Friday, October 29, 2010

Devon Farms Out a Small Chunk to Sun River Energy

Sun River Energy, a small Dallas-based E&P, announced Wednesday that Devon Energy had farmed out 5,700 gross acre (5,470 net) parcel in Panola Co., Texas prospective for the Haynesville Shale to the company.  Sun River did not make an upfront payment but is required by the agreement to drill a certain number of vertical test wells targeting the Haynesville.  If successful, Devon will get a carried working interest in those wells.  Sun River's working interest will be between 75% and 77.5%.  If the company drills more wells than called for in the agreement, Devon will chip in its share of the drilling costs.

Expect more arrangements like this in the future as companies with big leaseholds - especially with approaching expiration dates - want to focus their energies on their core properties.  Producers don't want to lose their leases, even those that are viewed as marginal, and a farm-out arrangement allows the company to have a "taste" of the upside without having to invest significantly in the drilling costs.  For Devon, it is a low to no cost way to see upside on a lease it might have otherwise lost.

On the surface it is a win-win because the big company is able to get value out of the lease, a smaller independent gets to participate in the Haynesville Shale and the landowner finally gets some drilling on his or her land.  But the downside of this arrangement, at least from the perspective of the landowner, is that it ties up the leases with vertical wells.  The landowner is committed to the existing lease but doesn't get a lot of royalty income to show for it.  The land might see horizontal wells down the line, but who knows when?

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