Powerful Production

Amir Arif
Stifel
202-778-1975
[email protected]

We witnessed some key themes emerging during the second-quarter earnings season, including the following: Improved drilling times, wider spread implementation of pad drilling, and prior infrastructure investments are leading to marked improvement in efficiency gains. This trend was most evident with reduced completed well costs, with gains coming from a variety of areas, including reduced spud-spud (the process of beginning to drill a well) times, lower services charges on the completion side as capacity remains loose, a move toward slick-water fracs versus gel fracs and less use of ceramic proppants.

We saw operators reduce costs in the Permian, Bakken, Eagle Ford, Marcellus and Mississippi Lime.

The end result is higher production/cash flow per dollar of capital expenditure (or capex) spending, in addition to few rigs required to drill the same number of wells.

Infrastructure constraints persist, but should improve in the second half of 2013 as new capacity comes online.

During the quarter, we saw production growth limited by infrastructure constraints, including high line pressures in the Niobrara that choked older producer wells, insufficient takeaway capacity in the Delaware basin, and lack of takeaway/compression capacity in the Marcellus. We expect some of these issues to ease in the second half as new capacity comes online in the Marcellus and Niobrara.

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Penn Virginia Corporation (PVA) is up to 62,000 net acres in the Eagle Ford, after recently adding about 9,000 net acres in the play.

Penn Virginia has been testing downspacing to between 45 and 70 acres in the play, which it feels is successful and, based on this downspacing, now estimates [there may be] 750 undeveloped drilling locations in the play.

Production, when including the acquired Magnum Hunter Resources assets, was up 53% quarter over quarter, and Penn Virginia is currently running four operated rigs and participating in two non-operated rigs.

42.3 net Eagle Ford wells, not including seven net wells drilled by Magnum Hunger Resources prior to the acquisition, are forecasted to be drilled in 2013.

Penn Virginia reported second-quarter 2013 cash flow per share of $0.76 on a diluted basis, slightly below our $0.78 estimates, and second-quarter 2013 cash flow per share of $0.99 on a basic basis, in line with the Street forecast of $0.99. Second-quarter 2013 earnings per share were -$0.17, slightly below our estimate of -$0.14 and the Street at -$0.15.

Second-quarter 2013 production averaged 19.2 thousand barrels of oil equivalent (or mboe), up 21% quarter over quarter, as acquired Eagle Ford volumes aided the strong sequential growth.

However, actual production beat our 18.6 thousand barrels of oil equivalent per day estimate by 4%.

In addition to higher volumes, the acquired Eagle Ford assets improved the oil weighting from 42% in the first quarter of 2013 to 49% [in the most recent] quarter.

Despite the higher oil volumes, unit lease operating expenses fell by 12% quarter over quarter to $10.63 per barrel of oil equivalent, and lower than our $11.71 barrel of oil equivalent estimate.

Jason Gammel
Macquarie Capital (Europe)
44-20-3037-4085
[email protected]

[In the second quarter,] Royal Dutch Shell’s (RDS-A, RDS-B) financial objectives [were] maintained—on a net basis. The major targets of cash flow from operations (CFFO) of $175 billion to $200 billion and net capital expenditures of $120 billion to $130 billion from 2012-2015 are essentially unchanged. Cash flow from operations was $12.4 billion in the quarter, including a positive working capital contribution of $4 billion; over the six quarters since the beginning of 2012, Shell has generated $70 billion of cash flow from operations, which is right on the pro rata pace for the midpoint. However, that $70 billion does include $7.5 billion of positive working capital contributions.

We note that the net capital expenditure target has been maintained despite the expectation for accelerated divestitures, which amounts to raising the organic capital expenditure target.