The Denver-Julesburg Basin, which
spans Colorado, Kansas, Nebraska and Wyoming, continues to be one of the most
attractive domestic oil and gas plays available to investors, with the
Wattenberg Field, centered in northeastern Colorado’s Weld County, being a
particular hot spot for numerous E&Ps. The Wattenberg Gas Field is one of
the biggest natural gas deposits in the entire country at around 200k BOEPD
estimated and has produced well over 4T cubic feet of gas to date, mostly from
the Niobrara and Codell sandstone formations, as well as the even deeper Muddy
J. Projections for 2019 indicate Wattenberg will likely surpass 500k BOEPD in
gas production, or roughly 50% of the gas coming out of North Dakota’s Bakken,
which has ramped up equally as fast, thanks to an abundance of tight shale
formations.
Oil production in Weld County in
particular is up roughly 34% from last year (25.8M bbls through May) and
accounts for nearly 82% of statewide oil production, according to Colorado’s
Oil and Gas Conservation Commission. With solid projections that this year will
meet or exceed last year’s record output (64.4M bbls), before movingly steadily
higher over the next five years, the region’s biggest players like Noble Energy
(NYSE:NBL), Anadarko Petroleum (NYSE:APC) and Encana (NYSE:ECA), which
represent collectively around 78% of Weld County’s total oil and gas
production, are looking like excellent buys as the December WTI contract slumps
to around $75 a barrel.
A strong dollar and OPEC’s
resistance to cut output have helped push domestic crude inventories up to
four-month highs of around 381.6M bbls, even as gasoline and distillate
stockpiles shrank by 1M bbls and 2.2M bbls respectively, according to a recent
Bloomberg analyst survey, with December gas around $4.40 per MMBtu. These price
dynamics have created a buying opportunity for investors looking to get in on
the energy action moving forward, allowing them to snap up stock in some of top
players in the game today, at what are relatively discounted share prices.
Meanwhile, natural gas production
in Weld County is lagging approximately 5% behind 2013 figures, mostly due to a
lack of takeaway infrastructure. At around 120 new wells per month being
drilled in Weld County, it is clear that the exceptional rate of return
E&Ps are finding here is continuing to generate mounting capital
investment. The attraction is primarily due to the superb development economics
found here, which are on par with the Bakken and Eagle Ford, as relatively
shallow plays and short laterals combine with high BTU content, liquids-rich
natural gas, as well as typically long-lived production and reserve values.
DJ-Niobrara on the whole has added
another 15 drilling rigs this year, and the record-breaking output levels
achieved in August (235M BOPD) are thanks in large part to a continuous surge
of horizontal drilling that has been taking place since 2009, something which
has even forced the start of four new crude pipeline construction projects in
the last three months. Even as energy looks relatively cheaper heading into
this winter, activity in the DJ Basin’s Niobrara shale is accelerating towards
the 2019 projection of around 450M bbls/day. Congested takeaway logistics
should be somewhat relieved by the new pipeline infrastructure that is set to
come online, likely resulting in a total of roughly 600M bbls/day throughput to
Cushing, Oklahoma being realized by as early as 2017.
One of the top ten oil and gas
producers in Weld County, Synergy Resources (NYSE MKT: SYRG), has an easily
accessible share price compared to some of the bigger players and is heavily
focused on the core of the Wattenberg, with their extant production all coming
from wells in the Greater Wattenberg Area. The company announced late last
month that they have doubled down on their regional growth strategy, which
employs low risk drilling in proven areas and either acquisition of existing
wells or recompletion using advanced hydraulic stimulation techniques, with a
bold new purchase agreement. The company will have expanded (post customary due
diligence) their existing core Wattenberg footprint by approximately 20%, to
over 35k net acres, via a $125M purchase agreement (70% cash and 30% common
stock) once the deal is complete. This sizeable deal will significantly add to
the company’s already enviable leasehold acreage, which spans the core
Wattenberg, the NE Wattenberg Extension (over 25.7k acres in Weld and Morgan
counties), and Nebraska (over 182.6k acres).
Producing assets in the new
acquisition, which includes 73 operated and 11 non-operated vertical wells
(with over 5k gross acres besides that have rights to the Codell and Niobrara
formations), saw net production from September in the range of roughly 1.24k
BOED on average, with another 190 BOED net from wells that were shut-in by
other operator’s offset completions. Also included in the acquisition are 91
net horizontal PUD locations (proven undeveloped) and 35 in-process permits for
operated horizontals, as well as comprehensive 3D seismic and another 2.4k
gross acres bearing rights to the Muddy J (J-Sand), Shannon, and Sussex
formations. Ten wells in the acquisition are currently in production and seven
more (being completed) are slated to go into production before the close of
2014, priming the pump for a noteworthy increase to SYRG’s already superb oil
and gas portfolio.
The purchase agreement comes fast
on the heels of mid-October’s proved reserve evaluation, which showed a 133%
year-over-year jump to 32.2M BOE, with a 126% rise in the PV10 value of the
company’s proved reserves, to around $534M. Roughly 61% of SYRG’s portfolio
reserve value is in the proved developed producing (PDP) and proved developed
non-producing (behind pipe) categories, with the remainder being proved
undeveloped reserves and the overall volume being evenly split between gas
(including natural gas liquids) and oil. The co-CEO of SYRG, William E. Scaff,
Jr., chalked the company’s increasing proved reserves growth up to their
multi-rig horizontal drilling program and noted that prior to the latest acquisition,
Synergy had thirty plus PDP operated horizontals in their third party (Ryder
Scott Company) reserve report.
Given that SYRG had three rigs in
operation as of mid-October this year and disclosed plans to have another 30 to
35 horizontal wells in production by late 2015, prior to their recent purchase
agreement, the company is clearly on track for success, especially considering
their use of a $75 net oil price in calculating their fiscal 2014 and 2015
strategic and budgetary guidance. Synergy’s other co-CEO, Ed Holloway, even
noted late last month that recent operating analysis, using $60 net oil and $4
net gas, indicated EBITDA margin on revenue of over 60%, even without factoring
in lower drilling/servicing costs which would be associated with lower
commodity prices. Synergy posted a 125% year-over-year revenue increase last
month for FY14, driven by a 103% increase in production and a 11% rise in the
company’s realized average BOE selling price.
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