Monday, December 29, 2008

Petrohawk's Haynesville Capex Budget

While there has been much bad news where it concerns capital budgets (drilling money) for gas E&P companies, one thing recently caught my eye. Petrohawk, which has been aggressive in the Haynesville Play but has been overshadowed by Chesapeake Energy, announced that it has reduced its capital budget for 2009 from $1.5 billion to $1.0 billion. That's not so hot on the surface, but looking at how the budget is allocated, more than 55%, or $550 million, is allocated to the Haynesville Shale. Twelve of the company's twenty rigs will be allocated to the Haynesville Play. Not so shabby!

Here is a link to a recent company presentation detailing this information.

Sunday, December 28, 2008

St. Mary Land & Exploration Cutting Back Capex Budget

It's an oft-repeated story, but St. Mary Land & Exploration announced last week that it has scaled back its capital expense budget for 2009. By the end of January 2009 it will idle six drilling rigs and keep nine working, focusing on the Haynesville, Eagleford and Marcellus plays. Their expectation is that things will be tight for the first half of the year but if they generate a suitable amount of cash flow they will expand their capital expenditures during the second half of the year.

In its press release, St. Mary focuses on the concept of being flexible. This is has also been repeated by many other E&P companies that are slashing capital budgets. It's another way of saying, "We have no freakin' idea what is going on with oil and gas commodity prices, but when prices go up we'll start drilling like crazy again." It's the way of the industry - they are slaves to commodity prices. It's hard to be proactive in an environment where you can't borrow money, you can't sell your product for much of a profit and a bunch of hedge funds are shorting your stock as commodity prices drop. You just have to hold on for dear life.

Announcements of capital budget reductions have been coming out so often that it's hard to follow. Chesapeake has already lowered its capital budget four times since mid-summer. One thing to remember, however, is that the companies that did lots of leasing over the past year have only three to five years (depending on the lease terms) to drill before losing the leases. Given the fact that many of the leases are small, that's lots of potential drilling sites. Don't forget also that drilling rigs (both the equipment and personnel) are a constraining resource. Once things stabilize with commodity prices and the capital markets, I believe there will be a rush to restart drilling. When those two factors occur, however, I have no idea.

Sunday, December 14, 2008

Petrohawk: 3 New Haynesville Wells - 73Mmcfe/Day

Last week Petrohawk made a big announcement that it placed three new Haynesville Play wells into service at a combined rate of 73 Mmcfe/d, one with the highest reported initial production rate of any well in Petrohawk's history. That's HUGE! The Company expects to complete five additional Haynesville Shale wells by the end of the year. From their release:

--The Brown 17 #4 (69% W.I.), located in Section 17-T16N-R11W, Bossier Parish, Louisiana, was completed on November 18 and produced at a rate of 23.4 Mmcfe/d on a 26/64" choke with 7,700# flowing casing pressure.

--The Goodwin 9 #5 (97% W.I.), located in Section 9-T16N-R11W, Bossier Parish, Louisiana, was completed on November 25 and produced at a rate of 21.1 Mmcfe/d on a 26/64" choke with 6,750# flowing casing pressure.

--The Sample 9 #1 (100% W.I.) is located in Section 9-T14N-R11W, Red River Parish, Louisiana, approximately 12 miles south of Elm Grove Field. It was completed on November 27 and produced at a rate of 28.2 Mmcfe/d on a 30/64" choke with 7,100# flowing casing pressure.

Friday, November 14, 2008

Chesapeake Enters JV Deal for Marcellus Shale

After much discussion, Chesapeake Energy has signed a big joint venture deal with StatoilHydro ASA, the Norwegian state owned oil company, to develop Chesapeake's interests in the Marcellus Shale (press release). Under the agreement, Statoil will pay Chesapeake $1.25 billion in cash upfront and fund 75% of Chesapeake's Marcellus drilling costs up to an additional $2.13 billion. Based on the all-in numbers, the Wall Street Journal estimates the deal to be valued at approximately $5,600 per acre. Others peg the value at $5,800 to $6,000 per acre. Given the fact that lease bonuses in the Marcellus region never approached those in the Haynesville or Barnett Shales, it appears to be a very good deal for Chesapeake.

The deal brings up a few very interesting points:

First, the valuation of the deal is a bright light in an otherwise dour natural gas market. Since July, prices have plummeted by approximately 50%, and the gas price chart looks more like a cliff face than the side of a hill. Additionally, with the troubles in the credit markets, financing is increasingly difficult to find, and companies with lots of debt (like the independent E&Ps) are starting to look over-leveraged and risky. Stock prices have clearly reflected this, as some independent E&P's have seen 65% to 80% decreases in stock prices, far outpacing the decline in natural gas prices. Thre is definitely a feeling of panic out there. I view the Chesapeake deal as something that will calm the proverbial waters and allow the ships at sea to regain their bearings.

Second, some analysts believe (as I do) that the fundamentals of the natural gas market will support a higher price of gas. The pricing of the Statoil/Chesapeake deal seems to reflect this.

