[Editor's note: A version of this story appears in the August 2018 edition of Oil and Gas Investor. Subscribe to the magazine here.]
In June, Ascent Resources LLC unveiled four agreements to acquire oil and gas properties from two E&Ps, Hess Corp. (NYSE: HES) and CNX Resources Corp. (NYSE: CNX), along with leasehold and mineral interests from Utica Minerals Development and a fourth undisclosed seller, for about $1.5 billion combined.
It was a bold statement for Ascent, which is staffed with some former executives of Chesapeake Energy Corp. (NYSE: CHK) who were on the team that discovered the Utica shale play, when the late Aubrey McClendon famously declared it would be “the greatest thing to hit Ohio since the plow.”
Since that 2010 discovery, Ohio’s oil and gas industry has indeed changed. In the first quarter, the state produced 531 billion cubic feet (Bcf) of gas from 1,909 horizontal shale wells, about 6 Bcf/d, for a 42.85% increase over the prior year, according to the Ohio Department of Natural Resources (ODNR).
Ascent’s share was about 941 MMcf/d, but if barrels of oil and NGL are included in the count, Ascent’s total was 1 Bcfe/d from 210 gross (173 net) producing horizontal wells. In the first quarter, it spent about $190 million on drilling and completions.
The company was formed in 2013 and backed primarily by two private-equity leaders, The Energy & Minerals Group (known as EMG) and First Reserve Corp. It grew through a series of acquisitions from EnerVest Ltd., RHDK Oil & Gas, the SWEPI unit of Royal Dutch Shell Plc (NYSE: RDS.A), Hess, the XTO unit of Exxon Mobil Corp. (NYSE: XOM) and others made by its predecessor, American Energy-Utica.
These latest accretive bolt-ons, which will close in the third quarter, solidify Ascent as the largest pure-play and No. 1 operator in the Utica in daily production. It is running seven rigs and three frack crews in Ohio. Its two star wells on the Borovich pad showed flat production of 30 MMcf/d each for the first six months and recently increased to 40 MMcf/d. The EUR is about 3 Bcf per 1,000 ft of lateral.
More gas is coming. Pro forma for these recent deals, Ascent’s total holdings will be 310,000 net acres, with royalty on 70,650 of those. Net production is projected to reach 1.5 Bcfe/d soon, and 1.8 Bcfe/d by year-end. Total resource will rise to about 16.2 Tcfe, with nearly 2,300 locations.
Oil and Gas Investor spoke to CEO Jeff Fisher about all this. He has been Ascent’s CEO since December 2014 and chairman since February 2015. Before that, he was COO for American Energy Partners and was instrumental in building multiple basin-focused companies, including Ascent.
Like several of Ascent’s 300 employees, Fisher worked at Chesapeake Energy, in his case from 2003 to 2013, most recently as executive vice president of production, where he was responsible for upstream operations and integrated field developments. Previously, Fisher worked in various engineering and operational leadership roles at BP Plc (NYSE: BP), Vastar Resources Inc. and ARCO Oil and Gas Inc. He earned a bachelor of science in mechanical engineering from Oklahoma State University.
Although Chesapeake discovered the Utica Shale in Ohio in 2010, Ascent builds upon that legacy.
Fisher says, “It’s been fun to be part of the resurrection of the oil industry in Ohio. Until the Utica came along, there hadn’t been any significant oil and gas activity for decades. I would say Ohio has high expectations of operators, as they should, and we’ve found them to have a good understanding of our business.”
Investor: Congratulations on all these deals. You were already doing a lot in the Utica, so what was your thinking?
Fisher: We feel we’ve turned a vision that looked good on a map a few months ago into reality. We always said we wanted to have a commanding position in the Utica. The fee mineral interests are tremendously important to the economics here; they are about 60% of the acquired assets, so doing all these deals at once, plus fee acreage, is really value-enhancing to our company. It adds a whole other dimension to what we’re doing. This is such a milestone.
But the real story is our ability to execute and our operational prowess. We have a great team, and one of the things that brought us together originally was the opportunity to build something special in a play that we knew had a lot of potential. We feel we have the best rock in the Utica and that it is competitive with any play in the U.S., even the Permian.
I’ve worked a lot of plays in my career, but the outright consistency of our wells here has been stunning to me, through the volatile oil window to the liquids-rich rock to the dry gas. The ODNR says that in the fourth quarter of 2017, we had 17 of the top 20 gas wells and a significant number of the best oil wells. The dry gas area gets lots of attention because the wells are so spectacular, but these acquisitions give us more of a weighting to oil and NGL.
Investor: What’s the mix of gas to oil to NGL going to be then?
Fisher: Today we’re about 90% gas, but over time we’ll balance that out to a 75% to 25%, kind of split with oil and NGL. We were mainly focused on dry gas in 2017, because that gave the best economics, but as we roll through 2018, NGL prices have gotten better.
Investor: How did these four deals come down simultaneously? Were they contingent on each other?
Fisher: We were already pretty sizable and had become the No. 1 operator in the Utica in terms of production, but we are private and don’t have access to the public equity market. Sure enough, an opportunity came along: Utica Minerals Development.
While we were working on UMD, the Hess and CNX deals came up. Those assets were being marketed to a targeted buying group, and we were included. We’ve had a long relationship with both of them here. If you look on a map, we were the natural acquirer—we had contiguous acreage that would set us up for longer laterals, and we had similar gas marketing arrangements, so it was a natural fit.
