Chesapeake Deals Norway's StatoilHydro into the Marcellus Shale

New Standard Set for Marcellus Shale Acreage

Well, Aubrey got 'er done. The long awaited joint venture in Chesapeake's Marcellus shale assets was announced this morning to my and most of the investment community's surprise. While the long term value of Chesapeake's acreage position was never really in question, its ability to do a deal under the current economic circumstances certainly was. Eventhough the proceeds are a little light of the last forecast, it's a good deal for Chesapeake. Fortunately, StatoilHydro took the long view and after a thorough analysis of the economics of the play, signed on for nearly $5,800 per acre at a time when Chesapeake and others are paying only $500-$2500.

Europe's #2 natural gas supplier, StatoilHydro, committed US$ 3.375 billion for 32.5% of Chesapeake's 1.8 million acre interest. $1.25B in cash will be paid at closing and $2.125B of drilling carry will be paid over the next four years to fund 75% of Chesapeake's drilling costs. The presentation from this morning's conference call shows that the company used mildly conservative economic assumptions in the decision: an average EUR per well of 3.1 bcf and drilling capex of $3.5 million per well. But, a rather aggressive drilling program over the next four years may prove an underestimated political risk. At $3,5 million per well, the drilling carry implies over 800 horizontal well completions during the next four years. Since the carry is a use it or lose it proposition, if Chesapeake is to use all of it, the number of wells would seemingly have to be even greater as drilling costs go down. The companies expect to ramp to an average of 40 operating rigs in 2012, so, at 10 wells per rig/yr, the plan is back end loaded. Also aggressive was the 87% net revenue interest assumption which seems to preclude the imposition of a severance tax in Pennsylvania.

Overall, StatoilHydro plans commit US$ 6.0B over the next four years including $ 2.63B to the joint venture for its 32.5% share of capex. This amount, as well as the drilling carry, will be somewhat variable as it is dependent on Chesapeake's completion performance, but it does imply that Chesapeake intends to spend US$ 8.0B of its own in project capex beyond its share of the drilling costs. Chesapeake plans to continue acquiring leasehold in the Marcellus Shale and StatoilHydro will have the right to a 32.5% participation in any such additional leasehold.

Press Release
StatoilHydro Presentation

California Chokes on Alternative Fuels Proposition

California rejected Proposition 10 by a wide margin in yesterday's voting as 60% of the state's 9.5 million voters said no. The Alternative Fuel Vehicles And Renewable Energy Bonds Initiative Statute was strongly supported by T. Boone Pickens and Aubrey McClendon to promote natural gas as an important alternative for transportation fuel in the state.

The measure was strongly opposed by the Sierra Club, League of Women Voters, California Nurses Association, California Federation of Teachers, Consumer Federation of California, Consumer Watchdog, the Utility Reform Network, and California Labor Federation, AFL-CIO.

Description of Bill

Engelder-Appalachin Fracture Systems-Platts-Marcellus Shale Presentation

Terry Engelder has provided his Platts Marcellus Shale presentation for posting. It is available by clicking either the link below, or in the "Technical Papers" section on the sidebar. He also offered a few comments:

The hard variables lending to his estimate were provided, in the main, by Chesapeake.

Professor Engelder notes, "the more important number comes from the potentially accessible fraction of the GIP which I placed arbitrarily just under 400 Tcf recoverable (One-third of the play). Range has always told people that they think recovery will be patchy…….exactly what this percentage is has yet to be discovered. "

He also pointed out those key elements of his and Gary Lash's prior 50 tcf noting, "Gary Lash and I were conservative to a fault by assuming just a 50 foot thickness (we know the Marcellus is much thicker). This meant that were also conservative in our calculation for GIP/section. Finally, we only allowed for a recovery factor of 10%. "

Factoring 100' average thickness and 30% recovery(Chesapeake) to that original estimate gets you to 300 tcf, "which is not far from taking the 1100 Tcf given by Chesapeake and allowing access to only 33% of the GIP."

Finally, he noted, that "we are all on the same page of the playbook in SIZING the resource."

Engelder- Platts Presentation

After Further Review, At Least 15 Years of Gas in the Marcellus Shale

After publishing the piece about Terry Engelder's update on the Marcellus reserve estimate, I made an inquiry to confirm my assumption about the new estimate of recoverable gas in the play. To clarify, Professor Engelder notes that the new analysis is derived from a convergence of the latest data provided by Chesapeake, Range and several other operators. He provided the following assumptions used in his analysis:

Total Acreage 31,000,000
# Sections (640 acre) = 48,437.5
GIP/Section = 75 bcf
Total Gas in Place = 3,632 tcf
Recovery Factor = 30%
Technically Recoverable Gas = 1,089 tcf

Professor Engelder cautioned that a practical assessment of the amount of gas which could be expected to be recovered would need to consider how much of the acreage is accessible. There are, of course properties that cannot be developed, existing storage fields, terrain challenged areas, etc., which must be discounted. In his present assumption, 33.33% of the total acreage in the play can be considered developable. This would leave the truly recoverable reserves at 363 tcf, a sevenfold increase of the prior 50 tcf estimate and much greater than the double I reported earlier.