Third, with declining opportunities in many other parts of the world, either because of political instability or physically declining fields, many of the larger international players are looking to buy into US gas reserves. The US is a politically stable environment, and they view natural gas as a good future fuel for the US because it is clean and relatively abundant. BP has already struck two deals with Chesapeake for its Woodfork and Fayetteville Shale assets. Shell has partnered with EnCana in the Haynesville Shale, and Norwegian company Norse Energy already owns around 175,000 acres in the Marcellus Shale (see article). To me this is another positive because increased foreign investment will help fund and expedite the capital intensive development of the Hayenesville Shale and other shale fields.

Thursday, November 13, 2008

Petrohawk Announces Results from Five Haynesville Wells

In a presentation at the Bank of America 2008 Energy Conference on November 12, Petrohawk announced that it has five producing Haynesville Wells producing between 15 and 20 MMcfe/day with gross production of 55 MMcfe/day (link to presentation). Given Petrohawk's recent production, the company estimates that its total "risked" reserves in the Haynesville Shale is 11.9 Tcfe (that's Trillion). That's a lot of gas.

The five wells are clustered in the area where Caddo, Bossier and DeSoto Parishes meet. Three are in southern Bossier T16N R11W (EGP #63, #64 and #65; 15.4 - 16.8 MMcfe/day), one is in southern Caddo T15N R12W (Hutchinson 9 #5; 20.1 MMcfe/day) and the fifth is in northern DeSoto T15N R13W (Hunt Plywood 35 #1; 17.0 MMcfe/day).

The presentation has a map on page 9 showing the producing sites and the sites where Petrohawk is currently drilling and plans to drill in Q4 2008. Most of those sites are in southern Bossier and northern Red River Parishes. Additionally, Petrohawk has non-operating interests in a number of wells in southwest Caddo Parish that will be drilled in Q4 2008. In 2009, Petrohawk plans to drill 75 wells on leases it operates.

Tuesday, October 21, 2008

Petrohawk Announces Results of Third Haynesville Well

Petrohawk has hit another gusher in the Haynesville Play. In a press release today, the company announced results from its third Haynesville well, the Hunt Plywood 36 #11H, located in Section 36, Township 15 North, Range 13 West. The well was placed on production at a rate of approximately 17.0 Mmcfe/d, on a 22/64" choke with 7,225 pounds flowing casing pressure. The well has averaged 15.4 Mmfe/d over the first 30 days of production. That compares favorably with the company's results on two previous wells.


More from the Petrohawk press release: "The Company's first operated Haynesville Shale well, the Elm Grove Plantation (EGP) #63H, has produced for approximately 100 days and has averaged 8.8 Mmcfe/d over this period. Petrohawk's second operated well, the Hutchinson 9 #5H, has been on production for approximately 67 days and has averaged 14.6 Mmcfe/d over that time period. Several additional Haynesville Shale wells are currently being completed.


"The Company has instituted a "pre-drill", or spudder rig, program in the Haynesville Shale designed to accelerate the pace of drilling. Ten operated horizontal rigs are currently drilling in the play as well as five spudder rigs. Petrohawk expects to exit 2008 with twelve operated horizontal rigs drilling in the play. To date, the Company has drilled through the Haynesville Shale in a total of 16 wells. The added well control has shown the Shale to be consistently thick and with excellent reservoir quality in all of these wells. With the drilling program currently in place, Petrohawk estimates that approximately 18 wells will be on production prior to the end of the fourth quarter out of a total of 26 wells drilled through the Shale section by the end of the year."


The company also announced the discovery of a new shale find in south Texas called the Eagle Ford Shale in LaSalle County. They have drilled two wells there, one producing the other soon to go on line.

Monday, October 20, 2008

Bonuses Not Going Up Any More

With all of the chaos on Wall Street and the pressure on the natural gas drilling companies, you have seen lease bonuses peak in the Haynesville Play. They won't go back to zero, but the daily news of the next rich bonus is over. At least for a while.

While it hasn't been stated, the writing is on the wall. Chesapeake Energy cut back approximately 25% of its leasing staff. Petrohawk, Chesapeake and others are scaling back their capital expenditures. They need to drill the leases they have to hold them, so, while they may want more land, they can't take down more than they can drill in 3-5 years. The pressure is on from Wall Street to show returns for all of the eye popping leases these companies have signed. With the price of natural gas hovering below $7, the pressure is doubled.

This isn't doomsday, but most of these companies are moving from the leasing phase to the drilling phase. There will be new leasing, but it won't be making the headlines.

Friday, October 17, 2008

Takeover Fears

What a crazy few weeks this has been. To me, the news is a little better this week, but some of the big gas E&P companies aren't feeling good vibes just yet. As noted earlier, Aubrey McClendon had to sell approximately 94% of his stock to meet margin calls. Additionally, XTO's CEO Bob Simpson had to sell 2.1 million shares (30% of his holdings) and the CFO Lewis Baldwin had to sell 535,700 shares (33% of his holdings) for the same reason.