And then, another private company opportunity presented itself, and their acreage fit very nicely with the other three sets of assets. We love the scale of it.
Investor: Still, $1.5 billion is a big chunk to bite off.
Fisher: Right. Nothing gets done without capital, a team that can execute and, even then, you must have a compelling opportunity. These transactions met a high standard for what we felt would be a significant enhancement to our business. Even then, we were very focused on maintaining our strong balance sheet, so we held ourselves to using the right amount of equity to finance these transactions. Fortunately, through the years we have raised a significant amount of new capital through EMG and First Reserve and several new investors. Our sponsors have been huge supporters of our company, and they love what we are doing in Ohio.
Investor: You were hard hit by debt during the downturn though, when gas prices crashed. You had to re-equitize the balance sheet in 2016.
Fisher: Yes, we raised $1.5 billion of new equity in 2016, largely from EMG and First Reserve, but also with some new investors they brought in as well. And then, in 2017, we refinanced our second-lien term loan with $1.5 billion of new senior notes and established a broadly syndicated revolving credit facility to provide the company with liquidity for the future development of our assets. In doing so, we took out some higher-cost debt. With these transactions, we’re very focused on our leverage, which is why we chose to raise such a substantial amount of additional equity.
We are under 3x net debt to EBITDA now, and with our balance sheet, we can fund our development with free cash flow and liquidity from our credit facility. Certainly, through the downturn, our leverage was not good, but we have solved the issue.
Investor: How important were the 60,000 fee mineral acres you got here—were they a deal breaker if they didn’t come along?
Fisher: No. I wouldn’t say it was a deal breaker, but it was more like icing on the cake. The fit is so good, we’ve been able to expand our laterals and, clearly, the value proposition of the NGL and oil acreage is very important to us. Having such a strong mineral component absolutely intrigued us—this kind of opportunity doesn’t come along very often.
Investor: Net net, what will Ascent look like going forward?
Fisher: We will have over 300,000 net leasehold acres and over 70,000 royalty acres. We haven’t given guidance yet for 2019, but our intention is to be positive free cash flow in 2019, and these transactions won’t change that. With the assets we’ll have in hand, we can grow production at double digits for many years to come … if that is what investors want to see and is what generates the most value for our investors. We feel we have a significant growth asset even if we only spend at cash flow.
Investor: What about the challenges of natural gas prices?
Fisher: On natural gas, clearly we have a lot of it, but we still think we can generate strong cash margins by being in the right play and the right rock. We think we’ve positioned our portfolio well. Obviously, the macro is a challenge; you always have to keep an eye on the forward commodity price strip. We certainly understand the volatility of the commodity, so we have a strong hedge book; we are over 75% hedged on our pro forma production as of second-quarter 2018 and in 2019 at over $3/Mcf.
Investor: What about gas marketing?
Fisher: We are an anchor shipper on Rex and Rover, and our delivery point into Rover came online last September, just about the time we were ramping up, so we can move our gas to Chicago, Michigan, Dawn, Ontario and the Gulf Coast. We also have a few small deals with gas-fired power plants, and we see additional opportunities there. A number of newbuilds and conversions of coal plants to natural gas are going on throughout the Northeast corridor. And we think LNG is a real game-changer; to be able to move this resource to world markets is bullish, and we have some long-term contracts to supply gas to the LNG shippers on the coast as well.
Investor: What is the breakeven on these Utica wells?
Fisher: In the low $2s Henry Hub, like $2.20. These wells can generate IRRs in excess of 60% across the play, so as long as we can manage our costs, we feel pretty good about it.
Investor: Since your team was one of the first in the Ohio Utica, how has the technology changed? What have you been working on?
Fisher: Our technical team is outstanding. They’ve done precision targeting as to where to land the horizontal and not only stay in zone, but they’ve reduced costs. The downturn was tough on everybody but it gave us the incentive to tackle all the factors that go into greater efficiency in drilling and completions. We’ve done just less than 17,000 feet of lateral, and we have a number of wells that have been drilled beyond 15,000 feet. We’ve certainly been one of the early movers on drilling longer laterals, but we still think there’s upside in extracting gas along every foot of that lateral, so we want to get further up the completions efficiency learning curve before we go longer.
It’s like a Rubix Cube that we have to try to optimize. Clearly, longer laterals are well set up in the Utica, because the geology is not complex, and we’re able to stay in zone. The units we can create in Ohio can accommodate these longer laterals.
Investor: Jeff, what is the end game here? You were rumored to go public a while ago. And, do you foresee yet more deals?
Fisher: We need to digest these acquisitions. We only create value for our investors if we keep our eye on the ball. But from the very beginning, we went into this with the idea of being focused on one basin and to do it at scale. Our investors have had a long-term horizon, and we feel we are built to last. We’re in a financial position now where we don’t have to access the public equity markets, but we’ll consider it if the market is right, valuation is attractive and the window is open.
If you look across this basin, you’ll continue to see a lot of consolidation all across the Appalachian Basin. I think that as commodity prices stay moderate for longer, more consolidation makes sense, and our operational track record should position us well to be the natural consolidator.
All across the Lower 48, operators are rationalizing their portfolios and playing to their core strengths. For us, the Utica is where we always wanted to be and is where we are actively consolidating. Hess and CNX are also rationalizing where they want to be. If we are playing our part, that creates accretive opportunities for us.
Leslie Haines can be reached at email@example.com.
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