We were all a quarter-inch choke from three sets of per- a little nervous.” forations in the roughly 1,700-foot lateral at Findley recalled one of the engineers say- about 10,000 feet below the surface. The IP ing, “This permeability is so low there’s no was about three times that of the vertical Albin way this play is ever going to work. Let’s 2-33 and up to seven times the average of the walk away. It’s just not worth doing.” vertical reentries. But, “Bobby Lyle said, ‘No. We’ve come Bobby Lyle joined this far. Let’s go ahead and drill it horizontal.’” More wells as operator of The lateral reached about 1,700 feet; the Based on just the initial results, however, the prospect original plan was to take it to about 3,000 feet. Halliburton was disappointed: It had signed on and enlisted Lyle said, “The well started to torque up for only one well. Lyle had wanted Halliburton Halliburton Co. on us. I was concerned we were going to lose in for at least three; Halliburton would sign for as a partner. To it. I told the Halliburton group, ‘We have only one. frac horizontals enough exposure. Let’s stop and test the idea. Halliburton wanted now to participate in in tight rock If we twist off now, we may never get back testing further. Could it yet further improve re- “seems pretty here again.’ sults from this generous rock? simple” today, he “People might have gotten cold feet. ‘If we After a couple months online, the rate just said. “However, lose the well, we’re going to leave a lot of wasn’t declining. at the time, what money in the hole. And we may not convince Lyle said, “From our standpoint, we were we were doing ourselves that we ought to try this again.’ tickled: We had what appeared to be a success- had never been They said, ‘We think that’s a good idea.’ ful prototype, and there were no real encum- attempted.” “So we stopped drilling.” brances in terms of a commitment (with Halli- burton) on a go-forward basis. The frac “It gave us a little bit better negotiation po- It was time to complete the well. Perfora- sition.” tions had been made in preparation for the For Halliburton, should the play work out, frac job. From just open holes along the hor- the technology and expertise it could develop izontal wellbore, “we were surprised by the could translate across its business worldwide. (natural) flowback we were getting,” Lyle Particularly, it would give it a position and said. “It was better than we anticipated.” edge in the Williston Basin to serve other pro- Findley and Robinson had decided to go ducers wanting to do a Lyco-type completion. out and watch the frac. Upon arriving, though, Most frac jobs in the region were just small “there was nobody out there. Nothing,” Findley ones and on vertical wells. Burning Tree State said. “We didn’t know what was going on.” 36-2H was the first fracked horizontal in the They wandered around the site. “There was Williston Basin. this dust-covered gauge on the ground, and Halliburton signed a new, 10-well deal under it had 400 pounds on it. Bob looked over to which it became the preferred service provider. the storage tank and saw this flap going up Findley said of the middle Bakken, “Nobody and down on the top. We put two and two would ever think you could produce oil out of together and said, ‘My goodness. This well such a low-permeability rock in (what became is flowing!’ named) Elm Coulee Field.” “About that time, a tanker pulled up onto He recalled that, after making the brochure the location. The driver got out and said, about his Sleeping Giant idea to take to the ‘Well, this is my second load of oil today. Lyco group to review in the summer of 1996, I’ve already taken 400 barrels (bbl) out of “I was kind of embarrassed for naming it that. this thing.’ It sounded a little hokey. “Bob and I were pretty happy. It was flow- “Thinking back on it now, you know, it ing naturally—without a frac.” turned out to be correct.” Still, it would be fracked; the flow, then, was even more impressive. Also, it turned out The neighbors that the upper Bakken was a worthy barrier. In 2000, only six wells were drilled in Rich- Adding isotopes to the frac fluid, the com- land County—Lyco’s in the Bakken and five pletions engineers were able to log where the by others in Ratcliffe, Nisku, Red River or cracks went. Stonewall. Lyco had managed to remain alone Findley said, “Invariably, that frac would in the play, but other leaseholders were all come right up to the shale and just stop; it just around it. Some were exploring other forma- wouldn’t go up into the shale.” tions; some simply owned acreage HBPed by They didn’t lose their frac. existing verticals.

70 Oil and Gas Investor • May 2020 “They said, ‘You’re not going to make any money in Montana. You cannot Lyco advanced to No. 2 oil producer, mak- ing 4.1 MMbbl that year, second only to En- make any money in the Bakken. core Acquisition Co. (6.4 million) and its That’s absurd.’ A few years later, they enormous Cedar Creek anticline fields. were buying acreage all around us.” ‘Common sense’ Fellow oil and gas explorers had dismissed Lyco’s early work, Lyle said. “They said, —Bobby Lyle, ‘You’re not going to make any money in Lyco Energy Corp. Montana. You cannot make any money in the Bakken. That’s absurd.’ “A few years later, they were buying acre- age all around us.” By July 2005, Lyco and Sleeping Gi- The neighbors were watching, though. What ant LLC had run their race—and won. The kind of decline curve would Lyco get from its property was sold to Enerplus Corp. for $421 middle Bakken wells? Would the wells just million. Continental sputter out? Or would they be economic? The idea in 1996 had made 8.8 MMbbl for Resources Inc. Privately held Dallas-based Headington the partnership. Every one of their horizontal founder Harold Oil Co. had been curious. It made a vertical, attempts was a commercial success—100%. Hamm joined Albin 31X-28, for 130 bbl in late 1997. The Lyco had gone 83-for-83. in the Montana hole had been bored to Red River; it was com- Besides the 27 MMbbl the five-year-old play and took it pleted uphole in Bakken about a 15-minute, field had made, it had also given up some 26 to North Dakota. northerly stroll through a field from Findley billion cubic feet of associated gas. It was He said of Lyle, and Robinson’s Albin of 18 months earlier. making 30 million cubic feet a day. “He had a good In 2001, Lyco gave everyone more to talk Lyle had recognized early in the Sleeping plan for what about. It went nine-for-nine in its follow-up Giant program that gas gathering infrastruc- he thought he Bakken attempts, all horizontals, bringing ture would be needed in addition to more oil could do with Elm them online with between 190 and 368 bbl. pipeline infrastructure. Gas flaring is allowed Coulee Field … A Headington then went in with a horizon- in the state but not in perpetuity. lot of people just tal—Dynneson 11X-5. The well flowed 181 Also, the gas that the wells were making didn’t give him a bbl a day its first 12 days online; upon being was full of valuable NGL. lot of credit. They fracked a couple months later, it came back Lyle had gone to the gas-pipeline operator should have.” on with 242 bbl. in the area and explained he would be need- In 2002, already 10-for-10, Lyco went an- ing gas takeaway service. Lyle was sent away. other 10-for-10. Among them, it took its Pea- “They said, ‘Well, we don’t really think that’s body-Bahls 2-16H lateral about 8,500 feet likely to happen. We think that’s folly.’” for 576 bbl on Nov. 22, 2002—its biggest Lyle returned twice; the company refused well yet and the longest-reach well yet in the to believe him. state’s history. Eventually, he went to Harold Hamm, Con- Lyle said, “That gave us momentary brag- tinental’s founder and who also owned oil ging rights. It’s always fun to be part of some- pipeliner Hiland Partners LLC. Hamm was thing that is done for the first time.” the only pipeline operator who would listen In 2002, Headington’s WCA Foundation to Lyle. 21X-1 came on with 445 bbl from dual later- Hamm said, “We put in the oil gathering als. One turned at 9,943 feet and went south- pipe, and we brought in the gas gathering. east for about 2,500 feet; a second went out There was just one company gathering gas up about 4,000 feet. there, and they, basically, had no competition. By year-end 2002, Lyco had advanced “The result had been that, whatever they of- to No. 5 oil producer in Montana, making fered you, you had to take it. That’s not very 686,766 bbl that year—even advancing past attractive.” several Cedar Hills anticline operators south Lyle and Hamm agreed to dedicate their of Richland County, Mont. middle Bakken gas to a new pipe; Burlington The state named the new Bakken play: Elm joined as well. Coulee Field. Its first appearance on the Mon- Meanwhile, Hamm took the Bakken idea tana list of oil fields was at No. 5 among the to North Dakota, took Continental Resources all-time top 100. public and has grown it into one of the largest In 2004, it made 7.5 million barrels (MMb- U.S. oil producers. bl); Lyco’s share was 4.7 MMbbl. Oil reached “Bobby—well, he just has very good com- about $50 in 2005. Lyco went 35-for-35 that mon sense,” Hamm said. “He had a good plan year. for what he thought he could do with Elm Continental Resources Inc. had joined the Coulee Field, and he had Halliburton in there play; it went 32-for-32. All Elm Coulee Field with him, willing to spend money on the tech- operators combined were 143-for-143. nology and apply it. By year-end 2005, cumulative field produc- “I have a great deal of respect for him. A lot tion was 27.1 MMbbl—roughly half of all the of people just didn’t give him a lot of credit. oil made in the state that year. “They should have.” M

May 2020 • HartEnergy.com 71 BUSINESS STRATEGIES HEDGING IN TOUGH TIMES

In oil and gas, the decision to not hedge has always been at producers’ own peril. Fewer E&Ps have hedges in place than in prior years, according to a survey, which suggests a difficult path through the recent price collapse.

ARTICLE BY hile energy markets continue to be The following survey provides as much in- SHANE RANDOLPH volatile, fewer oil and gas producers formation as possible based on information AND Whave hedges in place than in prior disclosed in regulatory filings. U.S. GAAP ac- JOSH SCHULTE years. In addition, a number of producers counting rules form the minimum disclosures hedged with strategies containing sold puts on companies must provide in their filings to pro- large portions of their production. This essen- vide users these understandings: tially creates a trapdoor where a company ■ An entity’s use of hedges; doesn’t have price protection below the strike ■ How the hedges and the hedged production price of the sold put, which for some is any- are accounted for in the filing; and thing less than $45/bbl on crude. ■ How the hedges affect the financial state- The following is a survey of 30 of the largest ments. public oil and gas E&P companies and their While the accounting rules require entities to hedging activities as disclosed in their Dec. 31, disclose the level of an entity’s derivative activ- 2019, 10-K filings. It also includes compari- ity, there can be variance in practice as to how sons to the same survey done in the prior year. much information a company discloses about The first trading day of 2019 was the low- the instrument types, volume of production est daily closing price achieved by the prompt hedged and the average hedge price. WTI futures contract in 2019 at $46.54/bbl. From there, it was a rocky ride between clos- Why hedge? ing prices from around $50/bbl to $65/bbl for Upstream companies have relatively the remainder of the year. The crude price straightforward objectives, which are to search crash in early March 2020 that took prices for, develop and extract hydrocarbons. These down to nearly $30/bbl surprised many. Nat- activities are very capital intensive and re- ural gas prices followed an unusual path in quire large amounts of cash. Companies need 2019. Early in 2019, the prompt natural gas fu- enough cash flow, not only to support a level tures price reached just above $3.50/MMBtu, of capex and exploration activity to ensure that similar to price levels in early 2018. However, oil and gas continues to flow but also to make the average closing price for the prompt natu- debt payments, comply with debt covenants ral gas contract during the final two months of and support general and administrative costs. 2019 was about $1.55/MMBtu lower than the Hedging programs at upstream companies are average closing price for the final two months developed with the primary purpose of provid- of 2018. Natural gas prices have dipped well ing a level of cash flow to increase the likeli- below $2/MMBtu in early 2020. hood of meeting those needs. Without the protection of an effective hedg- % Of 2019 Surveyed Companies Hedged By Commodity ing program, an upstream company’s cash flows 100% are subject to the volatility of the market. An upstream company without hedges will bene- 80% fit from higher market prices, but they have a very short amount of time to react when market 60% prices decline. This is a predicament many up- stream companies experienced during the 2014 price downturn and what many experienced in 40% early March 2020. The following outlines the percentage of com- 20% panies in the survey that maintained hedges as of Dec. 31, 2019, for crude, natural gas or NGL. Consistent with prior years, it’s clear that the 0% Hedged Crude Hedged Natural Gas majority of public oil and gas producers main- Source: Opportune LLP tain hedging programs. However, fewer compa-

72 Oil and Gas Investor • May 2020 nies had hedges than in prior years. Twenty-five of the 30 upstream energy companies surveyed, Crude Hedge Instrument Types Comparison or 83%, had hedges on the books as of Dec. 31, 2019. This was down from 93% as of Dec. 31, 3-way Options 2018 2018. As of Dec. 31, 2019, 70% of the surveyed 2019 companies had crude hedges in place, and 60% had gas hedges in place. Collars

Types of instruments Purchased Puts While some companies will state that they have a hedging program and have executed hedges, investors should carefully consider the Swaps types of instruments utilized. The downside protection provided by some instruments may not be that significant. The following notes the Swaptions number of companies holding various instru- 0510 15 20 ment types in their hedging portfolio. Source: Opportune LLP No. of companies Of the companies reviewed, swaps continue to be the preferred instrument for both natural Natural Gas Hedge Instrument Types Comparison gas and crude. For a producer, swaps provide 3-way Options the highest amount of downside protection. 2018 However, swaps limit upside price participa- 2019 tion. This leads producers to utilize purchased Collars puts, which can be costly, or costless collars, which allow the producer to participate within a range of price movements. Purchased Puts Other instruments noted in the survey were swaptions, three-way options and put spreads. Swaps Swaptions, often used to raise a strike price by allowing a counterparty to increase the volume or lengthen the tenor of the contract at its discre- Swaptions tion, continue to represent a minority of the in- strument types utilized by the public companies. 0510 15 20 Source: Opportune LLP No. of companies Three-way collars and, to a lesser extent, put spreads (purchased put and sold put) continue bbl to $75/bbl range under the belief that pric- to exist. Many producers were hurt by strategies es wouldn’t go below those levels. Opportune containing sold puts during the 2014 price col- is seeing this pattern again in early 2020 where lapse as they contain what some consider a trap current oil and gas market prices are below sold door. For example, a producer that entered into put strikes. There’s no downside protection be- a three-way option with a $45/bbl sold put, $50/ yond the strike price of the sold puts. Producers bbl purchased put and $60/bbl sold call would hedging chunks of the production with these in- participate in price movements between $50/bbl struments were definitely not prepared. and $60/bbl. A strategy utilizing both swaps and collars However, once the price goes below $45/bbl, was common for both crude and natural gas. the company would have no downside protec- The types of instruments used for gas remained tion. This was particularly painful for many generally consistent with the prior year, with producers in 2014 that had sold puts in the $65/ over 80% of hedging companies utilizing either

