[Context: On August 2, GSO Capital announced the formation of a $325m drilling joint venture through its affiliate Sequel Energy Group with Eclipse Resources (NYSE: ECR). Eclipse Resources has EnCap as a significant investor. Further details and related links are below.]
Eclipse Resources Corporation Announces Second Quarter 2017 Results, a $325 Million Utica Shale Drilling Joint Venture Commitment Agreement and an Increase in the Company’s Borrowing Base
STATE COLLEGE, Pa.–August 02, 2017–(BUSINESS WIRE)–Eclipse Resources Corporation (NYSE:ECR) (the “Company” or “Eclipse Resources”) today announced its second quarter 2017 financial and operational results, along with updated guidance for the third quarter of 2017 and full year 2017. As discussed further below the Company has also entered into a commitment agreement with Sequel Energy Group LLC (“Sequel”) (an affiliate of GSO Capital Partners, or “GSO”) to establish a proposed drilling joint venture and has received an increase to its borrowing base on its senior secured revolving line of credit from its bank-lending group. In conjunction with this release, the Company has posted an updated investor presentation to its website at www.eclipseresources.com.
Second Quarter 2017 Highlights:
>> Average net daily production was 287.8 MMcfe per day, exceeding the high end of the Company’s previously issued production guidance range of 265 to 275 MMcfe per day.
>> Realized an average natural gas price, before the impact of cash settled derivatives and firm transportation expenses, of $2.98 per Mcf, a $0.20 per Mcf discount to the average monthly NYMEX settled natural gas price during the quarter.
>> Realized an average oil price, before the impact of cash settled derivatives, of $43.57 per barrel, a $4.53 per barrel discount to the average WTI oil price during the quarter, exceeding the Company’s previously issued oil differential guidance range of $7.50 to $8.50 per barrel.
>> Realized an average natural gas liquids (“NGL”) price, before the impact of cash settled derivatives, of $16.84 per barrel, or approximately 35% of the average WTI oil price during the quarter.
>> Per unit cash production costs (including lease operating, transportation, gathering and compression, production and ad valorem taxes) were $1.36 per Mcfe and include $0.35 per Mcfe in firm transportation expenses, which was below the Company’s previously issued per unit cash production cost guidance range of $1.45 to $1.50 per Mcfe.
>> Net income for the second quarter of 2017 was $11.5 million; and Adjusted EBITDAX1 for the second quarter of 2017 was $39.6 million.
Subsequent to the end of the Second Quarter:
>> The Company has entered into a commitment agreement with Sequel to establish a drilling joint venture on the Company’s Utica Shale acreage in southeast Ohio. Eclipse and Sequel expect to enter into definitive documents relating to the proposed transaction by the end of the current quarter.
o The commitment agreement sets forth the proposed terms for the drilling joint venture, including:
>> Committed funding from Sequel of up to $325 million to fund its proportionate share of two drilling programs comprising 34 gross wells in aggregate, commencing with wells currently in progress and extending through wells expected to be commenced through the end 2018.
>> A mutual option for an additional third well program of similar size, which would increase the committed funding.
>> Eclipse Resources shall be the operator of all wells drilled within each well program.
>> Eclipse Resources shall have the right to adjust its pre-carry working interest in the first program up until the fourth quarter of 2017 to between 30% to 50%, and its pre-carry working interest in the second program to between 30% to 70% until such program is commenced.
>> A 15% carried interest on drilling and completion capital expenditures incurred in each well program, proportionately reduced to Eclipse Resources retained pre-carry working interest.
>> A significant portion of Sequel’s working interest in each well program will revert to Eclipse Resources once a certain return is realized by Sequel in each program.
The Company’s proposed drilling joint venture with Sequel is subject to further negotiation, completion and execution of definitive agreements and other customary conditions. The commitment agreement provides that Eclipse and Sequel will negotiate in good faith for a period of time and use their commercially reasonable efforts to enter into mutually agreeable definitive documents relating to the proposed transaction, which the parties expect to complete by the end of the current quarter. Accordingly, there can be no assurance that the proposed transaction will be completed in the anticipated timeframe, if at all, and if consummated, what will be the final terms of such definitive agreement.
