With the downturn in commodity prices comes a reduction in drilling activity and capital expenditures. E&P Companies will be looking at their balance sheets to maximize value on what they already have in inventory. That will include PDP (Proved Developed Producing) as well as PUD (Proved Undeveloped).
Prior to shale, a typical E&P would have 80% of their asset value in PDP and 20% in PUD. As late as 2010 this reversed to 20% in PDP and 80% in PUD. These PUD’s were valued on a per net mineral acre value. Therefore the vast majority of the value of the company was in their undrilled acreage. While this has been changing with drilling activity, even today it is common to see a company value its PUD at 50% of its total assets. With reduced drilling budgets these valuations will be with us for several more years.
Recently this was apparent when facilitating the acreage reconciliation of a sale where there was little producing acreage and the price was $6,000 per net mineral acre (the total sale was in excess of $150 million). With the commoditization of acreage within the shale plays being valued at dollar per net mineral acre on a formation by formation basis, valuation of the company not only becomes more complex, but more important than ever. This is especially relevant where the PDP and PUD overlap at different depths on the same acreage.
Somewhere along the way, the question was asked, “Are we the owner of the net mineral acres at all depths?” More and more the answer will be, “No, not at all formations.” In every shale play there are multiple formations with potential value. Just as companies sell or farmout their leased acreage based on formation severance, so too have the mineral owners began to insert both vertical as well as horizontal depth limitations and expirations by area and depth. These clauses, commonly known as “pugh clauses,” will greatly affect the company’s value over time. The next round of leasing will see even more of this.
If you look at any E&P company’s valuations you will see more focus on value of net mineral acres on a formation by formation basis. How many net mineral acres they own in the geographic area, like the field, county, shale play and more, is almost irrelevant. What is crucial now is how many net mineral acres they own, at each depth, within a specific geographic area. With “sweet spots” being identified in each active shale play, the net acres in these spots are valued higher than the surrounding acreage.
This, of course, means more and more responsibility will be placed on land departments for accurate acreage counts by formation. These E&P’s will become more reliant on either brokers or their own lease analysts to give them accurate net acre counts. With acreage trading anywhere from $6,000 to $15,000 per acre, per formation, unlike horseshoes and hand grenades, “close enough” will no longer be an adequate response.
Tim Supple – President – iLandMan