Crude Hedge Strategy (2019 Survey) Natural Gas Hedge Strategy (2019 Survey) 14% Swaps Only 24% 17% Swaps and Collars

Other

44%

39%

62% Source: Opportune LLC May 2020 • HartEnergy.com 73 Price levels Crude And Natural Gas Hedge Tenors (2019 Survey) The ability to only hedge at the top of the market is impossible. The decision of when to 2024 Natural Gas hedge and at what price level is rooted more in Crude the risk management policy of providing pre- dictable cash flows than in an ability to pre- 2023 dict prices. As a hedging program is intended to increase cash-flow predictability, the price 2022 level at which companies execute hedges is often heavily influenced by operating budgets and debt compliance. 2021 Of the 25 companies that disclosed that they had hedges on their books at the end of 2020 2019, 20 gave their average prices for WTI Cushing crude, Henry Hub natural gas or 0510 15 20 both. The average swap price for crude was # Of Companies $58.41/bbl for 2020 and $54.52/bbl for 2021. Source: Opportune LLP The average swap price for natural gas was Crude Swap and Put Prices $2.58/MMBtu for 2020 and $2.54/MMBtu for 2021. The average collar put price (non- $70 Crude 2020 three way) for crude was $53.48/bbl for 2020 Crude 2021 and $49.68/bbl for 2021. The average collar $65 put price (non-three way) for natural gas was Put Price Swap Price $2.45/MMBtu for 2020 and $2.38/MMBtu for 2021. The average sold put prices in 2020 $60 were $45.70/bbl for crude and $2.15/MMBtu for gas. $55 Hedge coverage Consistent with prior years, few companies $50 disclosed the amount of their forecasted pro- duction that was hedged as of Dec. 31, 2019. Only four companies disclosed a percentage $45 of forecasted production hedged. For com- Source: Opportune LLP panies that did disclose this information, the Natural Gas Swap And Put Prices average hedge level for crude was 61% of $3.00 forecasted 2020 production and, for natural Swap Prices Put Prices gas, was 42% of forecasted 2020 production. $2.90 Note that these hedge levels include coverage $2.80 provided by three-way options. In summary, fewer E&Ps had hedges in $2.70 place at Dec. 31, 2019, than in prior years, $2.60 and sold puts continue to exist in many hedge portfolios. Companies with strong hedge $2.50 books have a better ability to try to weather $2.40 the storm. Those companies that were not ap- $2.30 propriately hedged are struggling. The implementation of a hedging program $2.20 can be an important tool that helps a compa- Natural Gas 2020 Natural Gas 2021 ny ensure certainty of cash flow and perhaps $2.10 Source: Opportune LLP avoid filing bankruptcy. Management teams are encouraged to consider the various alter- exclusively swaps or both swaps and collars. natives and strategies that a hedging program The use of crude collars and three-way collars can provide in meeting their ever-changing remained consistent in 2019 compared to 2018. business plans. M

Length of hedging Shane Randolph is a managing director at When executing a hedging program, many Opportune LLP and assists companies and companies are challenged with how far out to financial institutions throughout North Amer- hedge their production. If prices increase over ica, South America, Europe and Asia-Pacific time, they largely give up upside. However, in their understanding of what is possible as if prices drop, it allows a company to weath- they deal with the challenges of implementing er the storm for a longer period. Based on the risk management programs and highly techni- survey results, it’s common for companies to cal accounting pronouncements. Josh Schulte hedge some level of the prompt 12-month pe- is a manager in Opportune LLP’s commodity riod representing calendar 2020. None of the risk management advisory group and assists companies hedged crude beyond 2021, while companies with developing and executing a handful of companies hedged natural gas in complex risk management programs. 2022 to 2024.

74 Oil and Gas Investor • May 2020

EDITED BY A&D Watch DARREN BARBEE Sky Falls In On First-Quarter M&A THE INEVITABLE collapse of US Upstream Active Deals continuing bright spot for the M&A in first-quarter 2020 grinded For Sale industry. In January, Kimbell out a mere $770 million in deals— Royalty Partners, one of six about one-tenth of typical values— publicly traded royalty compa- as oil and gas companies drowned nies, bought a diversified package Scoop/Stack in oversupply, Enverus said in an Niobrara from private-equity-sponsored 4% April 2 report. 15% Springbok Energy I & II for As oil prices plunged to Bakken Multiple $175 million, Enverus said. 18-year lows, the quarter’s deal 2% 30% “Mineral and royalty interests value fell far below the $8 bil- are playing an increasing role in lion averaged in the past decade. deal markets,” said John Spears, Enverus said that nearly all Enverus market research director. deals were transacted before the Eagle Ford “We expect additional capital COVID-19 pandemic and the 20% will be interested in deploying over pumping of crude oil by Other here, even in a down market. Saudi Arabia as OPEC’s pro- 21% The challenge will be navigating duction détente with Russia fell a wide bid-ask spread between apart. Permian buyers and sellers with rig num- Featured deals of the first bers and development plans for 3% Conventional quarter included bankruptcy acreage in flux.” 5% sales and a royalty deal. The M&A market is likely “Even before oil prices col- Source: Enverus to rebalance as rigs are idled lapsed on COVID-19-related and operators cut capex, which demand issues and the surge in global indebted, and current prices are may reduce the need to add further production led by Saudi Arabia, M&A “likely to create the largest number inventory. Buyers with capital and markets were highly challenged,” said of such filings in modern history” the appetite for deals should see Andrew Dittmar, senior M&A analyst this year, according to Rystad’s opportunities materialize once some for Enverus. “Responding to Wall analysis. stability is added to the market, Street pressures, E&Ps had slashed By 2021, bankruptcy filings could Enverus said. spending and refocused from growth climb to 150 or more cases should Buyer groups with potential to to cash flow, dampening the appetite oil prices remain at $30/bbl Rystad capitalize on opportunities are likely for acquisitions.” said. In a worst-case scenario, at to include majors, private and insti- Enverus said the largest first-quarter sustained $20 WTI prices, E&Ps tutional capital, and foreign buyers. deal was the successful stalking horse carrying nearly $250 billion in debt “As painful as the downturn is, bid by Alpine Energy Capital for would be at risk. this may finally push the indus- the assets of bankrupt Midland Basin Legal firm Haynes and Boone try into healthy consolidation that operator Approach Resources Inc. LLP recorded seven E&P bankrupt- leaves us with larger, more effi- The assets were sold as part of a Chap- cies since January totaling $7.7 bil- cient, and better capitalized oper- ter 11 proceeding for $193 million. lion. The largest, Whiting Petroleum ators when the recovery starts,” Enverus speculated that bankruptcy Co., entered bankruptcy protection added Dittmar. “These buyers will sales might drive future deal flow or April 1 with a restructuring agree- likely have opportunities to acquire be a new clearinghouse for dealmak- ment for its $5.9 billion in debt. high-quality assets that might have ers if creditors are “perhaps leery of Through the sudden shift in oil been viewed as too expensive before taking equity in a reorganization.” prices and surges in supply, mineral the downturn.” However, the analytics firm also and royalty asset deals had been a —Darren Barbee noted that Sanchez Energy Corp. creditors are apparently taking equity First-Quarter 2020 Deals stakes in a reorganized company that Date Buyer Seller Deal $MM could emerge from bankruptcy. San- Feb. 4 *Alpine Energy Capital Approach Resources Inc. Midland Basin assets $193 chez entered bankruptcy in August with about $2.3 billion in debt. Jan. 31 Undisclosed ConocoPhillips Co. Conventional assets $186 Rystad Energy reported on April Jan. 9 Kimbell Royalty Springbok Energy Royalty interests $175 3 that dozens and perhaps hundreds of upstream companies could seek Jan. 24 KeyBank EdgeMarc Energy Asset Marcellus assets $90 bankruptcy protection depend- Feb. 26 Undisclosed HighPoint Resources Diversified assets $27 ing on the depths and duration of WTI prices. Producers are heavily Source: Enverus

May 2020 • HartEnergy.com 77 A&D Watch

Basic Energy Acquires NexTier’s Well Services Business BASIC ENERGY SERVICES INC. C&J Well Services was originally acquired production operations from established in San Angelo, Texas, in NexTier Oilfield Solutions Inc. as 1948 by Frank Pool, founder of Pool Basic develops its U.S. well services Well Servicing. Last year, C&J capabilities. Energy combined with rival pressure In a news release, Basic said it pumper Keane Group Inc. in an all- paid about $94 million for the Nex- stock merger forming NexTier. Tier production operations, which Together, Basic’s workover fleet the company plans to fund through will grow to 411 high spec rigs with a combination of cash and notes that nearly 5,000 employees across 11 includes proceeds from the previ- states including expanded footprints ously announced sale of its pumping in the Permian Basin, California and service assets. other key oil basins, which Schil-

The NexTier production opera- SOURCE: NEXTIER OILFIELD SOLUTIONS ling said positions Basic to increase tions, known as C&J Well Services, stockholder value. is the third-largest rig servicing pro- to divest its pumping services assets “Importantly, we expect our vider in the U.S. Combined, Basic in multiple transactions. Expected increased operating scale, enhanced expects to achieve $17 million in proceeds of between $30 million credit metrics and strong cash flow annual run-rate cost synergies. and $45 million were earmarked for generation will enable the company “This transaction solidifies Basic’s redeployment into the Fort Worth, to continue to de-lever while remain- foundation to become the leading and Texas-based company’s well servic- ing a disciplined but active partic- most trusted production services pro- ing and water logistics businesses. ipant in the ongoing consolidation vider in the country,” Keith L. Schil- “Starting with the near-complete occurring in our industry,” he said. ling, president and CEO of Basic, sale of our pumping services assets, Morgan Stanley & Co. LLC said in a statement. we have taken important steps to served as Basic’s financial adviser Similar to other oilfield service bolster our core production-focused for the transaction. Weil, Gotshal providers, Basic has been impacted businesses, enhance our credit profile & Manges LLP was the company’s by declining U.S. shale activity and ultimately position the company legal adviser. Additionally, Lazard is over the past year. As a result, Basic for future growth and leadership,” serving as financial adviser to the spe- announced a plan in mid-December Schilling added. cial committee of the board of Basic.

Market Meltdown Cools BLM Auction OIL AND GAS LEASE sales exceeded $100 per acre in a federal expect anywhere near a fair return offered by the Trump administration lease sales held in Wyoming. on oil and gas leases,” Taxpayers for in three Western states on March In Nevada, BLM received bids Common Sense and Conservatives 24 drew few bids as a crash in on less than 2% of the 70,110 acres for Responsible Stewardship said in energy prices tamped down interest offered, in a sale that brought in a joint statement last week. among drillers. less than $2,500 total. In Montana, In a statement, BLM spokesman The Bureau of Land Management eight parcels covering 5,180 acres Derrick Henry said the agency was (BLM) received bids on just 40% of received an average price per acre not postponing lease sales. the 193,584 acres offered for leas- of about $5. “Using an all-of-the-above ing via online auctions in Wyoming, Drilling on federal lands is a approach to energy development, Nevada and Montana, bringing in crucial part of President Don- we are helping to meet our nation’s total high bids of about $3.3 million, ald Trump’s “energy dominance” growing energy needs by facilitating according to results from online agenda to maximize domestic pro- development and letting free market marketplace EnergyNet. duction of fossil fuels. forces work,” he said. “Oil and gas Wyoming, which held the largest But the industry is in crisis as lease sales and royalties continue sale of 105 parcels covering 118,292 countries including the U.S. take to propel America’s economy and acres, accounted for 99% of the unprecedented steps to contain the support good-paying energy sector bid total. Wyoming is the top U.S. coronavirus pandemic, which has jobs,” he added. state for gas production on federal curbed demand for products such as BLM will offer another 20 par- lands and the second biggest for oil gasoline and jet fuel. cels on 18,960 acres in Colorado on production, according to the U.S. U.S. oil prices have dropped March 26. Energy Information Administration. roughly half since the middle of In March, the U.S. held an auction Yet even there, bidding was February to about $24/bbl. for oil and gas leases in the Gulf of sparse. Parcels covering just 72,000 Taxpayer advocacy groups had Mexico that generated the lowest acres received bids, and 40% of that urged the Trump administration total of high bids for any domestic acreage sold for the minimum price to delay the sales to ensure better offshore auction since 2016. Also of $2 an acre. The average price return to federal coffers. in March, BLM held a lease sale in of $46 an acre was less than half “In this environment, it is impos- Utah that received mostly minimum the average price last year, which sible for the American taxpayer to bids of $2 an acre.

