What to Expect From This Debt-Laden Oil Company's Earnings

Shareholders of Bill Barrett should pay close attention to how Bill Barrett plans on reducing its debt level while also pumping out more crude from the DJ Basin.

Jul 28, 2014 at 3:49PM

On July 31, Bill Barrett Corporation will update investors on its operations. Shareholders should pay attention to how Bill Barrett plans to expand in the DJ Basin while also keeping its debt under control. 

In order to focus on developing the copious amounts of hydrocarbons in the DJ Basin, Bill Barrett has been consolidating its asset base. Last year, Bill Barrett sold off its West Tavaputs asset in the Uinta Basin for $369 million; this allowed it to reduce its large debt load by $189 million. Bill Barrett's debt has been holding it back as it is forced to divert huge amounts of cash flow to service the interest on its $1.048 billion in debt. 

Drilling for a better sales price
To keep up the momentum, Bill Barrett is going to sell off 67,980 net acres in the Powder River Basin, dubbed the Powder Deep Oil asset, which produced 1,330 barrels of oil equivalent a day, or BOE/d, last quarter. By targeting the oil producing intervals of Turner, Parkman, Sussex, Shannon, and Frontier, Bill Barrett is trying to boost its drilling inventory so it can maximize the sale price of this asset. Most of the cash will go toward paying down debt.

Shareholders should pay close attention to how successful Bill Barrett is at adding new potential drilling locations in the Powder River Basin. Past transactions could value Bill Barrett's acreage at $3,500-$4,750 an acre. Depending on Bill Barrett's success, it could raise either $323 million (high end) or $238 million (low end) in a sale. Whether or not Bill Barrett can bring new drilling locations online could mean the difference of $95 million, or ~8% of its current market cap.

There could be a lot of interest in its Powder River Basin assets, particularly from EOG Resources Inc. The oil giant completed 16 net wells tapping into the Parkman last year, and plans to drill 28 net wells this year. With 30,000 net acres in the Parkman play, EOG Resources has only 115 net locations left to drill. This could prompt it to purchase additional acreage so it can keep tapping into the oily Powder River Basin. 

The average Parkman well yields 69% crude, 11% natural gas liquids, and generates an after-tax return of over 100%, making the play very economical. While this is just speculation, a company like EOG Resources could easily acquire Bill Barrett's asset and use scale to bring down costs and boost returns while using its current expertise to unlock additional oil-weighted reserves. 

By selling off its Powder Deep Oil asset, Bill Barrett could raise a substantial amount of capital that could meaningfully improve its balance sheet. Beyond asset sales, Bill Barrett is focusing on boosting its oil production through investments in the DJ Basin.

DJ all the way
75% of Bill Barrett's capex program is going to be spent on the DJ Basin this year developing its 75,500 net acre position in the play. In its latest quarter, Bill Barrett's DJ Basin production grew by 137% year over year to 6,430 BOE/d, which was also a 25% sequential increase. To keep growing, Bill Barrett is going to tap into the Codell and Niobrara shale formations by drilling 72 net wells this year.

According to EOG Resources, there is plenty of liquids-rich upside to be found in the DJ Basin. Targeting the Codell yields a production mix of 78% oil, 15% natural gas liquids, and 7% dry gas, yielding after-tax returns of over 100%. Due to the crude-weighted production, EOG Resources is going to add another rig to its DJ Basin operations targeting the Codell formation. 

For Bill Barrett, it hopes that targeting the Niobrara and Codell formations will allow it to boost its reserve base in the area from 66 million BOE to 287 million BOE, providing it with a long growth runway. The DJ Basin will also allow Bill Barrett to start growing its production base again after its asset sales.

From the first quarter of 2013 to the same quarter in 2014, Bill Barrett's dry gas production plummeted by over 50% as its oil production rose 16%, causing its overall output to fall down to 27,000 BOE/d. For the first two months of the second quarter, Bill Barrett produced 29,000 BOE/d. After the Powder River Basin sale, Bill Barrett will be able to continuously grow on the back of its DJ Basin operations, rewarding shareholders with stable production levels.

Foolish conclusion
Bill Barrett needs to get its debt under control. Fortunately, it looks like management has a clear plan to take a large chunk out of it. Investors need to pay close attention to Bill Barrett's Powder River Basin drilling program. If it's successful like EOG Resources was then it could fetch a much higher price for the asset than Wall Street is expecting.

Colorado was once thought of as just a dry gas region, but fracking has opened up new liquids-producing intervals that companies like Bill Barrett and EOG Resources have been able to successfully develop. The DJ Basin is where Bill Barrett will be able to completely revamp its operations and begin rewarding investors once more, which is why shareholders should pay close attention to what management has in store for the DJ Basin.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

Callum Turcan owns shares of EOG Resources. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers