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American Energy Talks Permian/Wolfcamp 2015 Drilling Plans

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   |    Thursday,January 08,2015

American Energy Partners, LP, today provided an operational and financial update outlining substantial production growth, adjustments to its planned drilling activity levels in response to a lower oil price environment and evidence of its strong liquidity and hedging position entering 2015.

Production, Drilling Activity and Well Cost Reduction Update

AEPB exited 2014 with a company record of more than 20,000 barrels of oil equivalent (boe) per day of net production and anticipates its net production for the 2014 fourth quarter will be in the range of 15,500 to 16,000 boe per day, an increase of approximately 3,150 boe per day, or 25%, compared to the 2014 third quarter.  As a result of adding 23 gross operated Wolfcamp Shale wells to production during the 2014 fourth quarter (approximately twice the number the previous operator added in the 2014 third quarter), AEPB ended 2014 with 106 gross operated horizontal Wolfcamp wells on production, exceeding its goal of more than 100 gross operated wells.

2015 Drilling Plans

The company entered 2015 with a five operated horizontal drilling rig program targeting the Wolfcamp Shale formation in Reagan County, Texas.  Given the substantial decline in oil prices over the past few months, the company is electing to maintain rather than increase this five rig program to its previously planned nine rig program until oil prices improve.

Notably, AEPB has implemented a well cost reduction initiative that has resulted in initial cost savings of approximately $1.0 million per well compared to wells drilled by the prior operator and AEPB is targeting additional reductions of approximately $1.0 million per well by year-end 2015.  The company will continue to monitor market conditions and adjust activity levels accordingly with a key focus on maintaining adequate liquidity and delivering attractive returns.

Hedging Position Update

AEPB's current hedging position for 2015 oil production includes downside protection through swaps and purchased puts at a weighted average price of $91.68 per barrel (including gains from closed positions) on approximately 4.7 million barrels of oil, or approximately 70% of the company's anticipated oil production during 2015.  Additionally, the company has secured basis protection between Midland, Texas and Cushing, Oklahoma markets through financial swaps and term sales at a weighted average discount to Cushing, Oklahoma of $2.41 per barrel on approximately 2.6 million barrels of oil, or approximately 38% of AEPB's anticipated oil production during 2015.

The company's hedging position for natural gas includes downside protection through swaps at a weighted average price of $4.62 per thousand cubic feet on a total of 502 million cubic feet, or approximately 29% of the company's anticipated natural gas production during the 2015 first quarter.

The mark-to-market value of these closed and open positions as of December 31, 2014 was approximately $160 million.

Year-End Liquidity and Revolving Credit Facility Update

AEPB exited 2014 with $100 million of borrowings outstanding under its $650 million revolving credit facility and more than $50 million of cash, resulting in more than $600 million of total liquidity entering 2015.  The company anticipates utilizing its credit facility from time to time during 2015 to fund ongoing capital expenditures and for general corporate purposes.  Additionally, to provide greater financial flexibility in 2015, AEPB and its lending group have amended the maintenance covenants in the company's revolving credit facility.  The primary changes to the credit facility include:

• Suspending the leverage ratio requirement (consolidated debt to consolidated EBITDAX) for the 2014 fourth quarter;
• Increasing the leverage ratio requirement to 5.75 times (from 5.25) in the 2015 first quarter, and lowering the required ratio 0.25 times each subsequent quarter until the 2016 first quarter, when the ratio would remain constant at 4.75 times (no change from current) until maturity of the facility; and
• Adjusting the annualization formula for the calculation of consolidated EBITDAX for purposes of the leverage ratio test: 1) for the 2015 first quarter, consolidated EBITDAX will be annualized by multiplying the 2015 first quarter by four; 2) for the 2015 second quarter, the consolidated EBITDAX for the six-month period ending June 30, 2015 will be annualized by multiplying by two; and 3) for the 2015 third quarter, consolidated EBITDAX for the nine-month period ending September 30, 2015 will be annualized by multiplying by 1.333. Consolidated EBITDAX for the subsequent quarters will then revert to the standard last twelve month methodology.

Jeffrey L. Mobley, AEPB's Chief Financial Officer, stated, "We appreciate the support of our lending group in amending terms under our revolving credit facility to provide greater flexibility to manage the company in a lower oil price environment.  Our strong oil and natural gas hedging position for 2015, which combined with our cost reduction initiatives underway, will enable us to deliver attractive drilling returns to our stakeholders.  We are pleased to enter 2015 with more than $600 million of liquidity and we plan to closely monitor market conditions before resuming our previously planned acceleration of operated drilling in our Wolfcamp Shale play beyond the five rigs we are utilizing today.  We continue to be pleased with the performance of our asset base, and even at a steady rig count of five operated rigs in 2015, we anticipate 2015 production to exceed 2014 production by approximately 125%."