Under these assumptions, the Marcellus could now provide all of the natural gas consumed in the US for 15 years.

Atlas Energy Resources Provides Update

Atlas provided an update on its Marcellus shale program with news of an accelerated horizontal drilling program and a remarkable IP rate from a vertcal well in Fayette County, PA, of 3.6 mmcf/day, The company also laid claim to the title of the largest producer in the Marcellus as it surpasses 4 bcf of cumulative production.
Full Story

Marcellus Potential Doubled

Yesterday, according to the attached report of his talk at the Platts Appalachian Gas conference in Pittsburgh, Terry Engelder, Professor of Geoscience at Penn State, doubled his estimate of Marcellus GIP to 1,100 tcf. Last January, the professor surprised the natural gas industry with his upside estimate of 516 tcf. I believe the article incorrectly states that his estimate of recoverable gas is now over 1 tcf. It should actually read over 100 tcf; also, a double from his earlier 50 tcf estimate.

Full Story

Drillbits

It Matters Hardly at All

As Chesapeake Energy seeks to shore up its cash position by taking on a JV partner for its Marcellus shale, a strange, but true back story may be hurting the company's chances. The consummate land man, Aubrey McClendon, might just have outdone himself.

The company’s latest investor presentation gives an implied value of $7,500/acre for its 1.8 mm acres of Marcellus leasehold (US $13.5B). So, a 25% share would be worth $3.4B. On the basis of the previous JV deals, a portion of this amount would be in cash with the balance delivered over time in the form of a drilling cost carry. According to the presentation’s tables, these JV proceeds combined with the proceeds from sales of some producing properties in Oklahoma and South Texas are projected to raise $2.5B to $3.0B. So, $1.7B from the Marcellus would seem reasonable and, thus, a critical piece of the 12/31/08 Ending Cash forecast of $3.5B.

But, there’s a problem. While advocating a lease acquisition and monetization strategy of buy low, sell high, Mr. McClendon noted:

“One of the great advantages of a time like this is we can drive down the cost of our business. That’s not only going to be true soon on the drilling side but it’s especially true today on the leasing side as we are continuing to be very, very aggressive in driving down prices in areas of shale plays so we can acquire leases we think at a lower price going forward.” …..“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.”

Now, that’s all well and good, if, as Chairman/CEO of the largest US gas producer, you can somehow profit by professing your abilities as a land man. Call me crazy, but I’d think the best way to profit by buying and selling leases is to keep lease prices in a play high until you sell them, not knock them down while you're still trying. Then, you could tout them by saying, as Mr. McClendon did:

“The neat thing is 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 at 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.”

Instead, what Chesapeake has done in the Marcellus is to be “very, very aggressive in driving down prices”, by effectively pulling out of leasing completely. First in NEPA, then in SWPA, then Range followed suit….then a few smaller operators, then Chief and last week, Marathon. Prices have plummeted to $500 to $2,000/acre, and so have Chesapeake’s chances of doing a JV deal by year end.

More likely is another kind of deal; a deal following a Not Done or Failure to Deliver on the JV; a kind of Bear or Wachovia deal when someone deciding to commit $3.4B for a 25% share of the Marcellus realizes that the entire market cap of Chesapeake is only $10B. And that, if they hold up on the JV, they just might get the whole company for the same number.

Unfortunately, for Aubrey, since getting hit with those margin calls, his vote on the motion………why, it matters hardly at all.

October 15, Business Update Call Transcript

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

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

Petrohawk Follows Chesapeake's Lead

Petrohawk Energy decided to cut 2009 capex by one-third or $500 million. Production forecasts remain unchanged at levels 25% above 2007. The company views its projects in the Haynesville and Fayetteville as having the highest IRR and reserve growth potential, so it will focus its efforts there.

Full Story

Epsilon Energy, Ltd. Completes Horizontals and Acquires More Acreage

Epsilon Energy provided an operational update this morning. The company reported having drilled two horizontal wells in the Marcellus shale and has begun drilling a third. Two of the wells are awaiting stimulation in Pennsylvania. The company also announced an agreement with Cabot Oil and Gas for a leasehold swap of approximately 2,000 acres in Susquehanna County.

