Energen Seeking Permian Pure Play With San Juan Exit

Energen Corp. (NYSE: EGN) is slimming down in hopes of generating $400 million to bridge a $200 million funding gap and develop its prized Permian Basin holdings.

Energen revealed plans on Feb. 11 to sell the remainder of its San Juan Basin assets—roughly 142 square miles—in 2016 along with noncore assets in the Delaware Basin.

A successful sale would leave Birmingham, Ala.-based Energen as a pure Permian Basin operator with the ability to focus on its high-quality assets in the Midland and Delaware basins.

The company needs to generate cash despite gutting its capex by about 70% year-over-year (yoy) at the midpoint.

Excluding assets marked for sale, the company has about 4,440 net drilling locations in the Midland and Delaware basins. Development of its deep inventory has been largely hindered by cost constraints.

"Energen's massive acreage footprint has been muted by limited financial capacity. The announcement of a planned San Juan exit and noncore Delaware asset sale [in combination with cost savings] highlights a step change in strategy," said Tudor, Pickering, Holt & Co. (TPH) in a report.

Under Pressure

Energen's remaining assets in the San Juan primarily produce natural gas with upside potential in the Mancos oil play.

The noncore assets in the eastern Delaware Basin consist of about 35,000 net acres in Winkler and Ward counties, Texas. Proved reserves on the acreage was 25 million barrels of oil equivalent at year-end 2015, according to Gabriele Sorbara, vice president of E&P/energy research at Topeka Capital Markets.

Sorbara estimates Energen could gain $50 million to $75 million in proceeds from the San Juan sale and $300 million to $400 million from the noncore Delaware asset sale.

The company said it is actively marketing the properties. Proceeds would cover Energen’s projected $212 million overspend in 2016, Sorbara said.

Energen's 2016 capex is expected to range between $250 million and $350 million—down from $1.1 billion in 2015. The company also said it plans to suspend its dividend.

Additional savings are expected to occur with the San Juan sale, including a 25% yoy decrease in general and administrative expenses. Energen said it has also implemented a variety of cost-cutting measures, such as a workforce reduction.

In 2016, the company aims is aiming to complete 47 gross/net horizontal wells in the Midland Basin, including 46 gross/net wells that were drilled but uncompleted (DUC) at year-end 2015.

Long Time Coming

Energen said its decision to exit the San Juan Basin came after assessing the early performance of exploratory wells it drilled in 2015 to test the oil play’s potential on portions of its acreage.

The company has yet to release the results from the exploratory wells in the Mancos, though it concluded its Midland and Delaware basin assets are superior, the release said.

RELATED: Energen Sells San Juan Basin Assets To Pay 2015 Bills

In March 2015, Energen sold the majority—about 70%—of its San Juan assets to Southland Royalty Co. LLC for $395 million. The assets included about 985 net operated wells on 205,000 net acres.

The sale provided Energen with the funds to operate through a rocky 2015.

Contact the author, Emily Moser, at emoser@hartenergy.com.

Sources: Energen Corp. Investor Presentation December 2015