Editor’s note: The full version of this story will appear in the August 2022 issue of Oil and Gas Investor.
The problem with dealmaking in the Barnett Shale, at first glance, is that it has already been explored and tapped out: it’s home to at least 16,000 horizontal wells, the oldest of which is 40 years old.
Like the E&P version of Antiques Roadshow, Denver’s BKV Corp. began appraising the Fort Worth Basin around 2019. CEO Chris Kalnin and team scrutinized the Haynesville Shale and other plays, but it was in the Barnett they believed they had found something of unrecognized value.
Since then, BKV hasn’t merely bought the upstream assets it’s known for amassing in the Marcellus Shale. It also locked down deals for power generation and carbon capture and sequestration (CCS).
Granted, BKV’s most recent deal has the same flavor as its once routine $100 million-plus Pennsylvania transactions of five or six years ago—just supersized. In July, BKV, led by CEO Chris Kalnin, closed its purchase of upstream and midstream infrastructure from subsidiaries of Exxon Mobil Corp. for $750 million.
BKV already stood as the top producer in the grandfatherly Barnett after its 2020 entry into Texas following the purchase of assets from Devon Energy for up to $830 million, including contingency fees.
The July deal adds Exxon Mobil subsidiary XTO Energy Inc.’s upstream assets in Tarrant, Johnson and Parker counties, as well as Barnett Gathering LLC’s 750 miles of gathering pipelines, compression and midstream processing.
In an interview, Kalnin said BKV plans to emerge as a consolidator of the Barnett.
“That’s the strategy, right? You’ve got to be the biggest dog in the play and certainly that’s where we’re going on the upstream side,” Kalnin told Hart Energy.
BKV is eyeing additional acquisitions among the Barnett’s “long in the tooth” upstream producers.
“I could see a billion dollars going into that business, upstream,” he said.
“Our carbon dioxide footprint as a company will go to zero at the end of this decade, entirely. That is unheard of. No other company can even come close.”—Chris Kalnin, CEO and Director, BKV Corp.
So why has BKV, since 2019, turned its attention—and roughly $2 billion in transactions—to a shale play the U.S. Energy Information Administration (EIA) doesn’t bother to monitor in its monthly drilling productivity reports?
BKV’s Barnett thesis relies on four decades and 7,000 wells worth of data; jumpstarting first-generation wellbores with cost-efficient refracks; and a touch of bright-eyed futurism.
Kalnin sees a “silent majority” of end consumers who care about climate change but don’t necessarily want to make drastic changes to their lifestyles. BKV wants to be the solution by owning and operating upstream and midstream assets, power plants, and CCS. In short, the integrated power company of the future.
“That’s really where consumers are at: ‘I don’t want any responsibility of having to solve all that too, by the way, you go solve that problem for me,’” he said.
BKV has been building a position in the Barnett to do that.
Last winter, BKV, in partnership with Banpu Power U.S. Corp., purchased a natural gas-fueled power plant in Temple, Texas, for $430 million. And in June, the company reached a final investment decision (FID) to begin a CCS project with EnLink Midstream LLC.
While BKV’s Barnett holdings have swelled to roughly 900 MMcfe/d on 487,000 net acres of leasehold, the company still plans to achieve net-zero Scope 1 and 2 emissions by 2025.
Kalnin, wearing a “Good Energy” T-shirt during a webcam interview, said that the war between Russian and Ukraine has demonstrated that fossil fuel “is absolutely not going anywhere.”
“But it doesn’t mean that the trend around ESG is going anywhere either,” he said. “And so, the world is sort of sitting there saying, what do we do next?”
The sweet spot for BKV is control of the energy chain with its CCS project effectively burying any excess carbon (and making a profit) at the end, Kalnin said. He plans to launch an app with satellite snapshots of the company’s ESG footprint.
“Our carbon dioxide footprint as a company will go to zero at the end of this decade, entirely,” Kalnin said. “That is unheard of. No other company can even come close.”
As ESG pressures have driven oil and gas companies to strive for zero net emissions by 2050, BKV has been more interested in the 1950s: specifically, the transformation of the U.S. during that period.
