Permian Operators Tout "Net Effective Acreage" Concept | Russell T. Rudy Energy LLC
Some oil and gas operators, especially in the Permian Basin of West Texas, are trying to engage in creative accounting for acreage, according to a recent article in “Rigzone”. The new concept, “net effective acreage” starts with traditional surface acreage, and multiplies it by the number of possible hydrocarbon bearing layers of rock below. Advocates insist that this three dimensional approach provides potential lenders and investors with better information for analyzing assets.
The results by applying the new concept can be dramatic. American Energy Partners, headed by former Chesapeake Energy Corp. CEO Aubrey McClendon, are leading advocates of “net effective acreage”. The company acquired 27,000 acres in the Permian basin at a cost of $25,000 per acre using traditional methodology. However, by utilizing the new concept the net effective acreage would increase to 110,000 and the cost per acre would plummet to $6,000 per acre. Other Permian Basin operators touting this novel approach are RSP Permian Inc., Laredo Petroleum Inc., and Callon Petroleum Co.
However, Apache, the most active driller in the Permian Basin, does not use “net effective acreage” and neither does Devon Energy Corp. Analysts remain skeptical as well. Phil Weiss of Baltimore-Washington Financial Advisors does not see the new concept as adding value, and went on to say “Maybe they are trying to give investors more information, but unless everyone else is doing it, you can’t compare apples to apples.” Conversely, Andrew Coleman with brokerage firm Raymond James, says that while he has not used the term “net effective acreage”, he has considered underlying strata in analyzing the number of potential drill sites on a property.
Thus far, the concept of “net effective acreage” is not being widely used by operators, investors or lenders. While it has the potential for offering additional information, it has great potential for misleading analysts.
To read the article in its entirety, please go to www.rigzone.com/news/oil_gas/a/136044/Oil_Companies .
