Bayou City Energy announced its affiliate, BCE Roadrunner LLC, has entered into a Joint Development Agreement with Chaparral Energy, an affiliate of Chaparral Energy, Inc. to finance the drilling of joint wells on Chaparral’s STACK acreage in Canadian and Garfield counties, Oklahoma targeting the Osage, Meramec and Woodford formations.
To date, Chaparral has drilled more than 80 horizontal STACK wells across its position in the play and has been able to reduce drilling and completions costs despite increasing completion design intensity. Chaparral has also participated in more than 115 non-operated wells in Canadian, Kingfisher and Garfield counties.
The initial drilling program calls for the development of 30 wells, which will be developed in one tranche. The parties may also mutually agree to additional tranches on the same terms and conditions as the initial tranche. Development on the joint wells began earlier this month and will continue through 2018. The joint venture does not preclude Chaparral from continuing to develop its STACK acreage with its own capital. Furthermore, the joint venture will allow Chaparral to redirect drilling capital toward acreage acquisitions and to existing HBP acreage, to capitalize on efficiencies of scale due to the certainty of development plan, and to convert reserves to PDP. These benefits result in significant value creation for Chaparral.
Under the JDA, DrillCo has committed to fund 100% of Chaparral’s working interest share of drilling, completion and equipping costs, subject to average well cost caps that vary by well-type across location and targeted formations, resulting in a maximum capital commitment of approximately $100 million for the first tranche. This structure also provides Chaparral with a large upfront promote on the joint wells. All wells will be completed using enhanced completion designs and practices honed over Chaparral’s several years of successful operations in the play.
In exchange for funding 100% of the drilling, completion and equipping costs, DrillCo will receive 85% of Chaparral’s working interest in each well, which will be reduced to 25% of Chaparral’s initial working interest upon DrillCo achieving a 14% internal rate of return in the tranche. The interests to be conveyed to DrillCo are wellbore interests only, and do not otherwise burden Chaparral’s acreage position or development units.
BCE Founding Partner, William McMullen, said: “We are thrilled to partner with Earl Reynolds and his team at Chaparral in developing these targeted drilling locations in Canadian and Garfield counties. Chaparral has demonstrated a track record of being a consistent low-cost operator while still being able to achieve high production rates and strong EURs. We expect the development program to deliver favorable economic returns even in today’s challenging commodity price environment.”
Chaparral CEO Earl Reynolds added, “We are pleased to announce our partnership with an experienced and successful firm such as BCE, whose significant investment experience in the STACK is a further testament to the value and potential of Chaparral’s Garfield and Canadian County assets. Their flexible E&P investment platform and ability to execute on unique, operator-friendly transaction structures will allow us to accelerate our STACK development plans in both Canadian and Garfield counties, while maintaining our industry-leading, low-cost structure and overall healthy corporate balance sheet.”
BCE Partner, Mark Stoner, noted, “The formation of this JDA with Chaparral is a prime example of BCE’s flexible E&P investment platform. Such drilling partnerships allow BCE’s capital to target the best drilling locations available today via a resilient investment structure that allows both parties to achieve their strategic and financial objectives in a dynamic pricing environment. The Chaparral team is leading the delineation of this play with efficient and effective operations and is an ideal DrillCo partner.”
Since inception, Bayou City, through its funds and co-investment, has committed or invested over $700mm to STACK E&P companies through both drilling partnerships and on-balance sheet investments.