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Energen IDs Permian, San Juan Basin Sweet Spots in 3Q

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   |    Thursday,October 30,2014

Energen Corp. has reported its third quarter 2014 update.

Highlights:

• 3Q14 production of 6,651 MBOE increases 5 percent from 2Q14
• CY14 production guidance range narrowed and raised to 25.6-26.2 MMBOE
• Company estimates December 2014 exit rate could exceed 77,000 boepd
• Energen’s first Martin County Cline well generates 24-hour peak IP (3-phase) of 2,425 boepd (74% oil)
• Company’s first Wolfcamp B well in Martin County tests at peak 24-hour IP (3-phase) of 1,172 boepd (94% oil)
• San Juan Basin Mancos oil potential strengthened by outstanding results from two more non-operated wells
• Acreage position in Mancos oil play increased approximately 15,000 net acres to 90,000 net acres
• 11 gross Wolfcamp development wells completed in 3Q14 performing above internal expectations
• Company anticipates possible sale of majority of gas assets in San Juan Basin in 2015

James McManus, Energen's chairman and chief executive officer, commented: "Energen had a terrific 3rd quarter. Production exceeded our internal expectations by half-a-million barrels. We now estimate that our Permian Basin production in 2014 could grow approximately 23 percent from 2013 levels and that our December 2014 exit rate could exceed 77,000 barrels of oil equivalent per day (boepd).

"Our excellent exploratory and development drilling results in the Midland Basin served to further reinforce our current plans to add two development rigs in the Midland Basin in 2015. And the results of our exploratory wells in the Delaware Basin served to increase our excitement about the Wolfcamp potential across much of our acreage there while underscoring the need for continued delineation.

"The results coming from the Mancos formation oil play in the San Juan Basin continue to impress. We have a 50 percent non-operated working interest in four Mancos oil wells drilled this year in the south-central portion of the basin, and the results of wells three and four were even better than the first two. We continue to secure drilling permits and plan to run a rig in 2015 to test our acreage position in the play. We recently purchased approximately 15,000 net acres in the Mancos formation oil window, bringing our total position in the emerging play to 90,000 net acres. If we find what we expect from our 2015 drilling program, this play will compete on a return basis with our best Permian opportunities.

"As we look ahead to 2015 in our budget planning process, we are very conscious of the recent pull-back in oil prices and are scenario-planning for different price levels. Given our quality of assets, under-levered balance sheet, financial capacity, and hedge position, we believe we are extremely well-positioned to continue moving forward with most of our preliminary plans for 2015, even if oil prices were to average in the low $80s. Midland Basin Wolfcamp economics remain attractive at those levels; however, we may choose to limit our lower-return, exploratory drilling activity in the Delaware Basin Wolfcamp. Even at sub-$80 price levels, Midland Basin Wolfcamp economics remain solid.

"Energen's balance sheet may be further de-levered in 2015 through asset sales. We anticipate marketing for sale the majority of our gas assets in the San Juan Basin as well as 5,300 net acres and assets in the northeast quadrant of Glasscock County located in the Eastern Shelf of the Permian Basin.

"Despite the current uncertainty surrounding near-term oil prices, Energen is in an excellent position -- both in terms of our assets and our financial strength -- and we have a great deal of flexibility with which to manage our capital investments and operating plans to best serve the interests of our shareholders."

Operational Updates

Energen Drills First Cline, Wolfcamp C Wells; Talks Future Plans

Energen Talks High Hopes for Oily Mancos Shale Play

Asset Sales Under Consideration

Energen expects to market for sale the majority of its natural gas assets in the San Juan Basin as well as properties in the northeast quadrant of Glasscock County located in the Eastern Shelf of the Permian Basin. Both assets were marked down in the 3rd quarter to their estimated fair market value in anticipation of being designated as "held for sale" by year-end 2014.

Energen has not invested drilling capital in its San Juan Basin gas assets for several years, and management does not expect to see in the foreseeable future a recovery in prices sufficient to allow these natural gas plays to compete for capital with the company's extensive oil opportunities.

The assets under consideration to be sold include approximately 985 net operated wells on some 208,000 net acres. These assets had proved reserves at year-end 2013 of 73.1 MMBOE, of which 84 percent was natural gas and 16 percent was NGL; associated production in 2014 is estimated to be 6.7 MMBOE.

