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Energen Tilts Toward Oil
Energen Corp. (NYSE: EGN) is an exploration and production company with a diversified base of properties - and a relatively low profile among investors. The company also owns a small, regulated gas utility in the southern U.S. Energen will focus on developing its oil assets in 2010, as it likes the prospects of this commodity over natural gas.
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Energen's largest business is Energen Resources, which will provide an estimated 85% of the company's total net income in 2009. Production growth is estimated at 8% for 2009 and 3% for 2010. Investors who are concerned about the price of oil and natural gas due to the possibility of a weak recovery in the economy should take comfort knowing that Energen has 57% of its production hedged for 2010, at $85.42 and $8.48 per Mcf (1,000 cubic feet) for oil and natural gas, respectively. Energen has proven reserves of 1.6 Tcfe (trillion cubic feet equivalent) located in four different basins in the U.S.
San Juan Basin
Energen has 829 Bcfe of proven reserves in the San Juan Basin, located in New Mexico and Colorado. Although this is more than 50% of the company's proven reserve base, Energen is only committing $65 million out of its $290 million 2010 capital budget in this area.
Permian Basin
Energen is bearish on natural gas in the short term. The company is focused on oil development in 2010, and the Permian is where its oil assets are. It is spending $217 million of its 2010 capital budget here. Earlier in 2009, Energen spent $182 million to buy the Permian Basin assets of Range Resources (NYSE: RRC). These assets are in the Fuhrman-Mascho field, and Energen picked up 15.3 million barrels of oil equivalent (BOE) for $182 million.
The Fuhrman-Mascho field doesn't have the same high profile as other fields under development by the exploration and production industry, but clearly the area is productive and economical at current prices. Another company very active here is Arena Resources (NYSE: ARD), which just committed a fourth drilling rig and plans to drill 175 wells here by the end of 2009.
Black Warrior Basin
One unique part of the Energen story is its strong position in the Black Warrior Basin in Alabama. The company has 50% interest in 660,000 gross acres that it received in a farm-out agreement with Chesapeake Energy (NYSE: CHK).
Some of this acreage is prospective for the Chattanooga, Conasauga and Floyd Shales - three low-profile shales that are not currently being heavily developed by the industry. Energen is committed in the farm-out agreement to drilling a well into both the Chattanooga and Conasauga Shales to test their potential. The company is nearing completion on the Cain 6-6 No.1 well, which is testing the Chattanooga Shale.
North Louisiana/East Texas
One thing that Energen is not doing is plunging full blast into the Haynesville Shale, which presumably underlies its acreage in East Texas and North Louisiana. The company is spending only $7 million in this area in 2010, barely enough to cover one horizontal well.
Either the company does not have acreage that is prospective for the Haynesville Shale play, or it is low-balling expectations and will blindside the Street one day. A third possibility is that since the company is bearish on natural gas in the short term and has its acreage held by production, it can therefore take its time in developing the area.
Regulated Utility
Energen's second division - the one it doesn't talk about much - is Alagasco, its regulated utility in Alabama. This utility serves 400,000 customers and is allowed a 13.15-13.65% return on equity on its operations there. While some investors might be anxious for Energen to shed a business that is not as "sexy" as the exploration and production business, the steady cash flows help fund the dividend that the company pays.
Energen is a bear on natural gas and is shifting the bulk of its capital expenditures to the Permian Basin in 2010, where it is focused on developing its oil assets. This plan may pay off given the weak fundamentals in the natural gas markets. (Learn about factors that affect oil prices in our article, What Determines Oil Prices?)
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IN PICTURES: How To Make Your First $1 Million
Energen's largest business is Energen Resources, which will provide an estimated 85% of the company's total net income in 2009. Production growth is estimated at 8% for 2009 and 3% for 2010. Investors who are concerned about the price of oil and natural gas due to the possibility of a weak recovery in the economy should take comfort knowing that Energen has 57% of its production hedged for 2010, at $85.42 and $8.48 per Mcf (1,000 cubic feet) for oil and natural gas, respectively. Energen has proven reserves of 1.6 Tcfe (trillion cubic feet equivalent) located in four different basins in the U.S.
San Juan Basin
Energen has 829 Bcfe of proven reserves in the San Juan Basin, located in New Mexico and Colorado. Although this is more than 50% of the company's proven reserve base, Energen is only committing $65 million out of its $290 million 2010 capital budget in this area.
Permian Basin
Energen is bearish on natural gas in the short term. The company is focused on oil development in 2010, and the Permian is where its oil assets are. It is spending $217 million of its 2010 capital budget here. Earlier in 2009, Energen spent $182 million to buy the Permian Basin assets of Range Resources (NYSE: RRC). These assets are in the Fuhrman-Mascho field, and Energen picked up 15.3 million barrels of oil equivalent (BOE) for $182 million.
The Fuhrman-Mascho field doesn't have the same high profile as other fields under development by the exploration and production industry, but clearly the area is productive and economical at current prices. Another company very active here is Arena Resources (NYSE: ARD), which just committed a fourth drilling rig and plans to drill 175 wells here by the end of 2009.
One unique part of the Energen story is its strong position in the Black Warrior Basin in Alabama. The company has 50% interest in 660,000 gross acres that it received in a farm-out agreement with Chesapeake Energy (NYSE: CHK).
Some of this acreage is prospective for the Chattanooga, Conasauga and Floyd Shales - three low-profile shales that are not currently being heavily developed by the industry. Energen is committed in the farm-out agreement to drilling a well into both the Chattanooga and Conasauga Shales to test their potential. The company is nearing completion on the Cain 6-6 No.1 well, which is testing the Chattanooga Shale.
North Louisiana/East Texas
One thing that Energen is not doing is plunging full blast into the Haynesville Shale, which presumably underlies its acreage in East Texas and North Louisiana. The company is spending only $7 million in this area in 2010, barely enough to cover one horizontal well.
Either the company does not have acreage that is prospective for the Haynesville Shale play, or it is low-balling expectations and will blindside the Street one day. A third possibility is that since the company is bearish on natural gas in the short term and has its acreage held by production, it can therefore take its time in developing the area.
Regulated Utility
Energen's second division - the one it doesn't talk about much - is Alagasco, its regulated utility in Alabama. This utility serves 400,000 customers and is allowed a 13.15-13.65% return on equity on its operations there. While some investors might be anxious for Energen to shed a business that is not as "sexy" as the exploration and production business, the steady cash flows help fund the dividend that the company pays.
Energen is a bear on natural gas and is shifting the bulk of its capital expenditures to the Permian Basin in 2010, where it is focused on developing its oil assets. This plan may pay off given the weak fundamentals in the natural gas markets. (Learn about factors that affect oil prices in our article, What Determines Oil Prices?)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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