The news this week is that some of the big Haynesville Play companies are reacting to concerns about being involuntarily bought out by rivals. While some companies have been rumored to be on the market for a long time (i.e. Petrohawk), other companies are vulnerable because of their suddenly very low stock prices. Today, Chesapeake was in the news saying that a buyout is unlikely and yesterday Petrohawk adopted a "Stockholders Rights Plan," which is one way for a company to defend itself against an unwanted corporate takeover.

I believe that market forces are very much aligned against corporate takeovers because of the poor credit market (it's hard to pay cash for a company unless you already have lots of excess cash in the bank) and because many of the would be acquirers have depressed stock prices themselves (making it hard to buy a company for stock). But there are people out there with piles of cash and ready access to bank loans, including private equity companies and some of the larger integrated oil companies, so a takeover bid is not out of the question. It's just that a company like Petrohawk would rather have seen a takeover bid when its stock was trading at $48 than when it is trading at $12.

Friday, October 10, 2008

Holy Shit!!!

Pardon the low grade French, but it's been an awful week/month for the stock market and an even worse one for natural gas stocks. I'll not delve into the details because there is too much blood on the floor, but suffice to say that the price of natural gas is down and the values of the gas E&P companies are down much more.

The price of natural gas dipped below $7 (the spot and futures are a hair over $6.50 as I write this), so the gas stocks are getting pummeled. The $7 figure has been tossed around as the point where expensive horizontal drilling becomes economical. Below that there is not as much reason for the gas companies to risk too much capital to drill (except to hold a lease). This past month has been a death spiral for the gas stocks, exacerbated by the falling price of gas, the crappy overall market conditions and the activities of traders and short sellers who are causing severe swings in the gas stocks.

The news that prompted my headline en Francais is a press release I noticed that acknowledged that Chesapeake Energy CEO Aubrey McClendon had to sell "substantially all" of his CHK stock. He made, sold and consumed the Kool-Aid and was a big buyer when the stock was in the $50's (it closed at $16.52 today, dipping as low as the low $12's today, after peaking several months ago around $74). This man was a billionaire based on his CHK holdings and was buying stock in multiples of hundreds of millions of dollars this year. Being that much of a believer probably prompted much of the gold rush in the gas stocks we witnessed this past spring and summer. To be forced to sell most of his stock (the exact amount was not disclosed today) has to be devastating to McClendon, who was Cowboy In Charge of the Natural Gas Movement. He is in no way a poor man now (he sold the stock - he didn't lose it), but hubris can be a bitter pill.

Where do we go from here? I have no clue. Pray for a cold winter, I guess, to see a spike in natural gas prices. I think over time the call for domestically produced energy and the calming of the markets will see gas prices rise and stabilize somewhat. I think the values of the gas stocks will gradually increase to pre-boomlet prices but not back to the spiked valuations. The exploration companies took on lots of debt (adding risk to the companies) and sold lots of stock (diluting the value of the stock) this year, so a more sober market will most likely more even-handedly balance the opportunity and risk of the companies.

Without viable exploration companies and stabilized (read: higher) natural gas prices, the sexy Haynesville leases will sit on the shelf and the grandiose drilling plans will be put on the back burner.

Tuesday, September 23, 2008

Low Natural Gas Prices for a While?

I was reading Chesapeake Energy's recent operational and financial update and was a little taken aback by some of what I read. The gist of the release is that Chesapeake is going to reduce its drilling capital budget by $3.2 billion through 2010. This is big. It comes as a result of the suddenly depressed price of natural gas, and Chesapeake probably won't be the last company to issue a statement that they are cutting back on near future drilling costs.

To me this indicates that the gas companies are actually a little scared about the price of natural gas going forward. All of this talk about over supply and lessened demand in the market might be more real than previously anticipated. In reading Chesapeake's statement, the company almost made it sound like getting natural gas into cars will be a necessity rather than a bonus.

Chesapeake is under pressure from Wall Street to reduce its debt to stabilize its stock price. To say that the company is going to spend billions on drilling when the price of natural gas is almost too low to make a profit on some of the wells puts Chesapeake in a bad position. This is going to be a tricky play for Chesapeake given the fact that the company has more than a half million acres (gross) of leased property that it has to drill to hold the leases by three to five years from now. It will make Wall Street happy in the short term, but it is still an open question for the long term.

Tuesday, September 16, 2008

Interesting Morningstar Article

In my previous post, I referenced an article on Morningstar.com (link to article) that offered some interesting insight and analysis of the perceived upcoming oversupply in the natural gas industry. I recommend reading the article (it's not too long) because it makes some great points about the gas industry and the Haynesville Play.

Perhaps the most interesting section is the discussion of Haynesville. Because there has been such a land rush in the Haynesville Play, the gas companies are under huge pressure to drill. They amount of land leased is tremendous - Chesapeake has leased over 550,000 acres (not counting what it has put in joint ventures to calculate its "net leased" land) - and most of the leases are for three years (some are three with a two year option). This creates a need to drill and produce on the land to be able to hold the lease before it expires. They are hell-bent to get the leases HBP (held by production) so they can suck it dry over time.

