Anadarko's Activity in Weld County

Vine Royalty keeps tabs on all the operators that we work with. One of our Wattenberg analysts found this in the Greeley Tribune.

Based on what Sharon Dunn of the Greeley Tribune is saying in her article from 10/28/15, it looks as though the Wattenberg’s biggest player is retreating from Weld County. Anadarko has reported a $2.2 billion (with a “b”) loss for 3Q15. This hasn’t shocked many people, including Anadarko themselves. All you have to do is look at commodity prices. It simply doesn’t pay to bring oil to market. This has forced Anadarko to substantially scale back spending in Weld. According to Anadarko execs, the company still believes in the Wattenberg’s potential not just for them, but for the country. They also like the fact that they still have, and will continue to have, a dominant presence in the area. Anadarko will shift the game plan to keeping costs low and prepping for greater, long-term success. How are they doing this? “Drill now, frac later.” While prices are down, it will give Anadarko time to organize and improve efficiency in drilling/production; thus, better positioned, with greater profits, when prices start to climb in the future.

Let us add to this reasonable comment the fact that another substantial operator, namely Kerr-McGee is owned by Anadarko and will therefore follow the same policy. In addition, EnCana, yet another large operator, sold all its DJ-basin operations last month. The new owner (95% a Canadian pension fund, 5% the Broe Group) will likely be guided by thinking put forward by Great Western Oil & Gas Co., a smaller operator, but also a member of the Broe Group. $900 million was paid to EnCana, who is now out, but does the pension fund have the funds and the guts to drill now? Or wait? Many EnCana leases are coming up for renewal.

The term "Drill now, frac later" may not even include much drilling, because so many giant spacing units were created that just one previously drilled horizontal well may hold many Sections.

As a royalty owner in Weld County leased with Kerr McGee/Anadarko developments are of interest to me and being somewhat new to this I’d like to be sure I understand your meaning correctly. By your reference to Anadarko “retreating from Weld County” and their decision to “substantially scale down spending” does that pertain to expanding their efforts to include more potentially profitable mineral acreage or would this indicate the possibility of shutting down producing wells until commodity prices rebound?

Mr. Gustafson,

You are quite right about the giant spacing units. Our acreage was recently pooled into many far larger units. While that was prohibited under the terms of the lease (which put the pooling limit at 620) those terms were apparently overridden by Colorado statutes.

What's mainly important here for the mineral owners who are leased is putting yourself in the mindset of an operator. They are most times highly-leveraged based on what will happen in the commodities market in the near future, even more so when oil and/or gas prices are extremely high like they were in 2014. How do they make money? In a nutshell, they negotiate leases with many mineral owners; pay them a lease bonuses; pay for well design/engineering; pay for drilling, pay for fracking; flow the oil out of the ground; then sell the oil for [hopefully] more than it costs to take it out of the ground; all the while, paying the mineral owner their royalties too. They do this over and over (safety in numbers.) As prices go down, it is harder for these companies to cover costs of production. It is even harder to convince investors that their money is safe and everyone can still see a return. With prices going from so high to so low in such a short period of time, operators are forced to adapt…rapidly. If they cannot adapt, they must get out by selling out, or consider bankruptcy. Now, there are plenty more moving parts here, but that should give you an idea what these operators are up against. Anadarko seems to be a solid operator who doesn’t like to cut corners and puts a lot of value on the DJ Basin. They have adapted their strategy to keep everyone as happy as possible i.e. still paying royalties on existing wells, cutting production costs by being more efficient and renewing older leases. They had a bad 3Q15 but are still profitable for 2015 overall. They will still file, and have filed, permits to drill (permits last 2 years, then are terminated) in Weld County and will still drill wells to either hold leases—a.k.a. stay rooted and committed to the area—but it seems that is where the buck stops. There are still several stages in the production process that have to happen before a mineral owner is paid their share of the profit (in royalties.) I’ve personally seen it becoming more and more popular amongst land owners in the area sell at least a portion of their mineral interest to negate the risk in waiting to see what the future holds. And from the latest news, it doesn’t look very clear.