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Energen’s Third Act Gushes

In the mid-’90s, Energen Corp. transformed itself from a utility to an oil and gas exploration company. Now it is focusing on the oil side of the production ledger.

James McManus had the foresight to diversify Energen’s exploration into a focus on oil, a move that proved very profitable for the company.

James McManus had the foresight to diversify Energen’s exploration into a focus on oil, a move that proved very profitable for the company.

Photo by Art Meripol

When James McManus took over as the CEO of Energen Corp. in 2007, the company was on the brink of a transformation.

Up until the early 1990s, Energen had consisted mainly of its gas utility, Alagasco. But by the mid-1990s, the company began moving toward a second act, investing more capital in the company’s natural gas and oil exploration subsidiary, Energen Resources, to grow its earnings, says McManus.

“We were primarily focused on gas during that time,” McManus says, “and we were using a strategy of acquiring properties from larger companies like Burlington [Resources] and Amoco, taking the properties they didn’t want and then trying to add value to them that a company our size could do. We were pretty successful in that strategy and grew the overall size of the company.”

Specifically, Energen began buying up properties in the Permian Basin, an oil-rich region of west Texas and southeastern New Mexico. The company also purchased land in the San Juan Basin, considered in the energy industry to be one of the nation’s top natural gas deposits. The San Juan stretches from northwest New Mexico to northeast Arizona and from southwest Colorado to southeastern Utah.

But nearly a decade later, Energen officials began worrying about an imminent glut of natural gas in the market, McManus says. While their customers would applaud lower gas bills, Energen officials knew the company would need a third act — a stronger focus on oil drilling — to keep earnings high.

“We took a conscious approach around 2008 to diversify ourselves into oil and really beef up our exposure to oil, because we were concerned that natural gas prices might go down,” McManus says. “We didn’t know they would go as low as they went. We actually thought they would go down to $5 or $6 mcf (per thousand cubic feet). We didn’t know they would go down to below $4. So it turned out to be a very good move for us.

“We invested about $1 billion between 2009 and 2012 to increase our land position in the Permian Basin to kick-start and accelerate our oil growth,” he says.

In fact, Energen made at least seven major land acquisitions in the Permian between 2009 and 2012, most in the sub-basins known as the Delaware and Midland basins. Today the company owns approximately 300,000 acres in the Permian Basin, McManus says.

By the end of 2012, Energen had some 753 MMBOE (million barrels of oil equivalent) — proved, probable and possible reserves. By the middle of 2013, oil production by Energen Resources was at 10.5 MMBOE, more than double the oil production figures for the entire year in 2009. The company’s production of natural gas liquids, which was 1.8 MMBOE in 2009, was at 3.3 MMBOE by mid-year 2013. Conversely, production of natural gas only rose from 8.4 to 9.9 MMBOE between 2009 and 2012. By mid-year 2013, natural gas production stood at 9.8 MMBOE.

Energen’s capital budget for 2013 was $1.08 billion, and the company’s capital budget for 2014 is $1 billion, says McManus, which he says will go toward developing oil.

At the same time, he says, no new investments will be made on natural gas. In fact, in October 2013, Energen sold its natural gas properties in Alabama’s Black Warrior Basin for $160 million.

“We really didn’t have any future investment opportunities because the [natural gas] prices were so low,” says McManus. “So there really wasn’t any new drilling to do. We thought that we would monetize that asset, take it and redeploy it where we have growth and investment opportunities.”

No new investments are planned for the San Juan properties, McManus says. Moreover, in October, the company announced in a news release that operations in the north Louisiana and east Texas regions are up for sale.

“I think focusing on oil makes more sense given the price disparity between the two commodities,” says Ryan Oatman, CFA, vice president of oil and gas equity research at SunTrust Robinson Humphrey Inc. “It’s a nice strategic shift, and we’ve seen the industry as a whole shift more towards oil, given the greater margins available in oil development. I think that shift makes sense for Energen, as well.”

To support the new focus on oil, in 2012 Energen’s Board of Directors elected David Godsey as senior vice president of exploration and David Minor as senior vice president of operations for Energen Resources. Then in September 2013, the Board elected Davis Richards into a newly created position of vice president of drilling and completions for Energen Resources.