This rush to drill by multiple companies has caused huge strains on the drilling infrastructure - drilling rigs, parts and supplies, pipeline capacity and personnel. There is only so much infrastructure out there and if the production out of Haynesville is going to be as big as expected, it's going to be stuck in the ground without huge expansion of the above ground resources. Don't forget that there are other plays demanding these resources, including Barnett, Marcellus, Fayetteville and Woodford. Chesapeake is on record having said that they have been building new rigs over the past couple of years for this very reason, but what about the other guys?

Another consideration related to the constrained resources is the monetary capital required to do all of this drilling in a short period of time. The exploration companies have spent the summer selling equity, raising debt, selling assets and entering into joint venture agreements to the point that they are maxing out their availability. Wall Street sees this and is spooked. In its infinite short-sightedness, Wall Street is punishing the natural gas companies badly. All of those investors who bought new shares over the past few months have to be sweating as they watch their investments sink (in the short term, at least).

On top of these constraints, the gas companies watched the price of natural gas plummet over the past two months. The gas futures price today ($7.20 at this moment) is approximately half of what it was in mid-July. At some point expensive horizontal drilling becomes uneconomical if the sales price is too low. Let's hope smart companies locked in future gas deliveries when the prices were in the double digits.

It's going to be an interesting time in the Haynesville Play for the next year (actually next three years) to see how the exploration companies behave. With the various constraints I've mentioned above, they are in a box right now, and it seems the only way out is to "drill, baby, drill!"

Monday, September 15, 2008

Is There Something to the Oversupply Question?

As I was watching a TV commercial for Chesapeake Energy (for the company itself, not one of the many initiatives they push), I was struck with the thought that maybe there is something to the question of whether or not we are going to be facing a natural gas glut in this country for the near future. I'm seeing lots of articles stating this (see recent Morningstar article), but so much of mainstream business media plays a sad "me too" game that it's hard to know when we are reading real insight or something that is being rehashed for a different publication.

The stock prices of the major gas producers certainly indicate that many investors believe there is going to be an oversupply, but it is very hard to tell where the Smart Money and the Dumb Money diverge. Wall Street is obsessed with short term results at the expense of long term truths, which causes lots of unnecessary volatility in most stocks (which is in turn good for the traders). But the gas producers are getting hammered worse on a percentage basis than the decline in price of natural gas. Is that where the Smart Money comes in? Is the truth that there are oversupply issues on the horizon? If the price of natural gas goes down by much more, many onshore drilling projects will not be economically feasible. But sometimes it is easy to confuse the real Smart Money with the useless Overpaid Money that just acts on rumor and trends. There are way too many "Hedge Fund Managers" out there getting paid a lot to follow the herd.

But I keep scratching my head about Chesapeake. Are these media ads an act of ego (as I originally believed), a good strategic move to expand markets for natural gas to other uses and new markets (as I have come to believe) or an act of desperation by companies whose very existence is inextricably linked to natural gas and suddenly see a bleak future (I'm not there yet, but I'm starting to worry)?

Ultimately, I still think the fundamentals for natural gas are strong and the market is overreacting to short term trends. It's hard to hold tight when the ship looks like its sinking, but that's where the Smart Money makes a killing.

Thursday, September 4, 2008

Chesapeake: The New King of All Media

I was a little surprised the other day to see a two page spread in the Wall Street Journal advertising compressed natural gas for cars (CNG). Glancing over the huge ad, I was not at all surprised to see the Chesapeake Energy logo in the lower left hand corner of the ad. With all of the advertising campaigns Chesapeake has sponsored, I'm beginning to wonder if Chesapeake is an exploration and drilling company or a media and advocacy company.

Chesapeake is behind the new campaign called CNG NOW (http://www.cngnow.com/). The site is also linked to the Pickens Plan, which promotes natural gas automobiles. The company also visibly backs The American Clean Skies Foundation and Shale.TV, along with a few other geographically specific advocacy programs. Chesapeake is positioning itself as the #1 gas producer in the US, so it makes sense that it takes the lead on media initiatives that promote natural gas.

It is good for the natural gas industry to position itself as the cleanest and least expensive fossil fuel (along with being a "home grown" product), especially given all of the advertising coal is doing ("clean coal" anybody?), but I wonder where the line is between promoting your product and ego. Ultimately, promoting natural gas use both here and as an export product is beneficial to the owners in the Haynesville Play, but I sometimes get a little uneasy with some of Chesapeake's techniques.

Tuesday, September 2, 2008

BP-Chesapeake Deal in Arkansas

A month and a half after Chesapeake sold all of its rights in the Woodford Shale to BP, it has inked a deal to sell a 25% interest in its Fayetteville Shale to BP for a total of $1.9 billion ($1.1 billion upfront, $800K for completion costs in 2008 and 2009) (Forbes article). This continues a string of deals by Chesapeake (remember huge Plains Exploration deal in the Haynesville Play?) that will likely continue until they sign a deal for their interest in the Marcellus Shale.

