Wednesday, October 22, 2008

Honey, It Was Just a Mirage

Interesting that during the last two or three Chesapeake calls, very little, other than the announcement of a monetization plan, was said about the Marcellus. The Haynesville was all the rage. During last week's Investor & Analyst meeting, the company left no doubt that the development of the Marcellus is a major priority and one that will contribute more than any other to the bottom line. The company plans to ramp production from 20 mmcfd to 60 mmcfd by the end of '09 and to 130 mmcfd through '10 with the rig count going from 4 to 10 to 20 during the period. With the lowest finding costs and highest net selling price, the Marcellus will provide, by far, the highest IRR of any of the shales; at $7 gas about 200% BFIT as compared to 25% in the Fayetteville and Barnett and 50% in the Haynesville.

Some of Aubrey McClendon's more interesting comments:

"We did everything that we said we were going to do during the quarter and ended up with a stock price at $38 on September 30. Today we wake up 15 days later and the stock price is $16. So what’s happened at the company? We’re still going to earn almost $10 a share of cash flow in 2009. We’re still going to earn over $3 a share of earnings, and nothing’s changed.

...I can’t do anything to convince anybody here or anybody listening that we have enough money. We've told you that we have enough money, $1.1 billion. I think we’ll end the year at $3.5 billion. I just read that at September 30 British Petroleum had $3.6 billion. I’m sure they have more resources than us, but the point is that we have plenty of cash today, we’ll continue to build cash through the quarter and into ’09 and ’10.

...I guess another thing that’s been a little surprising to me is I’ve seen some analyses where if gas prices go to $5, people go out and spend their cash resources. Why would we do that? Why are we not capable of decreasing our capital expenditures? We are not going to spend more cash than what we can generate.

...I can assure you that buying leases for X and selling them for 5X or 10X is a lot more profitable than trying to produce gas at $5 or $6 mcf.

...The neat thing is that leasehold is always cheap in a play whether you pay $5,000 an acre or $10,000 or $20,000 or $30,000. In most of these shale plays it matters hardly at all as to what you pay for leasehold because you consume so much leasehold, 80 acres generally a well and these wells can cost $3 million to $6.5 million. So you put some leasehold on top of that it’s just not much money at the end of the day.

...Natural gas is simply the fuel that is going to continue to make an enormous impact in our country and in our world. My own view is that we’re near a point of peak oil production whether it’s today or two years ago or five years from now or 10 years from now. It doesn’t really matter to me if it’s geological or if it’s geopolitical or a little bit of both."

Full Transcript