3TEC Hits Record Production in Second Quarter
3TEC participated in the drilling of 13 wells in the second quarter, seven of which had been completed as producers and five were waiting on pipeline hook-up or completion rigs at quarter-end. Since June 30, 2002, one of those wells has been completed as a producer. Development activity in East Texas has continued to be slower than originally projected due to unfavorable drilling economics caused by lower natural gas prices and high drilling and completion costs. However, 3TEC has continued to enjoy exploratory drilling success in South Louisiana. As previously announced, the Company drilled the #1 Bailey Minerals in St. Mary Parish (the "#1 Bailey") in the first quarter of 2002. Electric logs revealed 100 feet of net pay in the MA-1E sand at 16,122 feet total vertical depth (TVD) and ten feet of net pay in the MA-1D sand at 15,892 feet TVD. The Company has perforated the MA-1E sand, and tested the well at a rate of 10.4 Mmcf and 800 bbls per day using a 14/64 inch choke, with a flowing tubing pressure of 9,586 pounds per square inch (psi) and with a shut-in tubing pressure of 3,390 psi. Pipeline construction has delayed production on the #1 Bailey. The Company now expects initial production from this well to begin during the third quarter. Based on 3D seismic analysis, the Company has identified additional locations in the area with fault blocks similar to the one found at the #1 Bailey.
During the third quarter to date, 3TEC has participated in the drilling of four wells. Currently all four are in various stages of completion operations. The Company believes that one of these wells (which is awaiting pipeline hook-up) is an additional exploratory success in South Louisiana. This well, the #1 State Lease 14122 VUA in Chandeleur Sound Block 68, was drilled to a depth of 9,800 feet. 3TEC has logged 39 feet of net pay in the Tex W sand. The well was tested at a daily rate of 10.5 Mmcf on a 26/64 inch choke with a flowing tubing pressure of 2,677 psi, and a shut-in tubing pressure of 10,071 psi. The Company currently projects to have this well online early in the fourth quarter, and is actively evaluating other similar fault blocks in the area.
At the end of July 2002, the company conducted an internal review of its reserves. The reserves were evaluated using a three-year NYMEX strip pricing case for oil and gas escalated 3% thereafter starting in 2005. This analysis indicated total proved oil and gas reserves of approximately 300 Bcfe as of July 31, 2002. As of that date, the Company estimates its reserves to be 77% proved developed and 86% natural gas. Based on the results of the internal review, the Company believes that its drilling success through the first seven months of 2002 has improved its reserve position. Through July 31, the Company spent $11.5 million on exploratory drilling and completion costs and estimates it added 27 Bcfe to its proved reserves. This produced a favorable finding and development cost of $0.43 per Mcfe. Based on this success, the Company's Board recently approved increasing the exploratory component of its drilling budget for 2002 from $16 million to $20 million. During the second half of 2002, the Company plans to drill up to five additional exploratory wells South Louisiana in the same general areas where other successful wells have been drilled.
Floyd C. Wilson, Chairman and Chief Executive Officer of 3TEC, stated, "3TEC Energy Corporation posted solid results for the first half of 2002. Our internal evaluation of net proved reserves of approximately 300 Bcfe at July 31, 2002 indicates that our Company has the ability to grow reserves even in a very unfavorable acquisition environment. We are very encouraged by our drilling results to date and we continue to believe in our ability to add to our inventory of quality drilling sites."
The Company will continue to fund (i) exploratory and developmental drilling from cash flow; and (ii) acquisitions from cash flow, property divestitures, and debt (if needed). For 2002, 3TEC has budgeted approximately $64 million for drilling and completion activities.