Chesapeake's strategy is hitting full stride. The company has decided to focus on the Barnett, Haynesville, Fayetteville and Marcellus Shales and the strategy is to get into the play fast and hard to tie up as much acreage as possible and then get a big player as a partner to provide additional funding and support to drill and produce on the properties. This strategy is necessary because Chesapeake has taken on a large amount of debt in its aggressive activities. I'm sure they'd rather go it alone than sell of a portion of their stake, but since the company has taken down so much land, it will require huge amounts of capital to do the drilling. Chesapeake doesn't have enough debt capacity, so they have to set up these joint ventures. It is rather ingenious because they are making a big profit on their early land deals and then share the burden of the risk for the capital-intensive drilling component.

Thursday, August 14, 2008

The Big Story vs. The Big Picture

The two stories of natural gas oversupply and recently efficiencies leading to lower energy demand are getting lots of traction in the media, from newspapers to blogs. The recent price declines in natural gas (Henry Hub spot price was $8.10 at yesterday's close) and oil (about $114 right now) are certainly help drive the stories. But it is important when reading The Big Story to keep in mind The Big Picture.

I'm no prognosticator, but it's interesting to see the stories evolve as various media outlets pick them up and then beat them to death. I think there is a lot of overreaction going on here. As I've noted before, there is speculation that LNG imports will pick up again this year (although prices in Europe are significantly higher than in the US, thus making Europe a more attractive market) and smash gas prices in the US. There is also discussion that current exports to Mexico and Canada are artificially supporting the consumption (and therefore the price) of natural gas. There are many other ingredients suggesting depressed gas prices.

With all of the sudden doom and gloom, it's easy to overlook the long term situation: domestic natural gas is relatively clean (certainly in comparison to coal), relatively cheap (especially compared to oil) and absolutely NOT FROM THE MIDDLE EAST OR RUSSIA. Short term price changes are largely created by traders who profit from changing prices, either up or down. Traders do not change the ultimate fundamentals of a commodity, which in my opinion remain strong. Big decisions are being made today and in the near future that will lead to multi-billion dollar investments (building power plants, investing in natural gas technology for cars (maybe), etc.) that will drive the long term demand for gas. While recently plummeting gas prices are depressing to those who are involved in the Haynesville Play, it is important to keep in mind that the long term fundamentals remain strong.

Updated Petrohawk Presetation

Petrohawk (HK) recently came out with an updated investor presentation. There is nothing particularly earth shattering - it was at its core a "Rah Rah!" document aimed at enhancing the company's share price, especially in light of its recent decline and the sale of an additional 25 million shares to support growth - but it does affirm the company's devotion to the Haynesville Play.

The most interesting piece of information was the map (above) showing where the company has drilled, where it is currently drilling and where it will be drilling for the second half of 2008. HK is definitely focusing its efforts along the path of the Red River and the Bossier/Caddo/Red River Parish borders.

Some highlights:
  • HK has leased 300,000 net acres, up from the 150,000 it had in May, obtained at an average cost of $5,000. Obviously that cost per acre has gone up, but the company has already tied up most of the large chunks of acreage it has targeted.
  • HK has ten rigs in the area and anticipates having 20 by year end 2009. At that point, HK expects to have drilled 140 horizontal wells. The company's current Haynesville Play capital budget is $218 million.
  • The company remains open to deals and joint ventures. While things are still settling out, I would expect more sales of lease rights or joint ventures for producing among the various participants or prospective market entrants.

Tuesday, August 12, 2008

Second Petrohawk Well

New verse, same as the first.

There was a good recap of Petrohawk's recent operating activities in Oil Voice last week. Among the very interesting pieces of information relative to the Haynesville Shale was the report of results from the company's second well in the play, the Hutchinson 9-5, which came in as promising as Petrohawk's first Haynesville well. Quoting Oil Voice:

The well is "located in Section 9 / Township 15 North / Range 12 West, Caddo Parish, Louisiana. The well was completed on July 29 and tested at a rate of 16.7 Mmcfe/d on a 22/64" choke with 7,325 pounds per square inch of flowing casing pressure. Pilot hole data revealed approximately 151 feet of net Haynesville Shale at a true vertical depth of 11,222 feet. The well was completed with a nine stage fracture stimulation, including approximately 2.5 million pounds of sand."

Note the flow rate of 16.7 Mmcfe/day, which is about the same as the initial flow of the company's first well, Elm Grove Plantation #63. After a month of production, the flow rate at EGP has decreased to 13.7 Mmcfe/day, which isn't bad. The results from the well indicate that there may be approximately 170 Bcf of gas in place in the section in which it was drilled.

While I've noted a few things that interest me, there is much more in the article, which is a pretty good read.

