Drillbits

How a Player Plays the Play

In recent days, after leasing in the Marcellus shale had stopped almost completely, the last in a long line of the major E&P companies have sent lease rescission letters out to landowners who had signed up in the past few months. Two months ago, at the head of that line was, of course, Chesapeake Energy. Within a matter of days, Range Resources followed Chesapeake's lead; then Chief followed suit, and more recently, Cabot, East Resources and XTO all did too. Along the way, most of the smaller outfits also dropped out, and finally, last week, even zero debt Rex hauled its box of letters down to the post office.

So, while all this was going on, who do you think had his landman building mailing lists for the next round of lease offers,...you know, of all of those irate property owners that were just dumped by the other companies? And, guess who just mailed a big box of those letters in Greene County, PA last week? .......yep, right again, Aubrey McClendon.

While there are legitimate concerns among some of these companies about expending cash and credit lines in the face of a credit crunch and impending recession, most, in the wake of Chesapeake's walking away, just decided to wait it out for lower lease prices. It will be interesting to see how that gambit works out. As for Chesapeake, it will be really interesting to see how the new offers stack up against its recent $5,800/acre effective flip of previously acquired leasehold to StatoilHydro.

Also last week, Chesapeake made over 25 permit applications in one of the NWPA counties...and why not? It is becoming increasingly clear that the economics of the Marcellus are the best of the shale plays. Natural gas futures are still in contango and with the Marcellus' Appalachian premium, will still bring $8.50-$9.50/mcf for the next two years while input costs: day rates, pipe, supplies and services are all coming down.

As so often happens in the O&G business.......the cycle begins anew.

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)

Drillbits

Up From the Ground Come a Bubble

In what must be one of the greatest sector collapses in market history, participants in the nation's shale plays have had to move quickly to pare back risk. In an industry where the taking and management of risk are at the core of a company's success, it's not surprising that dramatic steps had to be taken. Most dramatic of all, beyond the deals falling through, capex being cut, leasing being stopped, wells being shut in and rigs being let go, was the quickness of some companies and individuals to cut debt exposure. Some, voluntarily and some not, and some more quickly than others.

This writer has long praised Aubrey McClendon for his bullishness and quickness in exploiting the shale plays and putting Chesapeake at the top of the producer list. The most remarkable part this ascent was his willingness to put his personal wealth on the line. Nobody did that better than Aubrey. Had I known that he'd also bought the last several million shares on margin, my remarks might not have been so laudatory. It's hard to say what his net equity was at the top when his holdings were worth $1.9 billion, but by the day of the first call, it had dropped to $750 million and after three days of selling, at Friday's close, it was worth $31.9 million. Nonetheless, I'll still root for him as long as he's capable of learning THE LESSON OF A LIFETIME and managing the company with the knowledge that there's so much more to lose if he's not.

Bob Simpson of XTO also did some heavy selling. Apparently, not by force as in McClendon's case, but Simpson cited cleaning up some debt as one of his reasons for disposing of 2.777 million shares or about 30% of his holdings.

Stories:
McClendon
Simpson

XTO to Raise over US $3.5 Billion

Through an equity offering of 26 million shares priced yesterday at $48 each plus over allotments coupled with senior note offerings of US$2.25 billion, XTO will receive proceeds of around $3.5 billion. The company intends to use the net proceeds from the offerings to fund its pending acquisitions, to pay down commercial paper and for general corporate purposes, including future acquisitions.

Full Equity Story at http://phx.corporate-ir.net/phoenix.zhtml?c=97780&p=irol-newsArticle&ID=1182908&highlight=
Full Debt Story at http://phx.corporate-ir.net/phoenix.zhtml?c=97780&p=irol-newsArticle&ID=1183238&highlight=

XTO Quietly Expanding in Marcellus

During yesterday's Q2 earnings conference call, XTO revealed having 280,000 acres in the Marcellus play. This is 128,000 acres higher than the previously reported 152,000 acres acquired from Linn in April. A good portion of the increase is probably attributable to the Deposit NY landowners group which at last count was negotiating with 37,000 acres though no final acreage amounts have been released.

In response to a question about water resource and infrastructure issues impacting development, President Keith Hutton noted that "Yes, there are going to be some issues with water handling and disposal and so forth" but that given the huge potential of the play, the industry would figure it out. He also said that because of the sheer size of the play the hotter areas will be more spread out and thus require a longer time for delivery infrastructure build out. "The Marcellus is a five year type game before it gets running real hard."

Full Transcript at http://seekingalpha.com/article/86362-xto-energy-inc-q2-2008-earnings-call-transcript?page=-1&find=marcellus

XTO Announces $1.68 Billion Stock Offering

At the close of trading today, XTO announced plans to sell 26 million shares of common stock to fund recent acquisitions in the nation's shale plays. The issuance would be 29.9 million shares with over allotments. Estimated proceeds assume yesterday's closing price of $57.98. In after hours trading, the stock is trading down $6.23 to $51.75. At this price, the anticipated proceeds would be over $185 million less.

Full Story at http://phx.corporate-ir.net/phoenix.zhtml?c=97780&p=irol-news

XTO Earnings - The Season Opener for E&P

XTO announced Q2 earnings this morning with a $.04 upside surprise. Expectations were $1.05/share on average with a range of $.95-$1.18. During the June quarter last year, XTO earned $.91. Revenues were up 45.7% over last year and gas production year over year were up 35%.

XTO also announced today that it has entered into definitive agreements with multiple parties to purchase producing properties located in its Eastern and San Juan Regions and acreage positions in the Marcellus, Fayetteville, Barnett, and Haynesville shales, for a total of about $1.3 billion, of which $1 billion closed during the second quarter.

In a separate release, XTO announced the acquisition of 12,900 acres in the Barnett for $800 million. The acreage is currently producing 35 mmcf/day. The seller was not disclosed.

Full Stories at http://phx.corporate-ir.net/phoenix.zhtml?c=97780&p=irol-news