Exploration & Production | Quarterly / Earnings Reports
Energen Sees Income Drop, Production Increase in Q3
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Energen Corp. has reported an update on its third quarter financials and operational results.
The company also updated its Midland and Permian Basin operations, which can be accessed here.
Third Quarter Earnings
For the three months ended September 30, 2013, Energen reported a consolidated net loss of $19.3 million, or $0.27 per diluted share. Excluding non-cash items, Energen’s adjusted income from all operations (a non-GAAP measure) totaled $36.1 million, or $0.50 per diluted share, in the third quarter of 2013; in the same period last year, adjusted income from all operations was $31.8 million, or $0.44 per diluted share.
Non-cash items in the current-year third quarter were mark-to-market revenue losses of $63.6 million ($39.7 million after tax, or $0.55 per diluted share) and a write-down of North Louisiana/East Texas assets totaling $24.6 million ($15.7 million after tax, or $0.22 per diluted share). In the third quarter of 2012, mark-to-market revenue losses totaled $46.8 ($29.7 million after tax, or $0.41 per diluted share).
After excluding income from discontinued operations (Black Warrior Basin and North Louisiana/East Texas), Energen’s adjusted income from continuing operations in the third quarter 2013 totaled $34.2 million, or $0.47 per diluted share in 2013, as compared with $28.2 million, or $0.39 per diluted share, in 2012.
The impact of a 15 percent increase in production from continuing operations, including a 21 percent increase in oil volumes, and higher realized oil and natural gas prices was partially offset by increased depreciation, depletion and amortization expense (DD&A), lease operating expense including production taxes (LOE), and administrative expense.
Relative to the company’s budget, third quarter 2013 adjusted income from all operations ($0.50 per diluted share) was below expectations largely due to higher stock-based compensation expense ($0.04 per diluted share) and increased exploration expense ($0.07 per diluted share) primarily associated with the write-off of approximately 4,200 miscellaneous acres of unproved leasehold.
Reconciliation of Consolidated GAAP Net Income to Adjusted Income from Continuing Operations
Energen’s adjusted EBITDA from all operations (excluding non-cash items) totaled $210.1 million in the third quarter of 2013 and compared with $162.3 million in the prior-year third quarter. The company’s oil and gas exploration and production unit, Energen Resources Corporation, had adjusted EBITDA from all operations (excluding non-cash items) of $209.9 million in the third quarter of 2013 and $163.9 million in the same period a year ago.
Energen’s adjusted EBITDA from continuing operations (excluding mark-to-market) totaled $208.3 million in the third quarter of 2013 and compared with $158.8 million in the prior-year third quarter. Energen Resources had adjusted EBITDA from continuing operations (excluding mark-to-market) of $208.1 million in the third quarter of 2013 and $160.4 million in the same period a year ago.
Third Quarter 2013 Financial & Operating Results
Energen Resources
Excluding non-cash items, Energen Resources’ adjusted income from all operations totaled $45.1 million in the third quarter of 2013 and $42.1 million in the same period a year ago. Energen Resources’ adjusted income from continuing operations totaled $43.3 million in the third quarter of 2013 and $38.6 million in the same period a year ago.
Production from continuing operations in the third quarter increased 15 percent year-over-year. Oil and natural gas liquids (NGL) volumes increased 27 percent, reflecting the company’s focus on its assets in the liquids-rich Permian Basin. Third quarter production in the Permian Basin grew 36 percent year-over-year, including 62 percent in the Midland Basin and 78 percent in the Delaware Basin.
Per-unit LOE from continuing operations in the third quarter of 2013 increased approximately 8 percent from the same period a year ago to $14.39 per barrel of oil equivalent (BOE). Base LOE and marketing and transportation expenses increased approximately 4.5 percent to $11.29 per BOE largely due to increased workovers and repairs and gathering and water disposal expenses, partially offset by lower expected ad valorem taxes. Commodity price-driven production taxes increased approximately 22 percent on a per-unit basis to $3.10 per unit.
Per-unit DD&A expense from continuing operations in the 3rd quarter of 2013 totaled $20.27 per BOE, increasing approximately 26 percent from the same period last year largely due to year-over-year increases in development costs and production and to the impact of reduced year-end 2012 natural gas reserves resulting from lower commodity prices.
Per-unit net G&A expense increased approximately 39 percent in the third quarter of 2013 to $4.84 per BOE primarily due to increased compensation expense tied to Energen’s stock price.
Alagasco
Energen’s utility operations under Alagasco generated a seasonal net loss of $9.0 million in the third quarter of 2013 as compared with a net loss of $10.0 million in the same period a year ago.