Tuesday, August 5, 2008

Recent Declines in Natural Gas Prices

I’ve been watching natural gas prices with clenched teeth lately. Since peaking over $12.50 three weeks ago, the natural gas spot price (Henry Hub) has been declining steadily. Yesterday it closed at 9.18 (up 1.7%), but it’s down nearly 30% since reaching its recent peak (although it is nearly 50% higher than this time last year). The price of crude oil has also dropped over this same time period. Publicly traded gas exploration companies are feeling a similar hit, as their stock prices have dropped precipitously over the past three weeks (Goodrich Petroleum -50%; Chesapeake -39%; Petrohawk -46%; XTO -40%, etc.).

Much of the decline started when the government reported in mid-July that natural gas supplies are currently higher than anticipated, which bodes well for the gas heat dependent residents of the Northeast going into winter. I thought this would lead only to a short term disruption of prices, but they kept going down. Upon further investigation, I found there is much more afoot, especially in the global arena.

Energy pricing usually boils down to supply and demand. When one is askew, prices follow. The energy story for the past year has been demand, both internationally and at home. As prices have increased, energy users have found ways to cut back, which has lessened demand, which has in turn lessened upward pressure on price. Some of these changes may be short term in nature, but they have impacted the market nevertheless.

On the supply side of the equation, there are two big issues. The first is international consumption of liquefied natural gas (LNG), especially in Europe. Because Europe has little natural gas supply of its own, prices there can be 50-100% higher than in the US. These high prices have lured LNG purveyors to export higher quantities to Europe rather than the US. In 2007, US LNG imports were down 60% from the previous year. With new international fields ramping up in Qatar, Russia, Nigeria, Indonesia and Yemen, analysts expect international LNG production to increase approximately 34% next year. It is expected that increased quantities of LNG will arrive on US shores, especially as new LNG ports are constructed.

The second supply issue is the projected increase in domestic supplies over the coming years. This is driven in large part by increased access to unconventional plays like the Haynesville Shale. Some analysts suggest that domestic supply will outstrip demand this year and next. This information certainly validates recent chatter by Chesapeake CEO Aubrey McClendon of exporting US natural gas to international markets.

Bottom line: commodity prices are determined in a market environment. A good is priced based on what someone is willing to pay for it. As a result, pricing is not firm and perception and anticipation have a large role in setting prices. Clearly the perception of market participants has changed recently and prices are headed in a negative direction. The news might be different tomorrow if, say, Toyota announces plans for a new natural gas powered car, but at this point it does not look like sustained prices over $10/MMBtu are realistic for the next couple of years.

One piece of good news for the publicly traded companies would be if they were able to hedge large quantities of their future sales when the prices were in the $12+ range. That news should come out in the next few months.

Monday, August 4, 2008

Chesapeake Earnings Call: We're #1

Chesapeake announced its quarterly earnings last week as all public companies do (shareholder presentation and press release). The big news from Chesapeake's side, however, was not that the company beat analyst projections of revenue and income but that Chesapeake is now the #1 producer of natural gas in the US. Given the company's obsessive list of things in which they are #1, one can tell that it was a central part of the company's internal strategy to become the #1 gas producer in the US (rather than #3). If they had to buy, sell and deal their way into it, it was absolutely going to happen.

In discussing the Haynesville Play, Chesapeake noted that they have 450,000 net acres under lease (remember that they have deals where they share acreage, most notably with Plains Exploration, that reduce the “net” acreage) and are continuing to lease. They have 11 horizontal wells in place that are producing 45 MMcfe/day gross and expect to be generating 75 MMcfe/day by the end of the year.

Chesapeake’s latest well, Milton Crow 27-1H, is producing 14 MMcfe/day at 5,800 psi on a 24/64 choke. Chesapeake now has 8 rigs working the area, but they anticipate having 12 by the end of the year, which should allow the company to complete a well every five days. As they continue to add rigs (targeting up to 60) in the future, they should be completing at least one well a day in a few years.

There is no question that Chesapeake is all over the Haynesville Play.

Sunday, August 3, 2008

China/Chesapeake Shale Venture?

As reported by Bloomberg last week, an article appeared in the South China Morning Post (Hong Kong), that said that the China National Petroleum Corporation is entertaining a minority investment in Chesapeake Energy's Fayetteville and Marcellus shale ventures. Anonymous sources said the talks valued Chesapeake's assets in these two plays at around $15 million.

It's interesting that Aubrey "Swift Boat" McClendon would partner with the national oil company of China, but money is money and the Chinese are known for making small minority investments in US companies at huge valuations. The net effect is that the Chinese put up lots of money for a small ownership share of a company (before the Blackstone Group IPO last year, the Chinese government, through an investment entity, invested $3 billion for about 10% (non-voting) ownership of the company).

More cash at a good price provides the fuel that the Chesapeake machine needs to attack the various shale plays in which Chesapeake is making its name. It also might play into McClendon's long term strategy to export US natural gas to foreign countries.

