Energen Corporation ( EGN) Delaware Basin Joint Exploration Agreement with BHP Bilition Call February 22, 2012 11:00 AM ET Executives Julie Ryland – IR James McManus – Chairman, President and CEO John Richardson – President and COO Analysts Gabriele Sorbara – Caris & Company Timm Schneider – Citigroup Mario Barraza – Tuohy Brothers Presentation Operator
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At this time, I will turn the call over to Energen Chairman and CEO, James McManus. James?James McManus Thanks, Julie, and good morning to you all. This agreement with the quality industry partner is a great opportunity for Energen. In short, BHP and Energen Resources have the opportunity to co-own and jointly develop 56,549 net acres in the Delaware basin. Almost all the potential JV acreage is in Reeves County, West of the Pecos River, and represents the leasehold we’ve acquired over the last several years. For Energen Resources, this agreement means that any development West of the River, in the Wolf Camp shale, 3rd Bone Springs or the Avalon shale, will be at a faster pace than if we developed the acreage alone. And on multiple levels this agreement means that Energen is minimizing its risk while preserving substantial upside. Let’s take a look at some of the specifics of the agreement that we signed yesterday. BHP has agreed to purchase three wells that we’ve already drilled, for approximately 18 million. BHP will carry us in horizontal completion operations in two of the wells. In the third well, we will split completion costs. The map on our website indicates the three wells with a green dot. Once BHP completes the purchase of the three wells and initiates horizontal completions in the two wells, they will have earned a 50% undivided interest in 4,829 net acres. By May 1, 2012, BHP has the option to purchase from Energen Resources a 50% undivided interest in 51,720 net acres. To earn the right to exercise this option, BHP must begin horizontal completion in one of the wells it has purchased. Should BHP exercise this option, we would expect to recoup all of our investment to acquire the acreage, and still have a 50% interest in the acreage. On a go-forward basis, the two companies would have rights to the Wolf Camp shale, 3rd Bone Springs and Avalon shale.
I specify on a go-forward basis because we retain the producing zone in our existing wells on the acreage position. These wells are outlined in red on the map. Once BHP exercises its option to purchase, the two companies will form areas of mutual interest around the larger acreage blocks and acquire future acreage in the Delaware sub-basis on a 50/50 basis.The potential AMIs are outlined in purple and blue on the map. BHP would operate the AMIs outlined in purple, they represent about 75% of the net acres, we would operate the AMIs outlined in blue are approximately 25% of the net acres. We obviously don’t know at this point what the drilling activity level may be in 2012 and ‘13 from the potential joint exploration agreement. If BHP exercises its option to purchase, current year drilling could result and would most likely increase our planned capital investment. It also would have implications on the capital and drilling plans we’ve already outlined for 2013. Regardless, we plan to continue implementing our existing 2012 capital drilling and development plans for the Delaware basin, East of the River. So, what does this agreement mean to Energen? We stand to gain an excellent industry partner with whom to explore multiple trends across the substantial acreage position. We’re positioning ourselves to accelerate the exploration and possible development of multiple trends West of the Pecos River beyond what we could have done by ourselves. We get a crew working up to two horizontal Wolf Camp completions. We’re positioned to recoup our investment in acreage acquisition West of the River, and essentially own 50% at zero cost, provides additional cash that can be invested in acquisitions and additional capital requirements generated by the joint exploration, if they exercise their option. Read the rest of this transcript for free on seekingalpha.com