Year-to-Date 2013 Financial & Operating Results
Consolidated
For the nine months ended September 30, 2013, Energen’s consolidated net income totaled $120.5 million, or $1.67 per diluted share. Excluding non-cash items, Energen’s year-to-date adjusted income from all operations (a non-GAAP measure) totaled $166.9 million, or $2.31 per diluted share; in the same period last year, adjusted income from all operations was $182.2 million, or $2.52 per diluted share.
Non-cash items in the current year-to-date period were mark-to-market revenue losses of $48.5 million ($30.7 million after tax, or $0.43 per diluted share) and a write-down of assets being held for sale in North Louisiana/East Texas totaling $24.6 million ($15.7 million after tax, or $0.22 per diluted share). In the same period in 2012, mark-to-market revenue gains totaled $34.0 ($22.0 million after tax, or $0.30 per diluted share) and a commodity price-driven write-down of East Texas assets totaled $21.5 million ($13.4 million, or 19 cents per diluted share).
After excluding income from discontinued operations (Black Warrior Basin and North Louisiana/East Texas), Energen’s adjusted income from continuing operations in the year-to-date 2013 totaled $160.6 million, or $2.22 per diluted share in 2013, as compared with $172.7 million, or $2.39 per diluted share, in 2012.
Energen’s adjusted EBITDA from all operations (excluding non-cash items) totaled $675.6 million in the first nine months of 2013 and compared with $605.5 million in the same period last year. Energen Resources’ adjusted EBITDA from all operations (excluding non-cash items) was $571.3 million in the first nine months of 2013 and $502.8 million in the same period a year ago.
Energen’s adjusted EBITDA from continuing operations (excluding mark-to-market) totaled $669.3 million in the year-to-date period 2013 and compared with $596.1 million in the same period a year ago. Energen Resources had adjusted EBITDA from continuing operations (excluding mark-to-market) of $565.0 million in the year-to-date period 2013 and $493.3 million in the same period a year ago.
Energen Resources
Excluding non-cash items, Energen Resources’ adjusted income from all operations totaled $128.9 million through the first nine months of 2013 and $145.0 million in the same period a year ago. Energen Resources’ adjusted income from continuing operations totaled $122.6 million in the current year-to-date period and $135.6 million in the same period a year ago.
Year-to-date 2013 production from continuing operations increased 10 percent year-over-year. Oil and NGL volumes increased 21 percent, reflecting the company’s focus on its assets in the liquids-rich Permian Basin. In the Permian Basin, year-to-date production grew 28 percent year-over-year, including 40 percent in the Midland Basin and 82 percent in the Delaware Basin.
Per-unit LOE from continuing operations in the first nine months of 2013 increased approximately 18 percent from the same period a year ago to $15.07 per BOE. Base LOE and marketing and transportation expenses increased approximately 20 percent to $12.20 per BOE largely due to increased workovers and repairs, equipment rental, water disposal and gathering costs, and environmental compliance. Commodity price-driven production taxes increased approximately 13 percent on a per-unit basis to $2.87 per unit.
Per-unit DD&A expense from continuing operations in the first nine months of 2013 totaled $19.10 per BOE, increasing approximately 23 percent from the same period last year largely due to year-over-year increases in development costs and production and to the impact of reduced year-end 2012 natural gas reserves resulting from lower commodity prices.
Per-unit net G&A expense in the 2013 year-to-date period increased approximately 31 percent from the same period last year to $4.73 per BOE. This largely was due to increased stock-based compensation.
Alagasco
Alagasco generated net income of $37.6 million through the first nine months of 2013. In the same period last year. The utility’s net income in the same period a year ago totaled $37.2 million.
2013 Guidance
Energen’s guidance range for production from continuing operations for 2013 is 23.4-23.8 MMBOE, which is slightly below prior guidance for all operations after adjusting for 2.0 MMBOE of estimated discontinued operations. (Energen’s prior guidance for production from all operations was 25.7-26.1 MMBOE, issued on August 28; adjusting for discontinued operations, the prior guidance equated to production from continuing operations of 23.7-24.1 MMBOE).
The decrease in the production guidance range largely reflects lower gas and NGL volumes in the San Juan Basin, lower NGL production in the Permian Basin, and less oil production in the Delaware Basin. In the San Juan Basin, production is less than expected largely due to unanticipated workovers on some high-volume wells, unscheduled third-party plant downtime, pipeline imbalances, and delays/reduction in scheduled pay-adds. Most of these impacts were felt in the 3rd quarter. Lower NGL production in the Permian Basin is due to drier gas being produced by some 3rd Bone Spring wells and price-driven ethane rejection in the Midland Basin; the impact of these factors was felt in the 3rd quarter and expected to continue for the remainder of the year. In the Delaware Basin, oil production is being hampered by interference issues in highly fractured areas in the 3rd Bone Spring play.
