Penn Virginia provided an update of its oil and gas operations, including second quarter 2010 results.
Second Quarter 2010 Highlights
Operational results for the three months ended June 30, 2010 included the following:
As shown in the table below, production in the second quarter of 2010 was 10.5 Bcfe, or 115.1 MMcfe per day, as compared to 13.6 Bcfe, or 148.9 MMcfe per day, in the second quarter of 2009 and 10.3 Bcfe, or 114.9 MMcfe per day, in the first quarter of 2010. Adjusted for the divestiture of our Gulf Coast assets in January 2010, production in the second quarter of 2010 was 15 percent less than the pro forma 12.3 Bcfe, or 134.7 MMcfe per day, in the prior year quarter and five percent more than the pro forma 10.0 Bcfe, or 111.6 MMcfe per day, in the first quarter of 2010.
The year-over-year decrease in pro forma production was due to natural production declines, the effects of significantly reduced drilling activity in the latter part of 2009 and, to a lesser extent, by well completion delays due to difficulty in obtaining stimulation equipment in East Texas and in the Granite Wash. Production in the second quarter of 2010 was less than the previously announced guidance range of 10.7 to 11.5 Bcfe due primarily to (i) completion delays in East Texas resulting in two Haynesville Shale and one horizontal Cotton Valley well being turned into line later than anticipated (0.4 Bcfe impact) and (ii) completion delays for non-operated wells in the Granite Wash (0.3 Bcfe impact).
Most of the impact of the completion delays occurred during April and early May, with production increasing significantly by June to average 133.0 MMcfe per day, the fourth best pro forma production month in our history. In May, we announced a fracturing services agreement that went into effect in July 2010 and has addressed completion delays for our operated wells in East Texas. In addition, in June 2010 we signed a fee-based processing agreement with our midstream provider in the Granite Wash pursuant to which we will report increased NGL volumes in our production and revenue streams going forward.
During the second quarter, oil and gas capital expenditures were approximately $117 million, consisting of:
Mid-Continent – During the second quarter of 2010, our joint venture partner, Chesapeake Energy Corp. (NYSE: CHK - News), and we drilled 12 (5.6 net) Granite Wash horizontal wells, nine (4.3 net) of which have been completed. During the second quarter, 10 (3.5 net) wells were completed. To date in the third quarter, four (2.2 net) wells have been completed and seven (3.8 net) wells are waiting on completion.
Two (1.0 net) of the second quarter completions were PVA-operated wells (Debra Jean #2-6H and Gudgel #1-6H) and had IP rates of 19.2 and 11.1 MMcfe per day, respectively. In addition, six (2.3 net) non-operated wells were recently completed with IP rates of 1.4, 12.3, 16.5, 16.7, 11.6 and 18.1 MMcfe per day.
We are currently operating four drilling rigs in the Granite Wash play in Oklahoma, with two rigs deployed in our area of joint operations with CHK and the other two rigs dedicated to testing our Mountain View and East Sayre exploration prospects. CHK is currently operating four Granite Wash rigs within our area of joint operations. Despite continued delays in completions, second quarter 2010 production from the Granite Wash increased to 28.9 MMcfe per day, up 28 percent from 22.7 MMcfe per day in the second quarter of 2009 and up 15 percent from the first quarter of 2010. At present, our acreage position in the Granite Wash is approximately 30,000 net acres, and we expect to spend up to $23 million in 2010 to add acreage in the Anadarko Basin.
East Texas – During the second quarter of 2010, we drilled two (1.8 net) Haynesville Shale wells, one (0.8 net) of which has been completed, and we drilled two (1.9 net) Cotton Valley horizontal wells, both of which have been completed. During the second quarter, we completed two (1.8 net) Haynesville Shale wells. To date in the third quarter, three (2.8 net) Haynesville Shale wells have been completed and a single (1.0 net) Haynesville Shale well is waiting on completion. As discussed above, since we resumed drilling late last year and prior to putting our fracturing services agreement in place, we faced delays in completions that resulted in less than anticipated production from East Texas in the first half of 2010.
The last five Haynesville Shale wells completed included the Brown #6-H (100 percent working interest or WI), the Fults #2-H (79 percent WI), the Hendry #1-H (77 percent WI), the Timmons #3-H (100 percent WI) and the J&R Tiller #1-H (100 percent WI), which had IP rates of 10.4, 15.3, 2.4, 8.9 and 10.0 MMcf per day, respectively. The Hendry #1-H experienced a casing problem that prevented completion of the full lateral length, with production only from five intervals that were completed before the mechanical problem developed. In addition, we completed two (1.9 net) Cotton Valley horizontal wells, with the Gibson #3-H (100 percent WI) and the McClendon #6-H (90 percent WI) having IP rates of 4.9 and 3.0 MMcfe per day, respectively.
The Brown #6-H and Fults #2-H were the first two Haynesville Shale wells completed in 2010. The 30-day rates for these wells averaged 7.4 and 11.2 MMcf per day and the number of frac stages were 15 and 24, respectively. Up until the completion of these two wells, the maximum number of frac stages had been 10 for the two best wells we had previously drilled. The Brown and Fults wells, now with almost 60 days of production, have current daily production rates exceeding the performance of these previous best wells at the same production date by approximately 75 percent. We believe this improvement is attributable to the increased number of frac stages, as well as higher back-pressures being held on the newer wells. Despite these promising results thus far, we have decided to defer drilling in the Haynesville Shale for the remainder of the year to evaluate the longer-term production results and economics of these recent wells.
At present, we are operating two drilling rigs in East Texas, both targeting the horizontal Cotton Valley, primarily due to the NGL and oil content as well as our desire to continue to test this play type, and we expect production to increase in East Texas during the remainder of the year.
Mississippi – During the second quarter of 2010, we drilled four (3.9 net) Selma Chalk horizontal wells, all of which have been completed. The last five Selma Chalk wells completed included the Caruthers #11-3-420H (96 percent WI), the Caruthers-Kemp #11-3-421H (100 percent WI), the Caruthers-Morgan #11-1-411H (99 percent WI), the Caruthers #11-1-423H (96 percent WI) and the Walker Lands #35-16-422H (100 percent WI), with IP rates of 1.4, 1.4, 1.4, 1.7 and 1.0 MMcf per day, respectively. We are currently operating one drilling rig in Mississippi and expect production to increase during the remainder of the year.
Appalachia / Marcellus Shale – During the second quarter of 2010, we did not drill any wells in Appalachia, but we expect to resume drilling in the Marcellus Shale in the late third quarter to early fourth quarter. We anticipate drilling up to two horizontal Marcellus Shale wells during 2010. In addition, we continue to add to our acreage position in the Marcellus Shale, increasing our acreage to approximately 58,000 net acres. Overall, in 2010 we expect to spend up to $63 million adding leasehold in the Marcellus Shale.
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