78 Oil and Gas Investor • May 2020 A&D Watch

Enbridge Sells Ozark System to Black Bear ENBRIDGE INC. SOLD natural Oklahoma through Arkansas to south- gas pipeline transportation and gath- eastern Missouri and has significant ering systems in the southeastern U.S., interconnectivity to major long-haul according to Black Bear Transmis- natural gas pipelines. sion LLC, which said it had acquired The deal also includes a fee-based, the assets for an undisclosed amount. 330-mile natural gas gathering system In an April 1 news release, Black that connects regional production into Bear said it completed the acquisition the Ozark Gas Transmission Pipeline. of Ozark Gas Transmission LLC Black Bear CEO Rene Casadaban

and Ozark Gas Gathering LLC SOURCE: G B HART/SHUTTERSTOCK.COM said in a statement, “This investment from a subsidiary of Calgary, Alber- expands our asset base of high-qual- ta-based Enbridge. transmission business included ity, demand-driven natural gas pipe- Based in Houston, Black Bear is a seven regulated natural gas pipe- lines serving utilities and other key portfolio company of Basalt Infra- lines, stretching approximately 550 end-user customers across the south- structure Partner LLP’s second miles. The pipelines were connected eastern United States.” fund. The investment firm formed to eight major long-haul pipelines Barclays was exclusive financial Black Bear through the acquisition across Louisiana, Alabama, Missis- adviser to Basalt, and Morgan, Lewis of Third Coast Midstream LLC’s sippi, Tennessee and Arkansas. & Bockius LLP served as the firm’s natural gas transmission business, The Ozark acquisition adds a 367- legal adviser. TD Securities was which closed December. mile, FERC-regulated interstate natu- exclusive financial adviser to Enbridge Rebranded as Black Bear ral gas pipeline transportation system. and Norton Rose Fulbright US LLP Transmission, the natural gas The system extends from southeastern provided the company legal advice.

Shell Exits, Energy Transfer Takes Over Lakes Charles LNG ENERGY TRANSFER LP announced March 30 that it will take over development of the Lake Charles, La., LNG export project following Shell’s announcement that it has decided not to proceed with an equity investment in the project, cit- ing current market conditions. Energy Transfer will take over the role of lead project developer and will continue the project’s development. The company will evaluate various alternatives to advance the project, including the possibility of bringing in one or more equity partners and reducing the size of the project from three trains (16.45 mtpa of LNG capacity) to two trains (11 mtpa). “We continue to believe that Lake

Charles is the most competitive and SOURCE: FELIX MIZIOZNIKOV/SHUTTERSTOCK.COM credible LNG project on the Gulf Coast,” said Tom Mason, executive 2019, under which the two companies “We remain in discussions with vice president and president, LNG. agreed to share the cost of developing several significant LNG buyers “Having the ability to capitalize on the project. Since that time the two from Europe and Asia regarding our existing regasification infrastruc- companies have jointly undertaken the LNG offtake arrangements as well ture at Lake Charles provides a cost engineering, procurement and con- as, in some cases, a potential equity advantage over other proposed LNG struction (EPC) bidding process. investment in the project,” Mason projects on the Gulf Coast. The Lake Shell has committed to support said. “In light of the advanced state Charles project also benefits from its Energy Transfer with this process of the development of the project, unparalleled connectivity to Energy through the receipt of commercial we remain focused on pursuing this Transfer’s existing nationwide inter- EPC bids in the second quarter of project on a disciplined, cost-ef- state and intrastate pipeline system 2020. Additionally, Shell will con- ficient basis and, ultimately, the that provides direct access to multiple tinue to support Energy Transfer decision to make a final investment natural gas basins in the U.S.” during a transition period to facili- decision will be dependent on mar- Energy Transfer and Shell signed a tate the latter’s plans to continue the ket conditions and capital expendi- project framework agreement in March development of the project. ture considerations.”

May 2020 • HartEnergy.com 79 A&D Watch

GoM High Lease Bids Fall To $93 Million FOCUSED ON THE long-term • EnVen Energy Ventures LLC, potential of offshore oil and gas two bids totaling about $4 million. development as today’s market faces Usoro pointed out that majors unprecedented headwinds, offshore accounted for more than 60% of players placed a combined $93 mil- the high bid amount with competi- lion in high bids on blocks in the tion seen between Shell, Chevron, U.S. Gulf of Mexico (GoM). BP and Total SA for recently-ex- The March 18 lease sale, which pired blocks in Green Canyon and was scheduled in late 2019, came Garden Banks. amid a market collapse that has seen “A notable block was [Garden a growing list of oil and gas com- Banks] 963, a stone’s throw from

panies chop capital budgets for the SOURCE: DONVICTORIO/SHUTTERSTOCK.COM Total’s North Platte project, which year. Facing uncertainty brought by expired in October 2019,” Wood the coronavirus pandemic and oil from that aspect, dollars per acre, we Mackenzie said in a statement. price war sparked by OPEC+ alliance did fairly well.” “Total and Shell went toe to toe on breakup, companies participating in The $93 million in high bids for that block, with Total winning it with the sale had until 10 a.m. March 17— the sale, the first of two federal off- a $1 million bid, a fraction of the $22 the day before the sale—to withdraw shore oil and gas lease sales sched- million that was paid to pick up the bids previously placed. uled for 2020, was the lowest since block in 2012.” But none had, Mike Celata, direc- 2016, Reuters reported. Blocks near existing infrastruc- tor of the U.S. Bureau of Ocean Before the latest market crash, the ture also continued to attract bidders Energy Management (BOEM), August 2019 lease sale results added to as tiebacks and infrastructure-led said during a media call following renewed optimism offshore. That sale exploration continue to make off- the sale. Preliminary sale statis- garnered $159.4 million in high bids. shore more economic for oil and tics provided by BOEM showed 22 Despite the market ups and downs, gas companies. companies participated in the sale, interest remains in the GoM with sev- Of areas receiving bids, interest placing 84 bids on just 71 of the eral multimillion-dollar bids placed appeared the greatest in the Green nearly 14,600 blocks available across by offshore players as evidence. Top- Canyon blocks, and deep water the GoM region. ping the list of high bids on a single continued to reign. Of the 71 blocks The number of participants is block was BHP Billiton Petroleum with bids, 53 had water depths of at down from the 30 companies that Deepwater Inc., which bid about $11 least 800 meters, according to the participated in the March 2019 lease million for Green Canyon Block 80. preliminary statistics. sale, which brought in more than Another block in the area received In all, participating companies $244 million in high bids on 227 a $5 million bid. placed about $108.6 million in bids. blocks. Back then, oil prices were “Those were both newly available “We should also remember that hovering around $60 per barrel, com- blocks, and they were offset to Green lease sales are just the start of pared to less than half that today. Canyon 124, which was the high the offshore investment window,” “While bidding did take a tough bid in the last sale,” Celata added, Milito said. “Companies will spend hit, it could have been substantially pointing out the possible pursuit of millions of dollars exploring, evalu- worse due to the unprecedented near- Miocene-aged reservoirs in fairly ating and, hopefully, producing from term financial constraints created large structures in the area. “All this many of today’s lease blocks. NOIA by COVID-19 and the oil price war bidding was by BHP. So, there’s still member companies remain commit- between Saudi Arabia and Russia,” prospects out there that operators are ted to providing energy security, eco- National Ocean Industries Associ- interested in acquiring.” nomic growth and a high standard of ation President Erik Milito said in Commenting on the sale in a state- living through American offshore statement. “Long-term projections ment, Mfon Usoro, senior research energy production.” for energy demand, including oil and analyst with Wood Mackenzie’s The next GoM lease sale is pro- natural gas, show strong growth for GoM upstream team, said, “BHP also posed for the summer. If held, it will the foreseeable future. Offshore proj- bid on a cluster of blocks in Alami- mark the seventh sale of the 2017 to ects are undertaken with the long- nos Canyon to bolt onto its existing 2022 Outer Continental Shelf oil and term outlook in mind.” acreage in the region where it is cur- gas leasing program. Celata admitted he didn’t know rently evaluating results of the Ocean “We think more lease sales are what to expect going into the sale, Bottom Node seismic.” still in the cards, but higher oil prices given what had happened in the mar- The top five companies in terms of will be required for bid amounts to kets in the prior two weeks. sum of high bids were: climb back to historical norms,” “But I’m pleased with the dol- • Chevron USA Inc., 15 bids total- Usoro added. “Otherwise this sale lars bid per acre. I think that’s a fair ing about $24.7 million; result will continue with even lower assessment of the sale, and I think • BHP Billiton, six bids totaling bidding activity.” that bodes well for this sale and then about $20 million; BOEM estimates the GoM Outer future sales,” he said, which he said • Shell Offshore Inc., seven bids Continental Shelf contains about 48 averaged around $234 but was $251 totaling about $18.4 million; billion barrels and 141 trillion cubic per acre for deep water—“the driving • BP Exploration & Production feet of undiscovered technically force of all these lease sales.” It was Inc., 16 bids totaling about $10.4 recoverable oil and gas resources. the highest since August 2017. “So, million; and —Velda Addison

80 Oil and Gas Investor • May 2020 A&D Watch

Water Midstream Consolidation To Continue OPERATORS INCREASINGLY at Deloitte, explained, for companies In July 2019, Concho Resources find that their water midstream looking to maximize operational formed a JV with Solaris Water assets don’t fit into their efforts to costs efficiencies, water midstream Midstream LLC for produced water win back investor and analyst confi- operations don’t come with the same management in the northern Dela- dence. 2019 and into 2020, the likes margins as production growth. ware Basin. In a case of two service of PDC Energy Inc. (which eventu- “You don’t get the same level providers joining forces, H2O Mid- ally merged with SRC Energy Inc.), of return on investments in water stream LLC and Layne Midstream Continental Resource Development management infrastructure that you signed a long-term contract in Jan- Inc., Noble Energy Inc. and Concho do growing a new producing well,” uary 2019 to serve as the preferred Resources Inc., among others, all he said. “There are better uses of water services provider for Univer- shed water management assets from capital, and there are companies sity Lands, covering water oper- supply lines to disposal wells. out there that are more capable at ations across 167,000 acres in the The trend continued almost imme- optimizing their water management Delaware Basin. Those two deals are diately when the calendar flipped to infrastructure and managing it on an likely indicative of what the industry 2020. In January EOG Resources ongoing basis.” will see, particularly in the Permian Inc. sold 23 saltwater disposal wells Maxson believes that more con- Basin. It’s a dynamic that also could and 300 miles of gathering pipelines solidation in the water midstream lead to new innovators entering the to Oilfield Water Logistics, according market will benefit the industry in market and testing the waters. to a report in the Houston Chronicle. the long term. “The majority of activity will be Most agree that in the current oil “Ultimately, it’s about scale,” he focused in the Permian,” Maxson and gas industry economic environ- said. “Consolidation is a good thing said. “I think we’re going to con- ment consolidation is both imminent from that perspective, as long as you tinue to see small startups investing and necessary. And as shale wells have some alternatives that provide in innovative ways to deal with water start to age and produce more water, the capability to ensure the market is recycling and reuse. Hopefully, we’ll water management will continue to balanced.” start seeing some trends that move play a key role in operations. One such alternative could be joint us more toward more efficient water However, as Shawn Maxson, prin- ventures (JVs) between operators management models.” cipal and oilfield service practice lead and water midstream companies. —Brian Walzel

May 2020 • HartEnergy.com 81 A&D Watch

TRANSACTION HIGHLIGHTS

DELAWARE BASIN with all 10 wells to be completed “Regular access to new explora- n WPX Energy Inc. on March 6 within 18 months after closing. For tion is crucial to further develop our completed its $2.5 billion acquisi- these initial 10 wells, Denbury will largest industry and maintain activ- tion of Felix Energy II, growing its receive only a 6.25% overriding ity on the Norwegian Continental position in the Permian’s Delaware royalty interest prior to the com- Shelf.” Basin, which CEO Rick Muncrief bined payout of the wells drilled The ministry did not say why it believes will help the U.S. shale pro- in a specific field. Subsequent to was not offering any blocks in the ducer generate shareholder returns. payout, Denbury will hold and bear Barents Sea, the first time it has not Backed by EnCap Investments the cost of its 50% working interest done so since 2010. LP, Felix Energy has a 58,500 in each well. Navitas is required to Greenpeace, which has previously net acre position in an overpres- drill at least one well in each of the called on Norway to stop exploring sured, oily portion of the Delaware four fields. for new petroleum resources, said Basin in West Texas. Tulsa, Okla.- After the initial 10-well program there would be little demand given based WPX had entered an agree- is completed and if certain perfor- the recent slump in oil prices. ment to acquire the company in mance hurdles are achieved, Navitas “It clearly shows that there is little mid-December. will have the opportunity to continue appetite from the industry for drill- WPX expected the transaction— the development of the fields for up ing in the Barents Sea, up in the sen- the largest E&P deal announced in to six separate extension periods. sitive Arctic,” Frode Pleym, head of the U.S. during the fourth quarter— During each extension period, Navi- Greenpeace in Norway, told Reuters. to significantly boost its free cash tas can propose and drill up to 10 The oil and energy ministry was flow in 2020 at $50 oil, allowing the additional wells, totaling up to 60 not immediately available for further company to implement a dividend. additional wells on a pro-rata work- comment. “We remain absolutely convinced ing interest basis Norway introduced annual about the accretive nature of the Denbury will retain 100% own- rounds for mature areas in 2003 to transaction and the outstanding qual- ership of the future Webster Unit expand areas that have been already ity of these assets,” Muncrief said CO2 enhanced oil recovery project. explored or had an existing oil and in a March 6 news release. “They Navitas may elect to participate in gas infrastructure. overlie a tremendous resource that the future CO2 EOR project through Greenpeace said the country clearly gives us the means for accel- reimbursement to Denbury of Navi- should use the oil market crash to erating our ability to achieve our tas’ working interest share of project speed up its transition to renewable five-year targets for shareholders.” costs incurred to date; or if Navitas energy. The company has core positions declines to participate in the CO2 Oil prices fell sharply again on in the Permian and Williston basins, EOR project, Denbury has the right March 30, with North Sea oil hitting where it now expects to produce to repurchase Navitas’ working its lowest level in 18 years at below more than 150,000 bbl/d of oil. interest in Webster under a contrac- $23/bbl, on heightened fears that tually agreed valuation mechanism. the shutdown of much of the global SOUTHEAST TEXAS economy due to the coronavirus n Denbury Resources Inc. said it BARENTS SEA could last months and demand for has entered into a definitive agree- n Norway proposed offering oil firms fuel could decline further. ment with a subsidiary of Navitas 36 offshore exploration blocks in an Petroleum to sell half of its nearly annual licensing round in mature GOM 100% working interest position areas, but for the first time in a n Mexico’s oil regulator approved in four southeast Texas oil fields decade it didn’t include any acreage on March 20 a request by French (consisting of Webster, Thompson, in the Arctic Barents Sea. oil company Total SA to give up its Manvel and East Hastings), for $50 The energy ministry, announcing E&P rights to a deepwater block in million cash and a carried interest in the plan on March 30, said it was the southern Gulf of Mexico that the 10 wells to be drilled by Navitas. still important to plan for the future firm had won at auction in 2016. The sale is expected to close by despite the challenging environment, The regulator said Total decided early March 2020 and is subject which has oil prices slumped. How- to return the block due to the results to customary closing conditions. ever, the proposed number of blocks it had obtained to date and must pay The company anticipates using on offer was down from 90 blocks a fine of $21.2 million for failing to the sale proceeds to fund operations, proposed in the previous round a comply with its contract’s minimum enhance liquidity and/or reduce year ago, of which the government exploration work requirements. debt. eventually awarded 69 blocks. Total, the project’s operator, had Denbury will remain operator of All the blocks are offered in the won rights to the area in a consor- the fields, but Navitas will drill and western part of the Norwegian tium that also included U.S. oil complete each of the 10 wells. Sea, with interested parties asked to major Exxon Mobil Corp. Under the agreement, Navitas submit comments in a public hearing Mexico’s Hokchi Energy and is committed to funding 100% of by May 11, the oil and energy min- U.S. Talos Energy Inc. have also the capital required to drill and istry said. relinquished some of their rights for complete an initial 10 horizontal “In demanding times, it is import- exploring oil and gas areas in Mex- wells across the fields, with the ant to plan for the future,” Norway’s ico after winning offshore blocks first of the 10 wells to be spudded Oil and Energy Minister, Tina Bru, as part of Mexico’s flagship 2013 within six months of closing and said in a statement. energy reform.