American Clean Skies Foundation Report

The American Clean Skies Foundation (http://www.cleanskies.org/) released a report last week that states that the US has total recoverable supplies of natural gas of 2,247 trillion cubic feet, or 118 years of supply at current production and consumption levels (Reuters article; link to report). The report was completed by consulting firm Navigant Consulting, Inc.

American Clean Skies was founded and is chaired by Chesapeake Energy CEO Aubrey McClendon. Chesapeake is not shy about using its cash to promote both the company and the natural gas industry (see shale.tv).

The report isn't really ground breaking - it was really a survey of various sources of information, including exploration companies, government entities, journals, media reports, etc. The main point of the report is that previous estimates of natural gas supplies did not include unconventional gas plays like shale.

Many see the organization and this report as self-serving (it's hard to admit that it's not), but it did earn McClendon an opportunity to tout natural gas to the House Select Energy Independence and Global Warming Committee and the numerous mentions on national TV that accompany such testimony.

Thursday, July 31, 2008

IP Leases Deep Rights to Chesapeake

In Chesapeake's continued efforts to collect acreage in the Haynesville Play, the company has agreed to lease from International Paper Corporation deep rights on 13,000 acres of timberland in Northwest Louisiana for $263 million (article, press release). In case you don't have a calculator handy, that works out to be a lease bonus of about $20,231 per acre.

Tuesday, July 29, 2008

NY Times "Gas Rush" Article

Today's New York Times features an article ("Gas Rush is on, and Louisianans Cash in") about the Haynesville Shale and the economic impacts to the region. The article was written by Adam Nossiter, the Times' main post-Katrina reporter in New Orleans. It is a generally positive piece, although there is some big city condescension that bubbles up periodically. The article focuses on a few people who have received big lease bonus checks and the possibilities for the region. It portrays the Haynesville Play in a positive light, referencing the possibility that the play might yield 250 trillion cubic feet of recoverable gas (a number that Aubrey McClendon of Chesapeake has tossed out in conference calls).

There is no groundbreaking information in the article, but it's always interesting to see how the rest of the world perceives what is going on down here.

Groundwater Contamination Issues

There has been some recent press about the potential damage to groundwater from natural gas drilling, especially with the rush to drill gas shales. CNN Money recently posted an article and video story and pointed out that many of the new finds are near large metropolitan areas, including the Dallas metro area, Pittsburgh, Cleveland and New York City.

This is getting a large amount of attention in the northeast where the Marcellus Shale is attracting a lot of attention. While this is not a recent discovery, like the Haynesville Play, it is causing a great deal of excitement and trepidation in an area that is not as experienced with oil and gas exploration as the south central portion of the U.S.

The big issue is the chemicals and water pumped into the wells as part of the fracing process. Interestingly, in 2005 Congress passed a law that made the chemicals proprietary business information, which allowed the drilling companies to keep them confidential. (An aside: it is frightening to think of the lobbying that must have gone into creating that very specific law.) It puts the state and federal regulatory bodies in a difficult position. Because the companies don't have to disclose the chemicals, the regulatory bodies can't truly understand the threat to the groundwater. Outside of this particular issue, many advocates claim that states have insufficient regulations to protect groundwater in general.

I'm in no position to take sides in this debate, but one thing is clear: for the truly successful development of the Haynesville Shale (and other shales), there must be a balance between maximizing production and protecting the surface land, which includes the health of the people, the quality of the drinking water, minimizing pollution and protecting agricultural uses, among others.

Thursday, July 24, 2008

Shale.tv

Chesapeake Energy has become a huge marketing/PR player in recent years, from the pretty tree on the company's website to the expensive PR campaigns the company has run recently (American Clean Skies Foundation, "Citizens of the Shale" infomercial with Tommy Lee Jones). Chesapeake's latest large scale PR venture is shale.tv, a soon to be launched faux news channel that focuses on the subject of drilling the various shale plays in the US, focusing mainly on the Barnett Shale, where the company has been feeling some heat from the externalities associated with drilling in an urban area. Shale.tv and the "Citizens of the Shale" campaign are both produced by ad agency Ackerman McQueen.

Chesapeake is nothing if not aggressive, both in getting what it wants (in this case massive producing acreage) and in putting its best foot forward. They have bankrolled various campaigns that are vehemently pro-natural gas and soft-pedal drilling in urban areas. The shale.tv campaign is nothing new to Chesapeake (see cleanskies.org), but it should be interesting given the statements Chesapeake has made about maintaining the site/station's independence. Chesapeake is forthright (or egomaniacal) enough to put its name on the site placeholder as the underwriter, but only time will tell if there is real journalistic independence.

I cannot opine on the impacts of drilling in Ft. Worth, but I imagine as the Haynesville Shale plays out, especially near urban areas, there will be much discussion of the pros and cons of drilling in residential areas. I have no doubt that Chesapeake will be a strong and clear voice in that discussion.

