2010-11-16-2010-11-16
To buy 50,000 net acres in PA Marcellus shale with related midstream assets, gaining 7 MMcf/d & gathering capacity of 25 MMcf/d.
Newfield Exploration Co. (NYSE: NFX) plans to double its acreage position in the Marcellus shale in northeastern Pennsylvania by acquiring certain producing gas assets from EOG Resources Inc., Houston, (NYSE: EOG) for approximately $405 million, as part of EOG's previously announced plan to divest both producing and non-producing gas properties in North America.
The assets include 50,000 net acres in the Susquehanna River Basin in Bradford County, with 7 million cubic feet per day (MMcf/d) of gross production from five producing gas wells. The assets represent less than one-half of EOG's total North American production. EOG will retain approximately 170,000 net acres in the Marcellus shale in northwestern Pennsylvania.
Current gathering capacity on the acreage is 25 MMcf/d, with further capability to expand to 95 MMcf/d in early 2011. Newfield estimates that more than 400 gross operated well locations exist on the acreage and that net unrisked reserve potential ranges between 1.5- and 2 trillion cubic feet equivalent. Upside also includes an inventory of 11 uncompleted wells.
Newfield intends to drill an additional 10 wells on the acreage by year-end 2010; as well, the company plans to run two operated rigs and invest approximately $100 million in 2011 to substantially hold the acreage by production. To allow for the re-allocation of some $70 million for its Appalachian development program, the company will defer exploratory drilling in the deepwater Gulf of Mexico in 2011.
Net production in 2011 from the acquired Marcellus properties is expected to exceed the production associated with Newfield's non-strategic assets planned for divestment in 2011, according to the company.
"This transaction doubles our footprint in the Marcellus and adds core acreage with attractive development drilling opportunities," adds Lee K. Boothby, Newfield chairman, president and chief executive. Boothby adds that the EOG Marcellus acreage is high-quality and has a low-cost structure. "It will complement our portfolio of oil assets and provide us with greater flexibility in future commodity price cycles," he says. "The deal is consistent with our strategy of building a business in the Appalachian region, just as we have done in the Midcontinent and the Rocky Mountains."
Boothby notes that existing infrastructure on the properties is a plus. "The acreage is contiguous and has a gathering system in place that will allow us to access markets and grow production," he says.
In its latest quarterly report released in early November, EOG unveiled plans to maintain a low debt-to-total capitalization ratio by selling certain gas properties. Exiting third-quarter 2010, EOG's total debt was approximately $3.8 billion, for a debt-to-total capitalization ratio of 27%.
The company expects to sell between $600 million and $1 billion of both producing and non-producing North American assets. Mark Papa, EOG chairman and chief executive, noted in the report that the company does not intend to sell-down or form joint ventures in any of its crude oil resource plays as it shifts from gas to liquids, however. The majority of these transactions are expected to close in fourth-quarter 2010.
"These sales will add liquidity to partially fund EOG's liquids-weighted capital expenditure program," says Papa.
The current deal is expected to close by year-end 2010. Newfield plans to finance the transaction with its undrawn $1.25-billion revolving credit facility. Longer term, borrowings under the credit facility would be reduced with proceeds from the sale of certain non-strategic assets.
Newfield entered the Appalachian Region in October 2009, and assembled a team of professionals with experience in assessing and developing resource plays. The company's initial entry into the region came through a joint venture with Hess Corp. covering approximately 70,000 gross acres primarily in Wayne County, Pennsylvania. The partnership has drilled three exploratory wells in Wayne County to date. Newfield operates the venture with a 50% interest.