82 Oil and Gas Investor • May 2020

E&P MOMENTUM DÉJÀ VU ALL OVER AGAIN

iscussion in Texas among a handful The proration concept originated as a of Permian producers and at least one response to a 19th century legal decision Dcommissioner with the Texas Railroad in Appalachia, birthplace of oil and gas. Commission is calling for reinstitution of Faced with legal wrangling on how to ap- proration as an administrative tactic to adjust portion ownership of ground related min- to the crippling global oversupply in oil. erals (and groundwater), courts adapted Proration is an administrative policy that English hunting law to fit U.S. minerals. adjusts hydrocarbon production to market This law—the Rule of Capture—held that demand. if a wild and migratory animal crossed Proration is an obtuse, nebulous term to property lines and was successfully hunt- anyone born after 1960. However, Texas ed by the adjacent property owner, the kill RICHARD MASON, oil production operated exclusively under was rightfully his, and he owed no com- CHIEF TECHNICAL proration from 1928 unofficially and offi- pensation to the owner of the land where DIRECTOR cially in the 1930s until the U.S. imported the migratory animal originated. its first barrel of oil four decades later in When applied to oil, the ruling encour- the 1970s. At that point, the railroad com- aged wildcatters to drill as many wells mission lifted production restrictions other along property lines as quickly as possible than for conservation. to capture as much oil as possible, includ- The Texas model incorporated allow- ing oil originating underneath adjacent ables—production quotas—tied to acreage. land where a competing producer was pur- At the core, and reflecting free market oil suing the same strategy. This resulted in patch politics, all producers regardless of dissipation of reservoir pressure, stranded size are guaranteed market access. How- resource and led to the perennial boom/ ever, their share of access depends on the bust nature of hydrocarbon development. productive potential of an arbitrary acreage Oil plays lasted three to five years at parcel and its relation to the whole. most, then collapsed, creating economic A century ago, proration was a conser- disarray. Producers moved boom to boom vation measure. Production controls were from Appalachia to Oklahoma, to the Texas developed to conserve hydrocarbons by Gulf Coast and North Texas by the 1920s. preventing waste, either through reservoir Then came discovery in the Permian Ba- damaging production methods that cut sin of two giant San Andres fields, Yates short a field’s potential and stranded hydro- in Pecos County and Hendricks in Kermit carbons, or for producing oil that went to County, one week apart in 1926. economic waste in an oversupplied market. Yates was the U.S. equivalent of Saudi Proration prevents an economic collapse Arabia’s Ghawar Field with a potential 5.5 in the market as occurred in the U.S. after million barrels per day. Excess production the East Texas oil field was discovered. from both fields led to a price collapse by Here, production was so large it over- 1928 and threatened early depletion in whelmed the national market. Independents both reservoirs. Producers at Yates opted ran “hot oil” to sell for whatever they could for voluntary proration based on newly get, which was below 10 cents/bbl, or about developed reservoir pressure measurement $1.50/bbl today. It took the Texas National techniques that provided all producers Guard and judicial rulings in favor of the market access, prevented water encroach- Texas Railroad Commission at the state and ment and was tied to the productive poten- federal level to bring proration and rational tial in 100-acre parcels. Separately, Hen- business practices to the oil patch in East dricks producers opted for 40-acre spacing Texas and, by extension, the U.S. until one producer balked, which brought a The Texas model operated successfully court fight that resulted in mandatory pro- even though, by the early 1970s, produc- rationing in the field by the Texas Railroad ers were restricted to one day of restricted Commission. pumping per month. Texas, as the world’s Fast forward three decades. When OPEC largest oil producer, set national market organized global producers in the early conditions under direction of the Texas 1960s, the organization based its quota Railroad Commission, which administered system on the Texas model, which created proration and made the agency a factor in the OPEC cartel. What goes around appar- the global oil market. ently has come around again today.

May 2020 • HartEnergy.com 85 QUEBEC

EXPLORATION HIGHLIGHTS ONTARIO MINNESOTA EASTERN US

1 A Smackover test planned 3 Savoy Energy LP has by Shreveport, La.-based Sklar scheduled a 4,000-ft exploratory Exploration could reestab- test in Calhoun County, Mich., WISCONSIN lish production in Castleberry about 3 miles west of a Trenton/ NEW YORK Field, a one-well Alabama Black River project operated reservoir last online in 2018. by the company. IHS Markit Michigan The Conecuh County venture, reported that #1-6 Fuller will be #1 Myrtice Ellis 35-9, will be vertically drilled in Section 6-4s- MICHIGAN Appalachian directionally drilled to 12,876 ft 8w. The Traverse City-based in Section 35-4n-10e. Accord- company has been active in the 11 ing to IHS Markit, Midroc area since 2018. The company’s 3 Operating opened Castleberry discovery well, #1-34 Seymour Field in 2009 with the com- in Section 34-3s-8w, was tested NEW JERSEY pletion of #35-8 McMillan. It in 2018 pumping 48 bbl of crude PENNSYLVANIA was tested flowing 134 bbl of daily from an undisclosed zone IOWA 43-degree-gravity crude and 107 in Trenton. The Leroy East Field Mcf of gas daily from Smack- opener has recovered 72.686 10 over at 12,272-76 ft. Within 4 Mbbl of crude through late 2019. DELAWARE 5 miles to the south-southeast is The well was drilled to 4,035 ft. 6 8 OHIO 4 MARYLAND Kirkland Field, a Smackover oil A 2019 completion by Savoy, Forest 7 pool opened by Sklar in 2014. #1-19 Motz in Section 19-4s- City 9 DC Through 2019, the Escambia 7w, was tested pumping 192 bbl ILLINOIS INDIANA County reservoir has recovered of crude per day from Trenton 511.874 Mbbl of crude and 1.3 at 3,482-98 ft. The discovery is Bcf of gas from perforations at 7 miles west of Trenton/Black Illinois 12,924-13,108 ft. River oil production in Tekonsha WEST Field. To the west is Kalamazoo VIRGINIA 2 Ventex Operating is near- County’s Climax Field, a Tren- VIRGINIA ing total depth at a Smackover ton/Black River reservoir opened KENTUCKY test in Conecuh County, Ala., in 2014. MISSOURI along the southeastern edge of Brooklyn Field. The #1 Pate 4 Denver-based Antero 13-15 is being directionally Resources Corp. announced drilled to a total depth of 12,500 results from a Utica Shale com- ft, and it is in Section 13-3n-13e. pletion in Monroe County, Ohio. One Brooklyn Field well has The #1H McChesney Unit was been completed in Section 13 at drilled in Section 30-6n-6w. It NORTH CAROLINA Ventex’s #1 Cedar Creek Land initially flowed 24.387 MMcf of & Timber 13-5. It was tested in gas and 854 bbl of water per day, TENNESSEE 2019 flowing 743 bbl of crude and production is from perfora- from Smackover at 11,915-20 ft. tions between 8,900 and 18,426 The Adsison, Texas-based com- ft. The venture was drilled to pany’s only other Brooklyn Field 18,564 ft, 8,611 ft true vertical, well, #1 Pate 11-3 in Section 11, and bottomed in Section 7. OKLAHOMA Arkoma SOUTH CAROLINA was completed in 2018. Through November 2019, the well pro- 5 A Harrison County, Ohio, 6 Two Utica discoveries were duced 137.47 Mbbl of crude and Utica Shale well was tested flow- reported in HarrisonARKANSAS County, 109 MMcf of gas from Smack- ing 1.314 Mbbl of oil, 14.209 Ohio, by Ascent Resources. Black over at 11,740-80 ft. MMcf of gas and 342 bbl of water The Uniontown Field wells were Warrior per day. The Ascent Resources drilled from a pad in Section GEORGIA completion, #1H RH Sparger W 5-9n-5w. The #2H Bravo SW NTG HR, is in Section 9-11n-6w. ATH THREXAS was drilled to 23,773 MISSISSIPPI The McFadden Run Field ven- ft with a true vertical depth of ALABAMA ture was drilled to 22,587 ft with 9,038 ft. It initially flowed 115 a true vertical depth of 7,884 ft bbl of oil, 33.446 MMcf Northof gas Oil Production and was tested after acidizing and 226 bbl of water per day Louisiana Gas Production and fracturing. Production is from perforations at 9,128- from perforations between 8,246 23,658 ft. The #4H Bravo S Mississippi 1 2 © Rextag and 22,394 ft. Ascent is based in ATH HREast was drilled LOUISIANAto 24,175 ft Salt Oklahoma City. (9,085 Texasft true vertical). The well flowed 116 bbl of oil, 32.948 MMcf of gas and 161 bbl of water per day from perforations at 9,278-24,019 ft. FLORIDA Gulf Coast Destin Dome Apalachicola Gainesville

Tarpon Florida Springs De Soto Middle Ground Mississippi Canyon Canyon Saint The Elbow Petersburg Lloyd Atwater Valley Ridge Garden Banks Green Canyon East Breaks Charlotte Harbor Henderson Vernon Basin 86 South Lund Alaminos Canyon Keathley Canyon Walker Ridge Florida Miami Florida Howell Hook Pulley Ridge Lund South Plain Sigsbee Amery Terrace QUEBEC

Eastern US Rig Count ONTARIO MINNESOTA Nov. 8, 2019-Mar. 20, 2020 60

50

40 WISCONSIN NEW YORK 30 20 Michigan 10 MICHIGAN Appalachian 0 FEB 7 DEC 6

11 JAN 3 NOV 8 FEB 14 FEB 21 FEB 28 MAR 6 DEC 13 DEC 20 DEC 27 JAN 10 JAN 17 JAN 24 JAN 31 NOV 15 NOV 22 NOV 29 3 MAR 13 MAR 20 Alabama Florida Illinois Indiana Kentucky Michigan NEW New York Ohio Pennsylvania Virginia W Virginia JERSEY Source: Baker Hughes Co. IOWA PENNSYLVANIA 7 A Monroe County, Ohio, 10 Ascent Resources Utica Shale completion was announced results from a Jeffer- 10 DELAWARE reported by State College, Pa.- son County, Ohio, Utica Shale 5 6 8 based Eclipse Resources I LP. discovery. The company’s #5H OHIO 4 MARYLAND Forest 7 The Cameron Field well, #6H Roxy NE was drilled in irregular City 9 Craig Miller B, was drilled in Section 33-6n-2w in Blooming- DC ILLINOIS INDIANA Section 15-4n-4w to 25,195 ft, dale Field. The completion was 10,431 ft true vertical. It initially drilled to 21,612 ft (9,310 ft flowed 17.418 MMcf of gas and true vertical) and flowed 24.057 Illinois 790 bbl of water per day, and it MMcf of gas with 252 bbl of WEST bottomed in Section 12. Produc- water per day. Production is VIRGINIA tion is from perforations between from a perforated zone at 9,909- VIRGINIA 10,629 and 25,404 ft. 21,461 ft. KENTUCKY MISSOURI 8 Two Utica Shale wells were 11 A Southwestern Pro- completed in Belmont County, duction Co. Marcellus Shale Ohio, by Ascent Resources. discovery, #7H Bliss, initially The wells were drilled from a flowed 31.074 MMcf of gas with Harrisville Consolidated Field no reported water per day. The pad in Section 17-7n-4w. The McNett Field well is in Tioga #3H Crowie E RCH BL was County, Pa., and was drilled to NORTH CAROLINA drilled to 18,375 ft, 9,204 ft true the north in Section 4, Liberty vertical, and bottomed in Sec- 7.5 Quad, Liberty Township, TENNESSEE tion 19. It flowed 24.252 MMcf to 14,838 ft with a true verti- of gas and 114 bbl of water per cal depth of 7,026 ft. Gauged day from perforations at 10,084- on an unreported choke size, 21,395 ft after acidizing and the shut-in casing pressure was fracturing. About 50 ft to the 3,153 psi, and production is from OKLAHOMA Arkoma SOUTH CAROLINA north, #1H Crowie RCH BL was perforations between 7,020 and also drilled to 18,375 ft, and the 14,736 ft. Southwestern’s head- true vertical depth is 9,204 ft. It quarters are in Spring, Texas. ARKANSAS flowed 15.773 MMcf of gas and Black 120 bbl of water per day from Warrior perforations at 9,883-18,249 ft GEORGIA after acidizing and fracturing. The well bottomed in Section 19. TEXAS MISSISSIPPI ALABAMA 9 In Tyler County, W. Va., CNX Gas completed North Oil Production a Marcellus Shale well. The #38SHRGHSM James E Ash Louisiana Gas Production ET AL is in Wilber Field. It Mississippi 1 2 © Rextag was tested flowing 28 bbl of oil, East LOUISIANA Salt 3.453 MMcf of gas and 459 bbl Texas of water per day. The well was drilled to 16,952 ft with a true vertical depth of 6,540 ft. Pro- duction is from an acidized and FLORIDA Gulf Coast fractured zone at 6,882-16,870 ft. Destin CNX is based in Pittsburgh. Dome Apalachicola Gainesville

