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

By Callum Turcan - Jul 28, 2014 at 3:49PM

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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.

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.

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