Drilling capital in 2013 is estimated to be $1.08 billion in 2013, up $80 million from the prior estimate. The increase largely is due to increased drilling costs (largely related to mechanical drilling challenges in the company’s exploratory program and to overages in some development drilling), additional working interest (primarily in the Midland Basin), and a net increase in costs associated with program changes; the latter includes four additional 3rd Bone Spring wells, additional facilities in the Delaware Basin, and increased non-operated projects partially offset by a reduction in testing, exploratory spuds, and lower drill-and-complete costs on numerous 3rd Bone Spring wells.
Energen’s revised guidance range for 2013 consolidated after-tax cash flows (excluding disposal gains or losses) is $889-$904 million. Energen Resources’ after-tax cash flows are estimated to be $788-$803 million, and Alagasco is expected to generate after-tax cash flows of approximately $101 million. In addition, the company has received net proceeds of approximately $150 million from the October sale of its Black Warrior Basin assets; these proceeds have been used to reduce short-term debt. of guidance for 2013 income from all operations (excluding mark-to-market and disposal gains or losses) to $3.10-$3.30 per diluted share to reflect increased stock-based compensation, increased exploration expense for 3rdquarter leasehold write-off, and lower production. Income from continuing operations in 2013 is estimated to be $3.05-$3.25 per diluted share.
In addition to the mark-to-market gains or losses recognized quarterly on derivative instruments, we expect a net gain on the disposal of assets in 2013. This is the result of a gain of $35.0 million ($23.2 million after tax) to be booked in the 4th quarter for the October 2013 sale of the company’s Black Warrior Basin assets. Because this gain will more than offset the loss on the impairment of North Louisiana/East Texas assets that was recognized in the third quarter, the resulting net gain (after tax) on disposal for 2013 will be $7.5 million.
Energen Resources’ estimated exploration and production expenses from continuing operations per BOE in 2013 are:
Approximately 78 percent of the company’s total estimated production for the remainder of 2013 is hedged. Assumed prices applicable to Energen Resources’ unhedged volumes for the remainder of the year are $90.00 per barrel of oil, $0.86 per gallon of NGL, and $4.00 per Mcf of natural gas.
Hedges also are in place that limit the company’s exposure to the Midland to Cushing differential to approximately 30 percent of its estimated oil production for the remainder of 2013. Energen Resources has hedged the WTS Midland to WTI Cushing (sour oil) differential for 0.9 million barrels of oil production at an average price of $2.99 per barrel and the WTI Midland to WTI Cushing differential for 1.1 million barrels at an average price of $1.00 per barrel.
Energen’s 2013 guidance includes assumed prices applicable to Energen Resources’ unhedged oil basis differentials for the remainder of the year. They are $4.25 per barrel (sour oil) and $3.00 per barrel (WTI Midland to WTI Cushing). Energen estimates that approximately 68 percent of its oil production for the remainder of 2013 is sweet.
The company’s current hedge position for the last quarter of 2013 is as follows:
In the table above, basin-specific contract prices for natural gas have been converted for comparability purposes to a NYMEX-equivalent price by adding to them Energen Resources' assumed San Juan and Permian basis differentials of $0.19 per Mcf.
Average realized oil and gas prices for Energen Resources' production associated with NYMEX contracts as well as for unhedged production will reflect the impact of basis differentials; average realized oil prices also will reflect oil transportation charges of approximately $2.50 per barrel for the remainder of 2013; and average realized NGL prices will be net of transportation and fractionation fees that are estimated to average $0.11-$0.17 per gallon for the remainder of 2013. The company also has basin-specific natural gas contracts whereby Energen Resources will receive the contracted hedge price.
Given Energen’s hedge position for the remainder of the year, changes in commodity prices are not expected to have a significant impact on Energen's 2013 cash flows. Every $1.00 change in the average NYMEX price of oil from $90 per barrel represents an estimated net impact of $175,000; every 1-cent change in the average price of liquids from $0.86 per gallon represents an estimated net impact of approximately $210,000; and every 10-cent change in the average NYMEX price of gas from $4.00 represents an estimated net impact of $30,000.
Price-related events such as substantial basis differential changes could cause earnings sensitivities to be different from those outlined above.
At the end of September 2013, Alagasco was on track to earn within its allowed range of return on average equity of $375-$380 million.
Energen Hedge Position Strong in 2014
Energen has built a strong hedge position in 2014 and has already started establishing its hedge position in 2015.
Basin-specific contract prices for natural gas have been converted for comparability purposes to a NYMEX-equivalent price by adding to them Energen Resources' assumed San Juan and Permian basis differentials of $0.19 per Mcf in 2014 and 2015.
Average realized oil and gas prices for Energen Resources' production associated with NYMEX contracts and unhedged production will reflect the impact of basis differentials; average realized oil prices also will reflect transportation charges; and average realized NGL prices will be net of transportation and fractionation fees.