Tarpon Florida Springs De Soto Middle Ground Mississippi Canyon Canyon Saint The Elbow Petersburg Lloyd Atwater Valley Ridge Garden Banks Green Canyon East Breaks Charlotte Harbor Henderson Vernon Basin South 87 Lund Alaminos Canyon Keathley Canyon Walker Ridge Florida Miami Florida Howell Hook Pulley Ridge Lund South Plain Sigsbee Amery Terrace EXPLORATION HIGHLIGHTS to the north. Within 2 miles to 7 Lafayette, La.-based Byron the north-northwest in Section Energy has completed the 23-9n-12w, #1-Alt Olympia Min- fourth well in the company’s GULF COAST erals 23-26HC flowed 31.182 South Marsh Island Block 71 MMcf of gas per day from per- development program. The #4-F 1 Two Eagleville Field wells 3 Verdun Oil & Gas, based forations at 12,910-22,482 ft OCS G34266 encountered 91 ft were completed at a pad in De in Houston, has completed an and was drilled to the south to of net pay in the primary target Witt County (RRC Dist. 2), Austin Chalk producer in a 22,450 ft (12,766 ft true vertical) Pleistocene Sand. The well was Texas, by Oklahoma City-based lightly drilled part of Austin and bottomed in Section 26. It drilled to 8,130 ft with a true Devon Energy Corp. in Wil- County (RRC Dist. 3), Texas. was tested on a 32/64-in. choke, vertical depth of 7,570 ft. The liam Lyette Survey, A-303. The The #1H Belleau Wood is in and the flowing casing pres- rig is preparing to drill #5-F #13H E Butler was drilled to William Sutherland Survey, sure was 8,566 psi. The #2-Alt OCS G34266, and it is also 19,617 ft, 13,320 ft true verti- A-96, and was drilled to 22,025 Olympia Minerals 23-26HC targeting Pleistocene, with a cal, and produced 1.314 Mbbl ft, 14,384 ft true vertical. It ini- flowed 37.599 MMcf of gas per planned total depth of 8,788 ft of condensate, 3.475 MMcf of tially flowed 10.339 MMcf of day from perforations at 12,961- (7,768 ft true vertical). gas and 1.205 Mbbl of water per gas and 648 bbl of water per 22,252 ft. It was drilled to the day from Eagle Ford at 13,723- day from perforations at 14,230- south to 22,450 ft (12,766 true 8 Castex Energy recom- 19,408 ft. It was tested on a 22,001 ft. The Giddings Field vertical) and bottomed in Section pleted a King Lake Field well in 20/64-in. choke, and the flow- venture bottomed about 1.5 26. Tested on a 32/64-in. choke, western Terrebonne Parish, La. ing tubing pressure was 4,435 miles to the southeast. the flowing casing pressure was According to IHS Markit, the psi. The #14H E Butler A was 8,566 psi. GEP is based in The Miocene workover, #1 Louisiana drilled to 19,614 ft, 13,302 ft true 4 Comstock Oil & Gas Woodlands, Texas. Land & Exploration, was tested vertical. It was tested flowing announced results from a 1.518 Mbbl of condensate, 3.118 Haynesville completion in MMcf of gas and 1.178 Mbbl of Bethany Longstreet Field. The Arkoma water per day from perforations DeSoto Parish, La., venture, at 13,722-19,415 ft. Gauged on #3-ALT Bagley 4 HZ, produced Hardeman ARKANSAS a 20/64-in. choke, the flowing 17.697 MMcf of gas and 1.093 casing pressure was 5,438 psi, Mbbl of water per day. It was Ardmore Black and the shut-in casing pressure drilled to 16,690 ft with a true Warrior was 5,468 psi. vertical depth of 11,575 ft and is in Section 33-14n-16w. Pro- 2 Two Tarrant County (RRC duction is from perforations Dist. 5), Texas, Barnett Shale between 11,963 and 16,475 ft. wells were reported by Fort Gauged on a 28/64-in. choke, Permian MISSISSIPPI Worth, Texas-based TEP Bar- the flowing casing pressure was nett USA. The Newark East 5,451 psi. Comstock is based in 2 Field wells were drilled from Frisco, Texas. 5 a drillpad in Lewis G Tins- ley Survey, A-1523. The #2H 5 Shreveport, La.-based Carden-Heidi-Little was drilled Caddo Parish Holdings LLC Fort 4 to 17,458 ft, 7,192 ft true verti- has completed a horizontal oil Worth cal. It was tested flowing 5.099 well in Caddo Parish, La. The North MMcf of gas and 1.35 Mbbl of Caddo-Pine Island Field well, #1 Louisiana water per day from perforations HLD Brown H, was tested pump- at 7,681-17,304 ft. It was tested ing 110 bbl of oil, 125 Mcf of 6 on a 36/64-in. choke with a flow- gas and 2.15 Mbbl of water per Mississippi ing tubing pressure of 1,214 psi day from Annona at 1,867-6,948 Salt and a shut-in tubing pressure of ft. The new producer is in Sec- East 1,716 psi. The #3H Carden-Hei- tion 17-21n-14w. It was drilled TEXAS di-Little was drilled to 17,025 to 7,080 ft, and the true vertical Texas LOUISIANA ft with a true vertical depth of depth is 1,673 ft. The lateral bot- 7,192 ft and produced 6.171 tomed about 1 mile to the north MMcf of gas and 1.191 Mbbl of in Section 8. water per day from perforations at 7,651-16,936 ft. Gauged on 6 GEP Haynesville has com- a 46/64-in. choke, the flowing pleted four strong Haynesville tubing pressure was 1,121 psi, Shale wells from two separate and the shut-in tubing pressure pads in northern Sabine Par- Gulf Coast was 1,818 psi. ish, La. The Bayou San Miguel 3 Field discoveries are in Sec- tion 26-9n-12w. The highest producing well, #2-Alt Olym- 8 pia Minerals 26-23HC, flowed 1 9 40.29 MMcf of gas and 763 bbl 7 of water daily from acid- and 11 fracture-treated perforations at 12 13,005-21,293 ft. It was drilled 10 Mississippi to 21,507 ft (12,761 ft true ver- Canyon tical) and tested on a 33/64-in. choke with a flowing casing pressure of 8,481 psi. The hor- izontal lateral bottomed within Oil Production 2 miles to the north in Section 23. The offsetting #1-Alt Min- Gas Production Green Canyon Garden Banks Atwater Valley erals 26-23HC produced 39.845 © Rextag East Breaks MMcf of gas daily from perfo- rations at 12,894-20,875 ft. It was drilled to 21,088 ft (12,763 ft true vertical) with a lat- eral extending about 1.5 miles Lund Alaminos Canyon Keathley Canyon Walker Ridge 88 Port Isabel flowing 7.322 MMcf of gas and 564 bbl of 48-degree-gravity oil, Gulf Coast Rig Count 351 bbl of 51.6-degree-gravity 5.968 MMcf of gas and 6 bbl Nov. 8, 2019-Mar. 20, 2020 180 condensate per day from Textula- of water per day. Production is ria L (Miocene) at 17,066-17,114 from Miocene perforations at 160 ft. Gauged on an 11/64-in. choke, 18,436-18,866 ft. It was tested on 140 the flowing tubing pressure was a 26/64-in. choke, and the flow- 120 6,060 psi, and the shut-in tub- ing tubing pressure was 3,022 ing pressure was 6,426 psi. The psi. Hilcorp is based in Refugio, 100 18,071-ft directional well was Texas. 80 plugged back to 17,135 ft. The 60 venture was initially completed 10 Beacon Offshore by the Houston-based company Energy, based in Houston, 40 in 2018, and it flowed 6.608 announced that it has drilled a 20 MMcf of gas daily from Textu- third well in the company’s laria L at 17,164-17,229 ft. The producing Claiborne Field. The 0 FEB 7 DEC 6 JAN 3 NOV 8 FEB 14 FEB 21 FEB 28 MAR 6

discovery is in irregular Section #3SS OCS G34909 is in Missis- DEC 13 DEC 20 DEC 27 JAN 10 JAN 17 JAN 24 JAN 31 NOV 15 NOV 22 NOV 29 MAR 13 MAR 20 35-20s-14e. sippi Canyon Block 794. It hit Arkansas Louisiana Mississippi TX District 1 TX District 2 284 ft of pay across five different TX District 3 TX District 4 TX District 5 TX District 6 TX Inland & Offshore 9 In South Timbalier Block 122, sands. The total depth was not Source: Baker Hughes Co. Hilcorp Energy Co. completed disclosed. Area water depth is a Caillou Island Field well. The 1,500 ft. First production from Block 794) Field was reported 11 LLOG Exploration #14 SL 02856 was tested flowing Claiborne (Mississippi Canyon in 2017. announced results from a Mis- sissippi Canyon Block 546 dis- covery. The #0SS004S0B OCS Arkoma G25098 ST00BP00 was tested flowing 1.099 Mbbl of conden- Hardeman ARKANSAS sate, 32.634 MMcf of gas and 19 bbl of water per day from an Ardmore Black interpreted Middle Miocene zone Warrior at 14,502-84 ft. It was drilled to 21,232 ft, 17,454 ft true verti- cal. Gauged on a 37/64-n. choke, the flowing tubing pressure was 7,083 psi. LLOG is based in Permian MISSISSIPPI Covington, La. 12 A Lower Miocene oil 2 5 well was competed by Hous- ton-based Shell Oil Co. in the company’s Kaikias Field. The Fort 4 Mississippi Canyon Block 812 Worth discovery #6-K OCS G34461, North was drilled to 27,386 ft (25,967 Louisiana ft true vertical). It was completed in a zone at 26,525-26,662 ft. 6 Water depth in the area is 4,500 Mississippi ft. The Kaikias prospect was Salt opened in 2018, and through East 2019 four Miocene wells have TEXAS combined to recover 16 MMbbl Texas LOUISIANA of crude and 37 Bcf of gas. The Kaikias discovery (#1 (BP) OCS G34458) was drilled in 2014 on Mississippi Canyon Block 812, bottoming to the north on Block 768. Total depth is 28,929 ft. The discovery well and the first appraisal test hit more than 300 ft of net oil pay. Gulf Coast 3

8 1 9 7 11 12 10 Mississippi Canyon

Oil Production Gas Production Green Canyon Garden Banks Atwater Valley © Rextag East Breaks

Lund Alaminos Canyon Keathley Canyon Walker Ridge Port Isabel 89 EXPLORATION HIGHLIGHTS 6 IHS Markit reported that of 7,650 ft. The parallel #2BU Earthstone Energy has com- Julie Hughes Unit 8-3 had an pleted two Wolfcamp-Spraberry initial potential of 980 bbl of MIDCONTINENT & PERMIAN BASIN Trend wells from offsetting 42.6-degree-gravity oil, 738 Mcf West Texas locations in Reagan of gas and 1.186 Mbbl of water 1 OXY USA Inc. completed 4 In Lea County, N.M., a County (RRC Dist. 7C), Texas. daily from treated perforations at a Bone Spring discovery in the Bone Spring well was com- The Midland Basin wells were 8,035-17,982 ft. It bottomed to Ingle Fields portion of Eddy pleted by Marathon Oil Corp. drilled in Section 8, GC&SF RR the south-southwest at 18,090 ft, County, N.M. The #001H Pure The #003H Ender Wiggins 14 Co Survey, A-676. The #1BU 7,675 ft true vertical. Earthstone’s Gold MDP1 29-17 Federal Com TB FC is in Section 14-25s-34e Julie Hughes Unit 8-3 produced headquarters are in Denver. was tested flowing 7.15 Mbbl of in Red Hills Field. It initially 852 bbl of 42.8-degree-gravity oil, with 8.214 MMcf of gas and flowed 2.272 Mbbl of oil, 2.176 crude, 929 Mcf of gas and 1.668 7 Results were announced by 11.42 Mbbl of water per day. The MMcf of gas and 2.173 Mbbl Mbbl of water per day from Stillwater, Okla.-based Terri- 23,106-ft well has a true vertical of water per day from Bone acid- and fracture-stimulated per- tory Resources LLC from a depth of 10,038 ft and is in Sec- Spring. Drilled to 19,840 ft, the forations at 8,033-17,980 ft. It Cement Field-Anadarko Basin tion 29-23s-31e. It was tested on true vertical depth is 12.337 ft, was drilled to 18,080 ft, and the workover. Located in Section a 128/64-in. choke, and the flow- and the well is producing from lateral bottomed about 2 miles 36-6n-10w of Caddo County, ing casing pressure was 823 psi. perforations at 12,474-19,754 ft. to the south-southeast in Sec- Okla., #2-36 Colonel initially OXY is a subsidiary of Hous- Tested on a 64/64-in. choke, the tion 3 with a true vertical depth flowed 5.65 MMcf of gas, 30 bbl ton-based Occidental Petro- shut-in casing pressure was 875 leum Corp. psi. Marathon’s headquarters are in Houston. Forest City 2 Two Lea County, N.M. Wolf- NEBRASKA camp discoveries were com- 5 A Wolfbone well was com- Denver- pleted from a drillpad in Section pleted in Lea County, N.M., by Julesburg 24-25s-32e by Houston-based Marathon Oil Corp. at #003H Salina EOG Resources Inc. The Blueberry Hill 19 TB Fee. #728H Valiant 24 Federal Com Located in Section 19-24s-35e, COLORADO produced 2.642 Mbbl of oil, the discovery flowed 4.321 Mbbl 6.585 MMcf of gas and 6.703 of oil, 4.992 MMcf of gas and Mbbl of water per day from per- 3.468 Mbbl of water per day. KANSAS forations at 12,719-20,088 ft. It Production is from perforations was drilled to 20,114 ft, and the at 12,359-19,757 ft. It was drilled true vertical depth is 12,553 ft. to 19,924 ft, and the true vertical MISSOURI The #723H Valiant 24 Fed Com depth is 12,074 ft. Gauged on a was tested flowing 2.762 Mbbl 48/64-in. choke, the flowing cas- of oil with 7.549 MMcf of gas ing pressure was 1,550 psi. and 6.093 Mbbl of water per day from perforations at 12,644- 20,003 ft. Gauged on a 64/64-in. choke, the shut-in casing pres- Raton sure was 1,691 psi. The total depth is 20,059 ft, and the true vertical depth is 12,555 ft. OKLAHOMA Dalhart 3 EOG Resources Inc. reported that a Wolfcamp com- 8 pletion in Lea County, N.M., was tested flowing 3.199 Mbbl of oil, 5.829 MMcf of gas and 12.06 Mbbl of water per day. 9 11 The #710H Peachtree 24 Federal Anadarko Com is in Section 24-26s-33e. 7 10 The Sanders Tank Field well was Arkoma drilled to 22,831 with a true ver- NEW MEXICO Hardeman tical depth of 12,582 ft, and pro- ARKANSAS duction is from perforations at 12,695-22,830 ft. It was tested on Ardmore a 92/64-in. choke, and the shut-in casing pressure was 1,310 psi.