In 2014 Energen has been testing the Cline potential on an isolated 5,300 net acres in far eastern Glasscock County. Through the prior testing of vertical targets, the company determined that, on this acreage, the Cline shale offered the greatest potential to be economically competitive with its drilling opportunities in the core of the Midland Basin. While the results of the Horwood SN 36-37 #401H Cline well were good for this northeastern Glasscock area (see page 3), the company has decided its deep inventory in the core of the Midland Basin offers better economics and repeatable returns.

3^rd Quarter Comparisons, 2014 vs 2013

• Permian Basin production increased 15 percent as new drilling in the horizontal Wolfcamp in the Midland and Delaware basins more than offset declines in the company's legacy assets in the Central Basin Platform and from a reduced vertical Wolfberry program.
• NGL production increased 27 percent largely due to less ethane rejection and new horizontal Wolfcamp drilling.
• Average realized oil prices were lower by 6 percent, primarily due to the impact of wider WTI Midland to WTI Cushing and WTS Midland to WTI Cushing differentials.
• LOE per unit decreased 5 percent to $10.18 per BOE largely due to lower water disposal costs and to decreased marketing and transportation expenses. Per-unit production taxes and ad valorem taxes increased approximately 7 percent as lower price-driven production taxes were more than offset by higher ad valorem taxes.
• Per-unit DD&A expense totaled $20.71 per BOE, increasing approximately 2 percent largely due to year-over-year increases in development costs.
• Per-unit net G&A expense of $4.18 per BOE fell approximately 17 percent from the same period a year ago largely due to stock-based compensation.
• Interest expense increased $1.4 million to total $11.5 million.

4Q and Full-year 2014 Guidance

Energen's 2014 drilling and development capital is estimated to remain under $1.4 billion, in keeping with prior guidance. The company production guidance midpoint, however, is estimated to increase 0.5 MMBOE to 25.9 MMBOE (70,950 boepd). Energen is both raising and narrowing its 2014 production guidance range to 25.6 to 26.2 MMBOE (70,135-71,780 boepd). The company is maintaining its 4th quarter production guidance midpoint of 6.9 MMBOE (75,000 boepd) within a range of 6.6 to 7.2 MMBOE (71,740-78,260 boepd).

Approximately 72 percent of the company's 4^th quarter production guidance midpoint of 6.9 MMBOE is hedged. Hedges also are in place that limit the company's exposure in the 4^th quarter to the Midland to Cushing differential. Energen has hedged the WTS Midland to WTI Cushing (sour oil) differential for 0.3 million barrels of oil production at an average price of $3.30 per barrel and the WTI Midland to WTI Cushing differential for 0.6 million barrels at an average price of $3.08 per barrel. Energen estimates that approximately 76 percent of its oil production for the remainder of 2014 will be sweet. Gas basis assumptions are $0.05 per Mcf in the Permian and San Juan basins.

2014e Capital, Drilling and Production Summary

Utility Sale Completed

Energen completed the sale of its natural gas utility company, Alabama Gas Corporation, to The Laclede Group on September 2, 2014. The transaction's effective date was August 31, 2014. The $1.6 billion purchase price included the assumption of approximately $267 million of utility debt. Energen's net pre-tax proceeds from the sale totaled approximately $1.3 billion (subject to additional working capital adjustments post-close). Energen estimates its after-tax proceeds will be $1.1 billion.

Immediately following the close, Energen repaid $570 million in outstanding principal under its December 2013 Senior Term Loans along with $750 million outstanding under its October 2012 Credit Facility Agreement. Energen also executed a new syndicated, senior secured, revolving credit facility with initial aggregate lender commitments of $1.5 billion and a reserve-backed borrowing base of $2.1 billion. In the fourth quarter of 2014, the company intends to draw approximately $230 million in borrowings under the September 2014 Credit Facility to pay income taxes generated from the sale; the full tax obligation is being partially offset by the expensing of intangible drilling costs incurred during 2013 and 2014.

Financial Results

Energen reported GAAP net income from all operations of $457.3 million, or $6.22 per diluted share. After adjusting for a mark-to-market gain, impairment losses in advance of potential asset sales, dry hole expense, and discontinued operations, Energen's adjusted income from continuing operations in the 3^rd quarter of 2014 totaled $45.2 million, or $0.62 per diluted share. This compares with adjusted income from continuing operations in the 3^rd quarter of 2013 of $46.6 million, or $0.64 per diluted share. The difference between the periods primarily is attributable to a 13 percent increase in oil and natural gas liquids (NGL) production being more than offset by lower realized oil and NGL prices and increased DD&A expense.

Energen's adjusted EBITDAX from continuing operations totaled $229.3 million in the 3^rd quarter of 2014, up approximately 5 percent from $217.9 million in the same period last year.