Going Whole Hog Produces Some Nice Results
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Natural gas continues to be a tough business even though prices are well off their lows from April. It’s forcing many companies to abandon their dry gas drilling programs and dig deeper into natural gas liquids (NGLs) and oily plays. We’re hearing about many new plays emerging as drillers search for the more profitable opportunities.
One play that’s getting a bit more attention is the Hogshooter in the Granite Wash of Texas. Linn Energy (NASDAQ: LINE) and a couple of their industry peers are drilling into the formation with good results. Linn just updated their guidance as a result of the nine wells they drilled in the quarter. These wells had an average initial production rate of 1,983 Bbls/d of oil, 534 Bbls/d of NGLs and 3.4 MMcf/d of natural gas. That’s a bit below the first three wells they drilled which had initial rates of 2,489 Bbls/d and 3.6 MMcf/d of natural gas. However, it’s still above the 1,700 Bbls/d of oil that they’d been modeling.
Linn expects to drill a total of 20 wells in the Hogshooter this year. In the Granite Wash alone they have a 10 year drilling inventory and about 600 potential low-risk locations. Right now they’re focusing on the oil rich zones but they can adapt the program to focus on higher returns if there is a shift in commodity prices.
Focusing on the Hogshooter makes sense and cents as those wells produce $12 in revenue per Mcf against $7 per Mcf for their other liquids rich Granite Wash wells. That's a 71% increase in cash flow per Mcf and their updated guidance is a sign that their plan is working.
These results led Linn to raise their guidance which has been a moving target this year due to a 2nd quarter plummet in NGL prices and several acquisitions. You can see from this chart just how much their EBITDA, production and the distribution coverage ratio has bounced around this year:
|Third Quarter EBITDA||Total Production||Distribution Coverage Ratio||Full Year EBITDA||Total Production||Distribution Coverage Ratio|
|2011 4th Quarter Earnings||$1.187 Billion||500 to 540 Mmcfe/d||1.15 Times|
|First Quarter Earnings||$1.370 Billion||590 to 630 Mmcfe/d||1.18 Times|
|Second Quarter Earnings||$364 million||740 to 770 Mmcfe/d||1.12 Times||$1.350 Billion||645 to 690 Mmcfe/d||1.07 Times|
|9/27 Guidance Adjustment||$380 million||760 to 780 Mmcfe/d||1.25 Times||$1.365 Billion||660 to 685 Mmcfe/d||1.1 Times|
Linn's not the only one excited by the play as others in the industry are seeing great initial results from the Hogshooter. Chesapeake Energy (NYSE: CHK) has seen initial average production of 7,350 barrels of oil equivalent per day (BOE/d) from their Thurman Horn 406H well which has since dropped to 5,100 BOD/d. Another well, the Zybach 6010H had 2,400 BOD/d while the first well they completed, Meek 41 9H is now seeing 720 BOE/d after 90 days of production. They’re planning on drilling 11 additional wells before the end of the year. That decline rate will certainly be something to watch, but these are great results for Chesapeake.
Apache (NYSE: APA) has also drilled in the Hogshooter in the past, but are concentrating on other acreage within the Granite Wash. Right now they are drilling just above in the Tonkawa and Cottage Grove part of the formation as well as going deeper into the Cleveland and Granite Wash areas. They have 1.1 million net acres in the region with 33,000 total future drilling locations to choose from.
Because of their size, the Hogshooter, and the Granite Wash as a whole matters much more to Linn than Apache or Chesapeake. Linn grows a lot by acquisition, the Jonah and Hugoton Fields they acquired from BP (NYSE: BP) cost them $2.2 billion dollars and included a lot of low decline production but it also included 1,400 organic drilling locations. These organic drilling locations that they are acquiring provide exceptional returns for Linn. When combined with their acreage in the Granite Wash as well as the Permian Basin have a drilling inventory for nearly a decade of growth.
These organic growth opportunities significantly add to their production rate, but it’s not production for the sake of production. There are continuing to add to their liquids rich production which is important given where natural gas is trading. Linn continues the be the one energy company I want to buy as I love their balanced approach to growth both through the drill bit and by picking off assets from willing sellers.
latimerburned owns shares of Linn Energy, LLC. The Motley Fool owns shares of Apache and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.