Permian

1 North 2 4 Louisiana 5 3 Fort Worth

6 LOUISIANA

East Oil Production TEXAS Texas Gas Production © Rextag

90 Gulf Coast of 50-degree-gravity condensate Corp.) was tested flowing 79 bbl Midcontinent & Permian Basin Rig Count and 8 bbl of water per day from of oil, 2.22 MMcf of gas and 623 Nov. 8, 2019-Mar. 20, 2020 Springer. It was tested on a 14/64- bbl of water per day. The hori- 400 in. choke producing through zontal discovery, #4H-30X Chan- 350 untreated perforations at 11,798- nel, is in Section 30-17n-9w of 11,818 ft with a shut-in tubing Kingfisher County, Okla. Gauged 300 pressure of 8,381 psi and a flow- on a 44/64-in. choke, the shut-in 250 ing tubing pressure of 5,937 psi. casing pressure was 1,000 psi, 200 Chesapeake Operating Inc. and the flowing tubing pressure originally completed the well in was 587 psi. The Altona Field 150 five fracture-stimulated Springer well was drilled to the south to 100 intervals (79 net perforated ft) 19,695 ft with a true vertical between 12,370 and 13,693 ft depth of 9,199 ft. It bottomed in 50 flowing 3.91 MMcf of gas, 1 bbl Section 31-17n-9w. Ovintiv Inc. 0 of condensate and 2 bbl of water is based in Calgary, Alberta. FEB 7 DEC 6 JAN 3 NOV 8 FEB 14 FEB 21 FEB 28 MAR 6 DEC 13 DEC 20 DEC 27 JAN 10 JAN 17 JAN 24 JAN 31 NOV 15 NOV 22 NOV 29 per day; it was drilled to 13,950 ft. MAR 13 MAR 20 9 Camino Natural Kansas Oklahoma TX District 7B TX District 7C 8 A Meramec completion by Resources LLC announced TX District 8 TX District 8A TX District 9 TX District 10 Ovintiv Inc. (formerly Encana the completion of two Anadarko Source: Baker Hughes Co.

Basin horizontal producers 11 Calyx Energy III LLC Forest City drilled from a multiwell pad announced results from an NEBRASKA in Section 8-7n-7w in Grady extended-reach producer in Denver- County, Okla. According to IHS McIntosh County, Okla. The Julesburg Markit, #16-21-1WH Holden #3-18-19WH Edison is in Sec- Salina 0707 was tested on a 34/64-in. tion 7-8n-13e, and it produced choke flowing 13.6 MMcf of 8.85 MMcf of gas and 3.02 Mbbl COLORADO gas, 25 bbl of 55-degree-gravity of water per day. Production is condensate and 5.424 Mbbl of from perforated and treated water per day after acidizing and intervals in Woodford at 5,645- KANSAS fracturing in Woodford between 9,420 ft; Mayes, 9,822-10,045 15,725 and 24,420 ft. It was ft; Woodford, 10,105-12,783; drilled to the southeast and bot- Mayes, 12,955-13,495 ft; and MISSOURI tomed in Section 16, then south Woodford at 13,760-15,582 ft. It to 24,493 ft (16,129 ft true ver- was tested on a 64/64-in. choke tical) and bottomed in Section with a flowing tubing pressure 21-7n-7w. About 30 ft north on of 480 psi. The discovery was the pad, #17-20-1MHR Kimber drilled to 15,749 ft, and the true 0707 has a parallel lateral that vertical depth is 5,163 ft with a was drilled across Section 17 to bottomhole location to 2 miles to Raton a bottomhole location in Section the south in Section 19-8n-13e. 20. The total depth is 24,800 Calyx is based in Tulsa, Okla. ft, and the true vertical depth OKLAHOMA is 15,914 ft. It initially flowed Dalhart 14.6 MMcf of gas, 6 bbl of oil and 5.808 Mbbl of water per day 8 from Mississippian. It was perfo- rated, acidized and fractured at 15,812-24,681 ft and tested on a 32/64-in. choke. Camino Natural Resources is based in Denver. Anadarko 9 11 7 10 10 Two horizontal Sycamore Arkoma producers were completed from NEW MEXICO Hardeman drillpads in the Anadarko Basin ARKANSAS by Tulsa, Okla.-based Casillas Operating LLC. The pads are Ardmore in Section 6-5n-4w in McClain County, Okla. The #1-6MH Kilkenny flowed 640 bbl of 46-degree-gravity oil, 954 Mcf of gas and 763 bbl of water per Permian day. It was drilled south across the section to 16,947 ft (11,382 ft true vertical). It was tested on North a 92/64-in. choke after fractur- 1 ing and acidizing. Production 2 4 Louisiana 5 is from perforations at 12,014- 3 Fort Worth 16,806 ft. Within 1 mile to the east, #2-6MH Kilkenny flowed 648 bbl of oil with 1.07 MMcf 6 LOUISIANA of gas and 940 bbl of water per day. It was drilled to 16,767 ft, East but no true vertical depth was Oil Production TEXAS Texas reported. Production is from a Gas Production treated interval at 11,911-16,672 © Rextag ft and was tested on a 92/64-in. choke with a flowing tubing pres- sure of 1,861 psi.

Gulf Coast 91 EXPLORATION HIGHLIGHTS 7 Anadarko Petroleum 8 Denver-based Extraction Corp. completed a horizon- Oil & Gas Inc. completed two tal Turner exploratory test Wattenberg Field wells from a WESTERN US that flowed 1.402 Mbbl of drillpad in in Section 9-5n-65w 46.8-degree-gravity oil, 3.214 of Weld County, Colo. The #8W- 1 Calgary-based Crescent 4 In Sandoval County, N.M., MMcf of gas and 935 bbl of 20-24 MT Fed Glenmere was Point Energy announced DJR Operating LLC com- water. The #3569-31-T3XH drilled to 18,055 ft (6,886 ft true results from a horizontal Ute- pleted two Gallup producers EH Fed Galaxy E is in Section vertical) and was tested flowing land Butte delineation well in the from a San Juan Basin pad 30-35-69w of Converse County, 650 bbl of condensate, 3.539 Uinta Basin. The #13.5-21-16-3- in Section 11-22n-6w. The Wyo. Production is from a lateral MMcf of gas and 5.455 Mbbl 1W-H1 Ute Tribal is in Section #206H Venado Canyon Unit drilled to the south-southwest of water per day from Niobrara. 21-3s-1w, Duchesne County, was tested flowing 265 bbl of to 21,697 ft with a bottomhole Production is from perforations Utah. According to IHS Markit, 41-degree-gravity oil, 607 Mcf location in Section 35. The true at 8,514-18,028 ft. Gauged on the venture initially flowed 239 of gas and 169 bbl of water per vertical depth is 10,873 ft. It was a 20/64-in. choke, the flowing bbl of 40-degreee-gravity oil, 67 day. The Gallup lateral was tested following 50-stage fractur- tubing pressure was 2,561 psi. Mcf of gas and 390 bbl of water drilled to the southeast to 15,110 ing between 11,529 and 21,587 The #8W-20-14 MT Fed Heath per day. Production is from a ft (5,247 ft true vertical) and bot- ft. Anadarko’s headquarters are was drilled to 17,447 ft, 7,043 lateral (Lower Green River) that tomed in Section 13-22n-6w. It in The Woodlands, Texas. ft true vertical. It produced 683 was drilled to the north to 8,588 was tested after 45-stage fractur- ft to 18,431 ft with a bottom-hole ing between 6,058 and 15,027 ft. location in Section 16-3s-1w. The #207H Venado Canyon Unit The true vertical depth is 8,571 produced 315 bbl of oil, 1.303 ft. It was tested on a 14/64-in. MMcf of gas and 717 bbl of Alberta

choke following 42-stage fractur- water daily. It was drilled south- MINNESOTA ing between 8,618 and 18,151 ft, eastward to 13,478 ft (5,278 ft and the flowing casing pressure true vertical) and bottomed in 11 was 3,600 psi. Section 13-22n-6w. It was tested WASHINGTON NORTH DAKOTA following 38-stage fracturing 10 2 A multizone producer in between 5,826 and 13,397 ft. MONTANA Williston Sublette County, Wyo., was completed by Denver-based 5 Greenwood Village, Colo.- Jonah Energy LLC. The #31- based Impact Exploration 12 Stud Horse Butte is in Section & Production LLC reported 12-29n-108w. It was drilled to results from a horizontal Fron- 12,796 ft, and the true vertical tier well. The Converse County, depth is 12,783 ft. It was frac- Wyo., test, #447-5-32H Bacchus, Powder River tured in eight stages and pro- produced 1.024 Mbbl of oil, duced 52 bbl of oil, 7.053 MMcf 1.221 MMcf of gas and 2.453 SOUTH DAKOTA of gas and 445 bbl of water per Mbbl of water daily. Located in OREGON IDAHO Big day from Fort Union (9,189- Section 8-37n-75w, production Horn 9,436 ft), Lance (9,681-12,305 is from a lateral that was drilled ft) and Mesaverde (12,389- to the north to 23,173 ft and bot- 6 12,705 ft). It was tested on a tomed in Section 32-37n-75w. Wind 5 48/64-in. choke, and the shut-in The true vertical depth is 12,868 2 River 7 casing pressure was 1,000 psi. ft. It was tested on a 30/64-in. choke after 42-stage fracturing WYOMING 3 IHS Markit reported that between 13,113 and 23,076 ft. Denver-based DJR Operating Green NEBRASKA LLC has completed a horizon- 6 A Niobrara well completed River tal Gallup producer in the San by EOG Resources Inc. pro- 9 Forest Juan Basin. Located in Section duced 1.528 Mbbl of oil, 3.023 City 11-23n-8w in San Juan County, MMcf of gas and 2.247 Mbbl of 8 Salina N.M. The #108H Betonnie water per day. The #1018-1918H Denver- Tsosie Wash Unit initially pro- Katara is in Section 19-40n-73w 1 Julesburg duced via gas lift 520 bbl of in Converse County, Wyo. It is Sacramento NEVADA Uinta 40-degree-gravity oil, 1.89 producing from a lateral drilled Piceance MMcf of gas and 436 bbl of to the north to 21,464 ft, 11,293 COLORADO Oil Production water per day. Production is from ft true vertical, and bottomed Gas Production a lateral in Gallup drilled to the in Section 18-40n-73w. It was UTAH Railroad © Rextag southeast to 13,675 ft, 5,200 ft tested on a 28/64-in. choke after Valley true vertical. The venture bot- 43-stage fracturing between tomed in Section 13-23n-8w. The 11,807 and 21,317 ft. EOG is Paradox Betonnie Tsosie Wash was tested based in Houston. CALIFORNIA after 38-stage fracturing between 6,021 and 13,593 ft. Raton North12 San Slope Joaquin 3 San Juan4

ARIZONA NEW ALASKA MEXICO

Cook Inlet

92 bbl of condensate, 4.272 MMcf 287 Mcf of gas and 1.825 Mbbl Western US Rig Count of gas and 148 bbl of water per of water per day. Production is Nov. 8, 2019-Mar. 20, 2020 day. Comingled production is from a lateral in Codell that was 300 from perforations in Codell drilled to the north to 18,002 ft 250 (7,902-17,418 ft), Fort Hays (7,680 ft true vertical). It bot- (8,795-15,452 ft), Niobrara tomed in Section 28 and was 200 (11,700-11,865 ft) and Carlile tested after 36-stage fracturing

(13,046-13,402 ft). Tested on a between 8,132 and 17,936 ft. 150 20/64-in. choke, the flowing tub-

ing pressure was 2,779 psi. 10 Two Dunn County, N.D., 100 Bailey Field wells were com- 9 EOG Resources Inc. com- pleted from a single pad in 50 pleted a horizontal Codell dis- Section 14-145n-94w by Hous- covery in Laramie County, Wyo. ton-based Marathon Oil Corp. 0 The #523-0428H Carpenter is in The #41-14TFH Maher was FEB 7 DEC 6 JAN 3 NOV 8 FEB 14 FEB 21 FEB 28 MAR 6 DEC 13 DEC 20 DEC 27 JAN 10 JAN 17 JAN 24 JAN 31 NOV 15 NOV 22 NOV 29 Section 4-12n-63w, and it ini- tested flowing 4.967 Mbbl of MAR 13 MAR 20 tially produced via gas lift 597 oil, 1.54 MMcf of gas and 7.98 California Colorado Idaho Montana Nebraska bbl of 36.7-degree-gravity oil, Mbbl of water per day from Nevada New Mexico N Dakota Utah Wyoming Source: Baker Hughes Co.