A drilling rig taps into Energen’s prospect in the Wolfcamp formation of the Permian Basin of west Texas.

Photo courtesy of Energen

The concentration on oil seems to have paid off. In July 2013, the company announced that tests on several Wolfcamp wells in the Permian Basin produced positive results and stocks that month rose 7.5 percent, to $60.74. By the end of October, Energen announced successful results from four new wells in the same region, which sent the stocks up about 4 percent, to more than $80, according to Energen reports. As of early December, the stock had drifted back to around $68. 

“Not only did they get these nice Wolfcamp wells on the Midland Basin on the eastern part of the basin,” says Oatman, “but they also got some very solid rates out of the Wolfcamp wells they tested on the western part of the basin, the Delaware Basin side. They really answered the main question that I think was holding the stock back — as to where they’re going to get their next meal, so to speak, or what they’re going to drill next. They did it even better than what we were expecting. They got it to work in both basins, whereas we were only counting on success from one basin.”

Energen periodically uses derivative commodity instruments like swaps to minimize the risk of market volatility for oil and gas. Currently, Energen has close to 10 million barrels of oil hedged in 2014 at about $92.64 and 5.8 million barrels hedged for 2015 at $88.85, McManus says.

Energen and others in the oil industry have benefitted in recent years from advances in technology, especially in directional or horizontal drilling. With horizontal drilling, flexible pipes, like fingers, can reach across great distances to wells that cannot be reached with vertical drilling.

Technologies like this, say experts, have helped cut the United States’ dependence on foreign oil. In fact, the International Energy Agency reported in 2013 that the United States could be the world’s largest producer of oil by 2015.

Energen also uses a technique called hydraulic fracturing or “fracking,” a practice that involves pumping large quantities of water, sand and a chemical mixture into rock formations at high pressure to create fractures in rock formations. Pressure from the fluid mixture helps open and widen fractures within rock formations, making it easier and more economical to extract oil and gas from more unconventional rock formations.

Over the years, however, environmental groups nationwide, including Black Warrior Riverkeeper Inc., in Birmingham, have criticized fracking, arguing that surface waters could become contaminated and that energy companies should be more transparent in informing the public about the chemicals used in the fracking process.

“The concern with fracking is that it’s a practice that’s not adequately regulated as far as we’re concerned,” says Nelson Brooke, who leads the organization. “It allows a myriad of chemicals, and in most cases, they are unknown to the public.”

McManus says Energen has never had an incident of groundwater contamination as a result of hydraulic fracturing. He also points out that Energen is a participant in FracFocus, a national hydraulic fracturing chemical registry that is managed by the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission. Through the website’s database, the public can find out which chemicals companies in their area are using in hydraulic fracturing.

However, a report published earlier this year by Harvard University’s Environmental Law Program criticized FracFocus for allowing trade secret protection and a lack of communication between FracFocus and the states when companies submit their disclosures.

Energen will, in 2014, begin recycling water used in the fracking process. The goal is to reuse about 50 percent of the produced and flowback water by the end of the year, says Energen spokesperson Sherri Goodman. They also are researching ways to use more brackish water in operations to limit the use of fresh water. They also have replaced gas-fired engines with electrical pumping units and retrofitted valves and other equipment to minimize methane gas going into the atmosphere. 

With its increased oil production, some oil and gas analysts have wondered about Alagasco’s future. In the 1990s, the utility made up more than 80 percent of Energen’s business. Today, about 80 percent of the company’s earnings come through Energen Resources, McManus says.

“We have three choices,” he says. “Keep the structure as it is, spin it off as a separate subsidiary or sell. That’s probably a decision we will make in 2014.”
McManus says that for now, the focus is on continued drilling in the Permian, and, so far, he says, the future looks promising.

“With the last eight wells, it looks like the company is going to have a depth of inventory within the Wolfcamp formation that could be 10 years all by itself,” McManus says. “And there are other formations to test in the Permian horizontally that we haven’t tested yet. No one two years ago was talking about the Wolfcamp in the Permian Basin. It wasn’t really on the radar screen. Now it looks like it could be one of the most productive formations in the United States.”

Gail Allyn Short is a freelance writer for Business Alabama. She lives in Birmingham.

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