Drillbits

Reach Out I'll Be There

XTO updated it's hedge position today as having approximately 70% of 2009 projected production locked in at $11 mcfe. The NG component is in the $9 range. At that level, the company should be able to reduce debt by $1 billion next year.

With the financial markets still in disarray, NG knocking on the $6 door, and just about everybody reporting 70-80% of next years production as hedged in the $9-$10 range, how'd you like to be on the other side of those trades? As companies have been reporting earnings, you're now beginning to see the release of counterparty exposures. Good to see, but a bit concerning.

Let's just hope this happiness isn't just an illusion.

RIP Levi (Levi Stubbs - June 6, 1936-October 17, 2008)

PA DEP Shoots SWPA Drillers First, Asks Questions Later

The Pennsylvania Department of Environmental Protection is investigating the source of unusually high levels of total dissolved solids, or TDS, detected at points along approximately 70 stream miles on the Monongahela River beginning at the West Virginia border to the confluence with the Youghigheny River. Test results indicate levels of up to 852 milligrams per liter which exceed the allowable 500mg/l.

To immediately address elevated TDS levels, DEP is directing all sewage treatment plants accepting gas well drilling wastewater, and which discharge to the Monongahela River or its tributaries, to drastically reduce the volume of gas well drilling wastewater they accept to one percent of their daily flow. Currently gas well drilling wastewater constitutes up to 20 percent of those plants daily flow. The restrictions will reduce the volume of drilling wastewater treated by 90 to 95 percent. The restrictions will remain in place until the levels of TDS fall below the 500 milligram per liter standard.

Full Story

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

Industry Update

Yesterday's article in Investor's Business Daily pretty much sums up what's going on in the gas patch. The title I think is a little dated. It should have been Credit Crunch Hits Natural Gas Drilling.

IBD Article