Upper Three Forks. Production is from perforations at 10,980- 20,902 ft. It was drilled to the Alberta

MINNESOTA south to 21,037 ft, 10,565 ft true vertical, and tested after 45-stage 11 fracturing. Gauged on a 64/64-in. WASHINGTON NORTH DAKOTA choke, the flowing casing pres- 10 sure was 1,200 psi. Within 200 ft MONTANA Williston to the east, #11-13H Bryden pro- duced 4.081 Mbbl of oil, 1.606 MMcf of gas and 5.889 Mbbl of water per day from Middle Bakken. Production is from per- forations at 10,966-20,789 ft. It was drilled to the southeast to Powder River 21,013 ft, 10,496 ft true verti- cal, and was tested after 45-stage SOUTH DAKOTA fracturing. Gauged on a 64/64-in. OREGON IDAHO Big choke, the flowing casing pres- Horn sure was 775 psi.

6 11 In North Dakota’s Reunion Wind 5 Bay Field, Marathon Oil 2 Corp. completed a Middle Bak- River 7 ken discovery. The #11-17H WYOMING Miriam USA was drilled in Section 8-150n-93w in Moun- Green NEBRASKA trail County. It initially flowed River 4.866 Mbbl of oil, with 3.726 9 Forest MMcf of gas and 2.561 Mbbl City of water daily. Drilled to 22,740 8 Salina ft, 10,832 ft true vertical, pro- Denver- duction is from perforations at 1 Julesburg 12,903-22,606 ft and tested on a Sacramento NEVADA Uinta 64/64-in. choke with a flowing Piceance casing pressure of 775 psi. COLORADO Oil Production Gas Production 12 Houston-based Con- UTAH ocoPhillips Co. is drilling at Railroad © Rextag Valley the first wildcat on its Harpoon prospect in the National Petro- Paradox leum Reserve-Alaska. The #2 CALIFORNIA Harpoon is in Section 30-7n-3e, Umiat Meridian. The proposed Raton total depth was not disclosed, North12 and it reportedly will evaluate San Slope Joaquin Nanushuk oil zones. The Willow 3 Field discovery, #2 Tinmiaq in San Juan4 Section 34-10n-1w, is about 22 miles to the southeast. During testing it had a sustained 24-hour test rate of 1.6 Mbbl of oil, 631.5 ARIZONA NEW MMcf of gas and 221 bbl of ALASKA water per day from Nanushuk at MEXICO 3,688-3,708 ft.

Cook Inlet

93 INTERNATIONAL 4

5 HIGHLIGHTS 3 umerous oil and gas companies have already restricted or stopped employee travel due to the Ncoronavirus pandemic. Petronas evacuated all 80 of its Malaysian employees 10 from its operations in Iraq’s Garraf Contract Area, and 2 7 production is temporarily suspended until further notice. The British government’s Oil & Gas UK offices have 8 banned people traveling to offshore installations if they 9 have traveled recently to certain countries, including Italy, Iran, China and South Korea. 1 Royal Dutch Shell Plc was one of the first companies to suspend employee travel, and others did the same, including Equinor ASA. Chevron Corp. had sent home employees at its London offices in late February after an 6 employee displayed flu-like symptoms—the company is also screening workers and visitors. 11 Chrysaor reported that a member of the crew on its North Everest platform in North Sea, Block 22/10a-A, had been quarantined onboard the platform. Equinor re- ported that one person at the Martin Linge Field platform in the Norwegian sector of the North Sea had tested posi- tive for the coronavirus. Bristow adapted helicopters for offshore U.K. workers showing signs of sickness with modifications to quaran- tine flight crews and medics and passenger-monitoring support for suspected workers. —Larry Prado

1 Trinidad 2 Morocco 3 UK 4 Norway Touchstone Exploration SDX Energy announced a gas Paris-based Total SA announced Stavanger-based Equinor com- announced production test results discovery at an exploration well results from discovery at pleted wildcat wells, #15/3-12 S from #1-ST1 Cascadura-1ST1 in the Gharb Basin. The #1-Beni #30/12d-11 Isabella well in off- and #15/3-12 A in offshore Nor- on the Ortoire exploration block. Malek was drilled to 1,551 m shore U.K. license P1820. The way production license PL 025 The testing was performed and encountered commercial well was drilled in a water depth in the North Sea. The wells were in two stages—the first stage quantities of gas in both target of about 80 m. It encountered drilled about 11 km southeast of included the lower-most 162 ft horizons (Upper and Lower 64 m net pay of lean gas and the Gudrun prospect and about 4 of pay in Herrera, and the sec- Guebbas). According to the com- condensate and high-quality km southeast of the Sigrun pros- ond stage included 345 ft of pay pany, the discovery at #1-Beni light oil in Upper Jurassic and pect. The primary and secondary in the upper part of the same Malek and the previously com- Triassic sandstone reservoirs. exploration targets for #15/3-12 horizon. The first stage flow test pleted #2-OYF confirm that the Additional testing and data S were to prove petroleum in indicated an initial production prospectivity in its existing core analysis are planned to assess Middle and Upper Jurassic reser- range between 7.75-9.7 Mbbl of production and development the resources and to determine voir rocks (Hugin and Draupne). oil equivalent per day (approx- area extends to the north. Based the appraisal program required The 3,352-m well encountered imately 40-50 MMcf of gas per upon results from both wells, to confirm commerciality. The three separate oil-filled reservoir day and an estimated 1.1-1.4 the London-based company has P1820 license is operated by zones of 9 m, 4 m and 9 m in Mbbl per day of gas liquids). The de-risked up to 20 Bcf of P50 Total with a 30% working inter- Hugin, which are about 100 m second stage had a peak flow- prospective resources for future est, and Neptune Energy thick. The exploration target for back rate of 5.76 MMboe per day drilling of which approximately (50%), Ithaca Energy (10%) 3,796-m #15/3-12 A was to prove including 29.4 MMcf of gas and 10 Bcf is located in and around and Euroil Exploration (10%). petroleum in Upper and Middle 865 bbl per day of NGL. Wire- #1-Beni Malek. SDX estimates Jurassic reservoir rocks (Draupne line logs and drilling samples that #1-Beni Malek produced and Hugin). The well hit indicated approximately 1,037 ft approximately 900 MMcf of gas Draupne and Hugin with respec- of prospective hydrocarbon pay in Upper and Lower Guebbas, tive thicknesses of about 85 m in the Cruse and Herrera forma- and it is estimated that Upper and 120 m. There are indications tions at depths between 1,030 Guebbas flowed approximately of oil in a thin, 3-m sandstone and 6,350 ft. Calgary, Alber- 400 MMcf of recoverable gas. layer in Sleipner in the Middle ta-based operator Touchstone Jurassic. No formation tests were holds an 80% working interest, performed. Preliminary estimates and partner Heritage Petro- indicate 1-2.7 MMcm of recov- leum Company Ltd. holds a erable oil. 20% working interest.

94 Oil and Gas Investor • May 2020 Mountain High Maps industries. The Dhahran-based company expects field produc- tion to start in 2024. By 2036, it is estimated that approximately 2.2 Bcf of gas per day could be ® Copyright 4 produced, with approximately 425 MMcf of associated ethane 5

3 © per day, which is about 40% of 1993 Digital Wisdom, Inc. the company’s current produc- tion. Aramco also expects the field to produce approximately 550 Mbbl of liquids and conden- sate per day. 10 2 7 9 Bangladesh Bangladesh Petroleum Exploration & Production, 8 9 based in Dhaka, Bangladesh, has discovered a new gas field in the Nabinagar upazila of Brahman- baria. According to the com- 1 pany, the primary drilling was at #1-Srikail East in the Srikail East gas field. New production from the discovery will add 13 6 MMcf of gas per day from the field. The well is producing from an interval between 3,054 m and 11 3,082 m.

10 China China National Oil Corp. reported a discovery in the Bohai Bay, which is expected to be the first large-sized oil field in the Laibei lower uplift. The discov- ery well #3-KL6-1 was drilled to 1,596 m and encountered oil pay zones with a total thickness of approximately 20 m. During test- ing, it produced approximately 1.178 Mbbl of oil per day. The Kenli 6-1 structure is located in Laibei lower uplift in southern part of the basin. Area water 5 UK 6 Angola 7 Lebanon depth is about 19 m. Additional Rockrose Energy is planning Eni drilled and tested #3-Agogo, Total SA will begin explora- surveying is planned for the Neo- to drill the first of two infill the second appraisal well of the tion drilling in offshore Leba- gene lithological reservoir in the development wells on the West Agogo discovery in offshore non’s Block 4. It will be the first Laizhou Bay region of Bohai Brae Field in the U.K. sector Angola Block 15/06. Results exploration well on the block. Bay. China Nation Oil is based of the North Sea P108 Block from the test increased the esti- The drilling in Block 4 will test in Beijing. 16/07a. The wells, #1-WPGZ mated size of it by approximately the northward extension of Oli- and #1-WPOZ, are designed to 40% to 1 Bbbl of oil with fur- gocene and Miocene sandstones 11 Australia access 2-P reserves of more than ther upside to be tested in the (Tamar Sands) found in offshore Sydney-based Empire Energy 8 MMbbl and could increase the northern sector of the field. The Israel’s Leviathan and Tamar has received a permit to drill Brae complex output by up to 6 test also indicated a production fields. Nearby Block 9 also has exploration well #1-Carpentaria Mbbl of oil per day. A four-well capacity of more than 15 Mbbl a possible reserve in its carbon- in Northern Territory, Australia, drilling campaign is scheduled of oil per day. The appraisal well ate limestone formations, similar in Block EP187. The 2,900-ft at the Shell Oil-operated Arran was drilled to 4,321 m, and it in geology to offshore Egypt’s vertical venture will test Velkerri gas/condensate field develop- is about 4.5 km northwest of Zohr Field and Cyprus’s Calypso and Kyalla shales and will test ment. London-based operator #1-Agogo. Water depth in the prospect. Operator Total holds Velkerri at approximately 2,200 RockRose has a 30.4% working area is 1.7 km. The #3-Agogo 40% interest and operatorship of m and Kyalla at about 1,200 m. interest in Arran and the West encountered 120 m of net pay Block 4 in partnership with Eni Empire may perform a vertical Brae Field with 40% interest in in Miocene and Oligocene sand- (40%) and Novatek (20%). fracture stimulation of Velkerri partnership with Taqa Britani stones. Testing also showed that similar to the fracture stimulation (45.7%), Spirit Energy (8%) #3-Agogo is in communica- 8 Saudi Arabia a nearby exploratory, #1-Tanum- and Nippon Exploration & tion with #2-Agogo reservoirs Saudi Aramco received reg- birini in adjoining Block EP161, Production (6.3%). and the further extension of the ulatory approval to develop the followed by drilling and fracture Agogo discovery to the north. Al-Jafurah unconventional gas stimulation of a horizontal well Block 15/06 partners are Rome- field in the Eastern Province. section for an extended produc- based operator Eni (36.8421%), Al-Jafurah lies between Gha- tion test. Sonangol (36.8421%) and SSI war Field and Qatar in the ad Fifteen Ltd. (26.3158%). Dahna desert. There are three conventional source rock inter- vals, Tuwaiq Mountain, Hanifa and Jubaila within the basin’s Jurassic petroleum system. The volume of gas resources in the field is estimated at 200 Tcf of rich raw gas, which will provide the petrochemical and metallic

May 2020 • HartEnergy.com 95

NEW FINANCINGS FUNDS FLOW FOR MIDSTREAM

rivate-equity sponsor Tailwater Capital LLC tied solving the prevailing capital constraints of the ener- up a fourth fund in what otherwise has been a gy industry,” said Downie. Plargely barren landscape for capital raising. Its A midstream funding was also announced by En- Tailwater Energy Fund IV LP, focused on midstream Cap Flatrock Midstream, which made a $500 million infrastructure investments, raised $1.1 billion in cap- commitment to Tatanka Midstream LLC. Headquar- ital commitments, including a co-investment in one tered in San Antonio, Tatanka is focused on creat- of its portfolio companies. ing value by improving operations, maintenance and Based in Dallas, Tailwater said it would target op- overall efficiency of acquired businesses and build- portunities “across the midstream value chain from ing highly competitive assets that serve changing en- the wellhead to the refinery gates.” Jason Downie, ergy needs. co-founder of Tailwater with Edward Herring, said that Tatanka is led by three industry veterans: CEO as it puts capital to work in a “strategic and patient way,” Keith Casey, president Nate Weeks and CFO Carlos it expects to see “some of the most compelling buying Mata. Collectively, they have more than 75 years of opportunities we have come across in many years.” experience in the midstream and downstream sectors. Tailwater said it had a total of over $1.3 billion of Earlier, EnCap Flatrock Midstream made a capi- dry powder. The company noted it had backed man- tal commitment of $400 million to Edgewater Mid- agement teams operating in all the core onshore ba- stream LLC. Edgewater was formed to provide in- sins in the U.S. Since its founding in 2013, it has dependent midstream logistics solutions to refiners, raised over $3.7 billion and executed more than 100 producers and marketers of crude oil, refined prod- transactions representing over $20 billion in value. ucts and other bulk liquids. Its prior Tailwater Energy Fund III raised $1 billion Edgewater’s three founders are CEO Stephen and has committed capital to six portfolio companies. Smith, COO Mike Truby and chief commercial offi- “Having invested through multiple cycles, we are cer Brian Thomason. confident private equity will play a critical role in —Chris Sheehan, CFA

EQUITY

Company Exchange/ Headquarters Amount Comments Symbol

Tailwater Capital LLC N/A Dallas $1.1 billion Announced that it has closed Tailwater Energy Fund IV LP with $1.1 billion in capital commitments, including a co-investment for one of Fund IV’s platform companies. Having sourced capital from leading institution- al investors, Fund IV will continue to employ a disciplined and nimble approach to investing, targeting opportunities across the midstream value chain from the wellhead to the refinery gates.