>> The Company has recently completed its semi-annual borrowing base redetermination of its revolving credit facility, which resulted in an increase in its borrowing base from $175 million to $225 million. The Company remains undrawn under its revolving credit facility, other than letters of credit associated with its firm natural gas transportation agreements.
>> The Company added to its 2018 oil hedge portfolio by executing incremental three way collars of 4,000 barrels per day at an average floor price2 of $45.00 and an average ceiling price of $52.26.
1 Non-GAAP measure. See reconciliation for details.
2 For the purposes of calculating three-way floor price, the higher valued put is used.
Benjamin W. Hulburt, Chairman, President and CEO, commented on the Company’s second quarter 2017 results, “Our continued focus on execution, innovation and efficiency resulted in the Company delivering another tremendous quarter with production above the top end of our guidance, operating expenses below the low end of our guidance and continued strong well performance in both the dry gas and condensate areas of our acreage. This now marks the eleventh consecutive reporting period in which the Company has met or exceeded its production and operating expense guidance, which represents every single reporting period since our initial public offering in June of 2014.
We continue to strive to be a leader in innovation, not only in our region, but nationwide, with a significant amount of work we are doing today focused on new technology applications to improve productivity, reduce costs and maintain high returning wells as we develop our substantial drilling inventory. This culture of innovation powers our well performance and we have seen that illustrated in our most recent set of Dry Gas wells. These wells have incorporated a series of trials on numerous new techniques that will help us develop our “Gen4” well design. Our seven well Moser pad, located in the Company’s Dry Gas acreage in eastern Monroe County, Ohio, was turned to sales in June and has produced at an average rate of approximately 19% above our recently increased Dry Gas type well expectation. We are continuing to evaluate which of the new techniques may be the most impactful on future operations, but we are very encouraged with the results we are seeing on certain of the techniques we’ve tested.
We have continued our relentless pursuit for industry leading drilling innovation, and have set a new internal record on our most recent “super-lateral”, which we drilled to a total measured depth of 24,600 with a 15,600 foot completable lateral in our Utica Condensate area in 12 days from spud to TD. Additionally, we are currently completing what we believe to be the longest onshore laterals ever drilled, the Great Scott 3H (19,100′ completable lateral) and Outlaw C11H (19,500′ completable lateral), located in our Utica Condensate area. We are approximately 70% done completing these laterals, which have treated as designed thus far. We have two additional wells to complete on this pad before we will turn all four wells to sales, which we expect to occur in the fourth quarter of 2017.
We believe that the drilling joint venture commitment agreement we have recently entered into with Sequel, an affiliate of GSO, speaks to both the quality of our assets and our industry leading operational performance. At today’s forward strip prices, Eclipse calculates that the present value of the carried interest and significant working interest reversion as outlined in the commitment agreement will equate to a meaningful valuation premium to both where we trade and where recent Utica asset transactions have taken place. Perhaps most importantly, as we see a significant amount of commodity volatility looking into 2018, the terms of this drilling joint venture will allow us to maintain, or even accelerate our current drilling pace, while scaling our company level capital expenditures based on the economic environment. Additionally, prior to commencing each well program, under the terms proposed in the commitment agreement, Eclipse will have the ability to choose its working interest for such program within agreed upon bands. We believe this structure allows us to maintain an efficient, two-rig operating program while providing flexibility to manage capital spending to a level that is appropriate depending on the strength of forward commodity curves. We are extremely pleased with the proposed terms and structure as outlined by the commitment agreement with Sequel and the high degree of confidence that our partner has in our assets and operational capabilities. We believe that the industry experience of the Sequel team combined with the scale and structuring capabilities of GSO make them the ideal drilling joint venture partners for Eclipse.
We believe that our proven operational performance, continued gain in efficiency and financial flexibility leave us well positioned to deliver upon the production guidance that we have provided. We remain highly focused on returns and excited for continued operational improvement. We believe that these attributes will drive significant value enhancements from our assets and generate long-term shareholder value.”