Full Story

Antero-Dominion Redux

Dominion and Antero have agreed to amend the deal they reached on June 30 by reducing the acreage involved. Originally, Antero was to acquire 205,000 acres of leasehold for $552 million. Dominion retained a 7.5% overide in the deal. Under the new arrangement, Dominion will maintain the overide but will reduce the overall acreage. The deal now will include only 114,259 acres for $347 million. As before, the rights are for the Marcellus Shale only, but the cost has increased from $2,693 to about $3,037 per acre. The parties are citing Antero's inablity to secure adequate follow on financing under current conditions in the credit market.

Full Story

Chesapeake Provides Operations Update

After the close today, Chesapeake released an operations update. The highlights:

-Company Reduces Drilling Capital Expenditure Budget through 2010 by Approximately $3 Billion and Expects Approximately $2 Billion of Excess Cash Generation in 2009 and 2010 to Be Directed Primarily to Debt Reduction

-Lower Capex and Asset and VPP Sales Lead to Lower Production Growth Forecasts for 2008 of 18% from 21% and for 2009 and 2010 of 16% from 19%

-Company Closes Fayetteville Shale Joint Venture Transaction with BP America; Discussions Progress on Marcellus Shale Joint Venture; Company Resumes Plans to Sell a $1 Billion Minority Interest in its Midstream Business Company Provides Hedging Update;

-Substantial Decline in Natural Gas and Oil Prices Has Led to an Approximate $6 Billion Favorable Mark-to-Market Change in the Company's Hedging Positions Since June 30, 2008

-Company Completes Three New Haynesville Shale Wells in September with Average per Well Initial Production Rates Exceeding 10 MMcfe per Day

A conference call to discuss this release has been scheduled for Tuesday morning, September 23, 2008, at 9:00 a.m. EDT

Full Story

Marcellus Permits in PA Increase by 73 to 257 This Year

The PA DEP announced last week that 73 drilling permits for the Marcellus Shale were approved from August 15th to September 15th. They also released this very nice graphic of the county by county count of permits issued and wells drilled in the play.

View the full image

Read the press release

SRBC Proposing New Permitting Rules

The Susquehanna River Basin Commission (SRBC) today announced it is conducting public hearings on October 21 and 22 on proposed regulatory revisions that will further protect the basin’s water resources and streamline the review of consumptive water uses by the natural gas industry. SRBC’s proposed revisions are open for public comment through October 31.

Included among the proposed revisions affecting the natural gas industry, SRBC would:

- Require all requests for consumptive water use approval to go through SRBC’s approval by rule process – an administrative procedure – rather than SRBC’s standard consumptive water use application process.

- Expand the approval by rule process to allow project sponsors to utilize a broader range of water sources as part of their consumptive use approval, including public water supplies, discharges from wastewater treatment facilities and other lesser quality water sources, and withdrawals from other sources approved separately by SRBC. (The current approval by rule process applies only to water from public water suppliers, thus making project sponsors undergo the standard consumptive use application process for all other water sources.)

- Regulate projects on a drilling pad basis, versus the current process that addresses consumptive use requests on a company-lease area basis.

- Require projects to demonstrate compliance with state and/or federal law for the treatment and disposal of flowback or produced fluids, including brines.

- Incorporate the August 14, 2008 determination by the SRBC Executive Director that all quantities of water withdrawn or used for natural gas well development be reviewed effective October 15, 2008.

- Limit SRBC approval to five years.


Press Release at http://www.srbc.net/pubinfo/press/docs/ProjectReviewNaturalGasRulemaking_Sept2008_3_.pdf

Penn's Woods' Marcellus Shale Draws Attention

The Pennsylvania Department of Conservation & Natural Resources announced the winners of its September 3, Oil & Gas Lease offering. Ten year leases at a 16% royalty were offered for eighteen tracts totaling 74,023 acres in Tioga County. The highest bids, $5,838/acre for a 5741 acre tract and $4,369 for a 3598 acre tract, came from Fortuna Energy. ExxonMobil, which low balled the process by bidding $1,151/acre for everything, picked up six tracts totaling 19,439 acres as the only bidder.

Bid Info Here

Rex Energy Diverting New Albany Assets to the Marcellus Shale

Rex Energy announced the divestiture of approximately 79,000 net undeveloped acres in Indiana and certain related non-producing wells for approximately $8.4 million. The proceeds will be used for development of the Marcellus as well as it's Alkali-Surfactant-Polymer (ASP) projects in the Illinois Basin. The buyer was not disclosed.

Full Story at http://www.marketwatch.com/news/story/rex-energy-corporation-announces-sale/story.aspx?guid=%7BF04B22D4-095B-4A7B-B949-276465A3F419%7D&dist=hppr