Tatanka Midstream LLC N/A San Antonio $500 million Secured initial capital commitment of $500 million from EnCap Flatrock Midstream. Tatanka’s goal is to create value by improving the operations, maintenance and overall efficiency of acquired businesses and building highly competitive new assets that serve the continually growing and changing needs of the North American energy market.

Edgewater Midstream LLC N/A Houston $400 million Secured initial capital commitment of $400 million from EnCap Flatrock Midstream and the Edgewater management team. The company will focus on the acquisition, development and operation of pipeline and terminal solutions between and in proximity to major North American petroleum trading hubs and demand centers. DEBT

Exxon Mobil Corp. NYSE: XOM Irving, Texas $8.5 billion Priced $8.5B worth of senior notes in five tranches as follows: $1.5 billion of 2.992% senior notes due 2025 at par to yield 2.992%; $1 billion of 3.294% senior notes due 2027 at par to yield 3.294%; $2 billion of 3.482% senior notes due 2030 at par to yield 3.482%; $1.25 billion of 4.227% senior notes due 2040 at par to yield 4.227%; and $2.75 billion of 4.327% senior notes due 2050 at par to yield 4.327%. Proceeds are to be used for general corporate purposes.

May 2020 • HartEnergy.com 97 Gain A New ersetive

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HartStore_0319_WallMaps_OGI SIZED.indd 1 4/9/19 11:55 AM COMPANIES IN THIS ISSUE ­­This index refers to the pages of the story or news item in which the company is first mentioned. Advertisers are in boldface.

Company Page Company Page Company Page Alpine Energy Capital 77 EP Energy Corp. 22 Patterson-UTI Energy Inc. 100 Alvarez & Marsal 54 Equinor ASA 94 PDC Energy Inc. 81 Anadarko Petroleum Corp. 22, 51, 92 Extraction Oil & Gas 92 Performance Analytics Group LLC 10 Antero Resources Corp. 86 Exxon Mobil Corp. 20, 44, 82, 97 Petrofac Ltd. 100 Apache Corp. 18, 35, 62 Felix Energy II 82 Petroleum Strategies 63 Approach Resources Inc. 22, 77 Fitch Ratings Inc. 13 Petronas 94 Ascent Resources 86 Forty Under 40 75 PGIM Fixed Income 49 Baker Hughes Co. 24, 41, 100 GED Haynesville 88 Plains All American Pipeline LP 26 Bangladesh Exploration & Production 95 Goldman Sachs 11, 13, 32 Pioneer Natural Resources Co. 11, 26, 35, 52, 58, 100 Barclays 39, 48, 79 Goodrich Petroleum Corp. 38 Pool Well Servicing 78 Basalt Infrastructure Partners LLP 79 H20 Midstream 81 Prudent Financial 49 Battalion Oil Corp. 22 Halcón Resources Corp. 22 Beacon Offshore Energy 89 Halliburton Co. 41, 69, 100 Raymond James 42 Bernstein Research 9, 22, 35, 65, 100 HartEnergy Conferences 6-7 RBN Energy 66 BHP Billiton Petroleum Deepwater Inc. 80 HartEnergy Store 43, 96, 98 Regions Securities 8 BJ Services 42 HartEnergy.com 67 Rextag 81 BKD LTD 21 Haynes and Boone LLP 17, 77 Rockrose Energy 95 Black Bear Transmission 79 Headington Oil Co. 71 Roth Capital Partners 100 BOK Financial 12 Helmerich & Payne Inc. 4 Royal Dutch Shell Plc. 94 Breitburn Energy Partners LP 54 Helmerich & Payne Inc. 100 RS Energy Group 18, 32 Bridger Pipeline 66 Heritage Petroleum Co. Ltd. 94 Rystad Energy 18, 32, 65, 77, 100 Bruin E&P Partners 13 Hess Corp. 65, 100 S&P Global Platts 49 Burlington Resources Inc. 68 Hiland Partners LLC 71 Saipem S.p.A. 100 Byron Energy 88 Hilcorp Energy Co. 89 Sanchez Energy Corp. 56, 77 C&J Energy 78 Hokchi Energy 82 Saudi Aramco 95 C&J Well Services 78 Houston Energy LP 59 Savoy Energy LP 86 Caddo Parish Holdings LLC 88 Hunting 100 SBM Offshore 100 California Resources Corp. 13 IHS Markit 9, 13, 40, 86 Schlumberger Ltd. 41, 100 Callon Petroleum Co. 22, 38, 46 Impact Exploration & Production LLC 92 SDX Energy 94 Calyx Energy III LLC 91 ING 39 Shell Offshore Inc. 80 Camino Natural Resources 91 IOG Capital 19 Casilllas Operating 91 IPAA 84 Shell Oil Co. 80, 89 Carrizo Oil & Gas Inc. 22 Ithaca Energy 94 Sierra Constellation Partners LLC 23 Castex Energy 88 Jagged Peak Energy LLC 22 Sklar Exploration 86 Chespeake Energy Corp. 13 Jonah Energy 92 Sleeping Giant LLC 69 Chespeake Operating Inc. 91 Kayne Anderson Energy Funds IFC Solaris Water Midstream LLC 81 Chevron Corp. 21, 80, 94, 100 Keane Group Inc. 78 Sonangol 95 China National Oil Corp. 95 KeyBanc Capital Markets 52 Southwestern Production Co. 87 Chrysaor 94 Kimbell Royalty Partners 77 Spirit Energy 95 Cimarex Energy Co. 100 Kosmos Energy Ltd. 60 Springbok Energy I & II 77 Citi 9, 11 KPMG 32 SRC Energy Inc. 81 CNX Gas 87 Laredo Petroleum Inc. 18, 49 SSI Fifteen Ltd. 95 Comstock Oil & Gas 88 Layne Midstream 81 Stephens Inc. 100 Concho Resources Inc. 52, 81 Lazard 78 Subsea 7 SA 100 ConocoPhillips Co. 21, 52, 62, 93, 100 LLOG Exploration Co. 59, 89 Tailwater Capital LLC 27 Continental Resources Inc. OBC Louisiana Energy Conference 29 Tailwater Capital LLC 97 Continental Resources Inc. 32, 65, 71 Lyco Energy Corp. 69 Talos Energy Inc. 82 Continental Resource Development Inc. 81 Marathon Oil Corp. 52, 90 Taqai Britani 95 Core Lab 100 Maverick Natural Resources LLC 54 Tatanka Midstream LLC 97 COSCO Capital Management LLC 69 Meagher Energy Advisors 83 Crescent Point Energy 92 Mizuho Securities USA LLC 13 TD Securities 79 Deloitte 81 Morgan Stanley 35, 48, 78 TechnipFMC Plc. 100 Denbury Resources Inc. 13, 82 Morgan, Lewis & Bockius 80 Tenaris SA 100 Devon Energy Corp. 18, 50, 58, 88 Nabors Industries 42, 49 TEP Barnett USA 88 Diamondback Energy Inc. 24, 36, 52 National Oilwell Varco 100 Territory Resources LLC 90 DJR Operating LLC 92 Navitas 82 Third Coast Midstream LLC 79 Earthstone Energy Inc. 36, 90 Neptune Energy 94 Tidal Aviation 25 East Daley Capital 66 Netherland, Sewell & Associates Inc. 2 Total SA 81, 94 Eclipse Resources 87 NexTier Oilfield Solutions 78 Touchstone Exploration 94 EDF Trading IBC Nippon Exploration & Production 95 Transocean Ltd. 49 Edgewater Midstream LLC 97 Noble Energy Inc. 52, 58, 81, 100 Triple Crown Resources LLC 35 EIG Global Energy Partners 56 Northern Oil and Gas 15 Tudor, Pickering, Holt & Co. 35, 49 Empire Energy 95 Norton Rose Fulbright US LLP 79 Unit Corp. 13 En*Vantage 40 Novatek 95 University Lands 81 EnCap Flatrock Midstream LLC 97 Oasis Petroleum 65 Ventex Operating 86 EnCap Investments LP 82 Occidental Petroleum Corp. 22, 35, 51, 61, 90 Verdun Oil & Gas 88 Energy Transfer LP 79 Oceaneering International Inc. 100 W&T Offshore Inc. 59 Energy XXI 62 Oil and Gas Investor 23 EnergyNet 76 Oilfield Water Logistics 81 Werrus AquaMarine 61 EnergyNet 78 Opportune LLP 74 Werrus Energy 61 Enerplus Corp. 71 Outrigger Energy 16 Westwood Global 59 Eni 95 Ovintiv Inc. 91 Winston & Strawn LLP 26 Enterprise Products Partners LP 26 OXY USA 90 Whiting Petroleum Corp. 13, 38, 64, 77 EnVen Energy Ventures LLC 80 Ozark Gas Gathering LLC 79 Wood Mackenzie 13, 24, 35, 58, 81 Enverus 13, 18, 65, 77 Ozark Gas Transmission LLC 79 Wood Plc. 100 EOG Resources Inc. 36, 52, 81, 90, 100 Parsley Energy Inc. 11, 22, 35, 49 WPX Energy Inc. 22, 36, 49, 83

May 2020 • HartEnergy.com 99 AT CLOSING SEIZE THE DAY

tretch a rubber band too far, and it “As committed bears, we do not upgrade breaks. Snap! The pieces ricochet right lightly.” Sback to sting your face. So here we The market has priced in annihilation, are. Lower for longer eventually will lead which is misguided, and thus we see a ma- to stronger for longer—but only for the sur- jor opportunity, he said. Green said he du- vivors. For these, this slump of rare propor- plicated his models seven times to be sure, tions could be the opportunity of a lifetime. involving over 200 separate sector and Everyone is looking for the silver linings. company models. That research indicates to Would that be vastly lower service and him that numerous top-tier service compa- supply costs? Rystad Energy said recent- nies will survive and some have “material ly that in the last downturn (2014 to 2016), upside even in a $30 flat world.” He also ran LESLIE HAINES, oilfield costs fell about 37% overall, 45% in the models at $40. EXECUTIVE EDITOR- shale plays and up to 40% offshore. That sil- His scenarios indicate this: Yes, EBITDA AT-LARGE ver lining is not apt to be as easily found this will be crushed by as much as 50%. But the time around because most cost reductions majority of names will be able to show free along the supply chain have been exhausted. cash flow; balance sheet distress is limited What about a recovery time frame? For to an unlucky few. industry and the wider economy, it will Bottom line, he finds average upside of take several quarters, probably years. Oil 60% to his Buys at $30 flat. demand will follow—or, will it? We took He named seven outright winners: Baker heart seeing the vast flow of cars, trains and Hughes Co., National Oilwell Varco Inc., celebrations in Wuhan, a city of 11 million Tenaris SA, SBM Offshore, Subsea 7 SA, people where the virus started its deadly Saipem S.p.A. and Hunting. He also advised sweep across the globe. We hope it’s not that investors take a position in the “divi- going to have been a false start by the time dend-cut crew” that are admittedly risky, you read this. but with the dividend cut being the signal to But there could be another consequence. jump in. These names include Schlumberger On the environmental front of World War C, Ltd., TechnipFMC Plc, Helmerich & Payne vehicular and factory activity has dropped Inc., Wood Plc. and Petrofac Ltd. precipitously—but water and air pollution On his watch list, ranked as Market from carbon emissions has too. The canals perform, are Halliburton Co., Core Lab, in Venice are so clear that we can now see Oceaneering International Inc. and Patter- the fish swimming in them. Who knew? The son-UTI Energy Inc. Each faces risks but sky in Beijing turned blue. Pollution haze upside is possible. above Los Angeles highways is gone for What about E&P ideas? Morgan Stanley now. Consumers see in the most dramatic likes Chevron Corp., ConocoPhillips Co., way possible how reduced oil use makes Noble Energy Inc., Hess Corp., Pioneer such a big difference. This is going to turn a Natural Resources Co. and Cimarex Energy lot of assumptions on their head and further Co. Bernstein cited ConocoPhillips, Hess encourage the already widespread moves and EOG Resources. Non-Texas-oriented by governments to wean their economies midstream companies might be worth a off fossil fuels in the coming decades. look, it added. Roth Capital Partners rated In the near term, as Jim Wicklund, man- all E&Ps neutral. Analyst John White sus- aging director at Stephens Inc., said: “The pended price targets and earnings estimates business is not going away, but it is going to for the names under coverage until they re- have a difficult 2020 and 2021.” vise their guidance. It’s hard to figure which sector is hurting All analysts emphasize companies with the most, E&Ps or service companies—or good assets, a strong balance sheet and hedge which has become a screaming Buy. But position, and credit strength, or companies on April 6, one brave soul said it is time to that can afford to keep paying at least some jump into oilfield services. Nicholas Green, of their dividend without borrowing—or cut senior research analyst for Bernstein, issued them altogether in order to pay debt instead. this call: “We started covering the space in Silver linings may be further in the future. 2014. We’ve never been bullish, even in WTI could reach $55/bbl again in 2022 once the depths of ’16. Yet expectations have demand stabilizes, the economy revives and dropped far too low—for the first time in oil inventories are drawn down. Meanwhile, seven years, it is time to buy! analysts see U.S. production shut-ins ahead.

100 Oil and Gas Investor • May 2020