“Ultimately if we step back, where’s the energy landscape going? We think that we’re going to go through a similar wave that we saw maybe in the fifties and sixties with the oil and gas companies, where they integrated into the value chain,” Kalnin said. “Highways started to get, built all over the U.S. and they started to build gas stations.”
The largest companies vertically integrated refining into their structures to reduce the volatility of their earnings and capture more margin in the value chain and tap into end consumers.
“We think that trend is going to happen again this time on the gas side,” he said. “If you look at where energy’s going, it’s primarily going to be consumed over time as electricity. That’s where the world is going. It's electrifying.”
BKV may have started as an E&P company, but it wants to get into the value chain, Kalnin said.
In addition to its CCS project with EnLink, the company entered into arrangements with Project Canary to address greenhouse-gas emissions across its upstream and downstream assets
BKV’s “closed-loop system” will be able to certify it is cleanly operated from wellhead to power generation.
“There’s not any company in Texas that can say, ‘hey, I know by molecule where my gas is coming from at the wellhead, the pipes that it’s moving through and the electrons that are getting generated from that, that I can certify it up and down the chain,’” Kalnin said.
BKV Barnett Asset Overview
|Current production (MMcfe/d)||Year-end 2021 reserves (Tcfe)||Producing wells||Net acres|
BKV also sees its supplies as a natural fit for LNG terminals. Kalnin sees exporters sending gas to European customers as fertile ground, particularly as the second wave of terminals are built and new producers are needed.
The Barnett is also at an advantage from its lack of pipeline constraints. In its heyday, the Barnett’s infrastructure moved 5 Bcf/d of natural gas to market, Kalnin said. Today it’s less than 3 Bcf/d.
“So, you’ve got 2 Bcf/d of headroom of pipe capacity that you can funnel right through to Corpus Christi or anywhere on the Gulf Coast,” he said. “That’s not lost on us.”
M&A and IPO
The mergers that have dominated the Permian Basin, the Haynesville Shale and are now spreading to the Williston Basin and elsewhere, have largely be driven by bigger is better. A larger producer has more sway over suppliers, service companies, access to markets and economies of scale, according to Kalnin.
“It is a game of scale. It’s a race,” he said. “If you want to predict what’s going to happen in each play, take the producers, rank them by production, and then just look left to right, and say, ‘these guys are going to eat all these little guys up, just like a goldfish and a piranha.’”
In April, BKV was reportedly exploring a potential IPO. Kalnin said the company is always exploring all options.
He noted that billions of dollars in potential acquisitions remain to fully consolidate the Barnett’s various upstream, midstream and power generation businesses.
“You see right now in the market a huge number of power plants that are kind of underwater from days where [the owners] over-levered,” he said. “And pipes are always being bought and sold.”
“I could see us tripling, quadrupling the size of the company over the next five years.”
Kalnin also sees the Barnett, as with the Permian and Appalachian, eventually dominated by a handful of companies. Declining to directly address a possible IPO, he said the company is optimistic about all its options.
“We’ll have to just kind of decide when the time comes, what the right path is that really kind of addresses all our all our needs,” he said. “But it’s really about growing the company. That’s really where we're looking to deploy capital.”
With its new Exxon Mobil acquisition, BKV estimates its Barnett position has an inventory of more than 400 drillable locations.
“One of the things that we see as being very exciting about our asset base is while it’s PDP heavy, we still have a lot of development opportunity in the Barnett,” he said.
The PDP-heavy portfolio has allowed BKV to deploy about 30% to 40% of its EBITDA to slightly grow production. However, a key component to the company’s success in the Barnett is refracks.
“We’re over 300 refracks now since acquiring the Barnett,” Kalnin said, citing research by Enverus. That makes BKV the largest, by refrack count, of any company in the onshore U.S. and possibly globally.
Despite the Barnett’s maturity as a play, Kalnin said the play has massive reserves.
BKV said its reserves in the play are at 4.9 Tcfe. This year, BKV intends to drill 12 gross wells in 2022 and potentially more next year. It also runs a rig program on its Marcellus acreage, with plans to drill five gross wells.
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