EnCana: 15 MMcf/d Test Well

EnCana released its second quarter earnings today. They were impressive and all, but from my perspective the most interesting part of their 38 page news release was the mention that they have preliminary results from their second horizontal well in the Louisiana Haynesville Play. The release was short on specifics except to say that the well flowed at an initial two-day rate of 15 MMcf/day. This volume puts it close to the huge Petrohawk 16.8 MMcf/d test well nearby.

Additionally, EnCana noted that the company has leased a total of 370,000 net acres in the Haynesville Play. The largest acquisition was 89,000 acres from Indigo Minerals (Indigo's press release puts the acreage at 89,500).

Tuesday, July 22, 2008

Tasty Morsels from Chesapeake/Plains Call

I finally got around to reading the transcript from the July 2 joint conference call with Chesapeake (CHK) and Plains (PXP) regarding their joint venture to develop CHK's Haynesville acreage. There was a lot of good information there, although they kept the tastiest morsels to themselves.
  • CHK CEO Aubrey McClendon stated that their research indicates that the Haynesville Play contains recoverable gas reserves of 250 TCF from over 700 TCF of gas in play. That's 250 trillion cubic feet. They firmly believe it is the biggest reservoir in the US and the fourth biggest in the world.
  • McClendon defined the core area of the Haynesville Play as approximately 3.5 million acres in LA and TX. They come to this figure based on analysis of 70 penetrations over the past two years. There is additional acreage outside of the core area that is considered less productive and is not counted in the 3.5 million acres.
  • This is old news that merits repeating, but CHK estimates that the Haynesville wells will recover between 4.5 and 8.5 Bcfe, and they use 6.5 Bcfe to calculate their estimated ultimate reserve (EUR). They consider 6.5 Bcfe a conservative number and referred to it as their "floor."
  • They expect things to move quickly in the Haynesville Play, especially compared to the Barnett Shale. They expect the borders of the play to be established in 6 months, compared to 5 years for the Barnett. They also see the Haynesville field as being easier to mine, both logistically and geologically than their other shale plays.
  • The Haynesville Shale is geologically superior to the other N. American shale plays. The reservoir is very consistent with high porosity. It also has fewer underground and surface challenges that the other shale plays face. Additionally, it over-pressured shale. Haynesville Shale is twice as pressured as the Barnett, Fayetteville and Woodford Shales and it is 50% more pressured than the best areas of the Marcellus Shale.
  • McClendon feels that the gas from the Haynesville Play will fetch a higher price in the market given the fact that the field is located closer to the east coast than some of the other fields.
  • CHK has 750 (out of 4,000) landmen in the Haynesville area. CHK has a very aggressive multipart strategy to lease property, but the huge number of boots on the ground give it access to the smaller landowners. Plus, CHK is using Twin City to do the urban leasing around Shreveport using the expertise Twin City developed in Ft. Worth leasing Barnett acreage.

The CHK/PXP deal is structured so that CHK benefits handsomely the faster the play is exploited, so expect Chesapeake to keep up their strong momentum going forward.

What's That Screeching Sound?

My ears are ringing from the screeching sound of the fallout from the slide in natural gas prices this month. As I write (midday July 22), gas futures are trading at $10 even, which is down about 20% from recent highs.

The collateral damage to the gas producers' stocks seems even greater. Big Haynesville names such as Chesapeake (CHK), Petrohawk (HK), XTO (XTO), Goodrich (GDP) and Plains (PXP) are down between 6% and 12% today (on a 4-5% drop in gas prices). They are also way off their highs for the year, which were admittedly a sharp peak. CHK (-30% off recent high), HK (-31%), XTO (-30%), GDP (-37%), PXP(-24%) are all feeling the pain.

Saturday, July 19, 2008

WSJ: More Big Deals Ahead?

Friday's Wall Street Journal published an interesting article reflecting on the deal between BP and Chesapeake in Oklahoma. While the article discussed the deal, the real point was that the oil and gas majors are way behind in domestic onshore production because of their focus in recent years on foreign opportunities. They are buying their way into unconventional plays, such as the Haynesville Shale, and are paying up since they are the last to arrive at the party. The article also cited Shell's deal with EnCana to develop the Haynesville Shale as well as Conoco's deal to buy Burlington Resources a few years ago.

Bottom line: many people (myself included) expect to see more big deals as the majors seek the stability of North America over the tumult of foreign nations. Smaller producers such as Chesapeake have developed expertise in drilling in unconventional plays, so the bigs ultimately might end up functioning as investors rather than producers. That would be an interesting change of course.

Friday, July 18, 2008

Pickens Plan and Natural Gas

There has been much PR-driven hype lately about the so called "Pickens Plan," T. Boone Pickens' plan to save us from our thirst for foreign oil. One interesting aspect of this plan is the emphasis on natural gas, especially for automobiles.

While the Pickens Plan is just one plan, it has been useful in shedding light on the potential importance of natural gas for our country. I'll be interested to see how that impacts the national dialogue on energy.

Thursday, July 17, 2008

Chesapeake Sells Oklahoma Interests to BP

This afternoon, Chesapeake announced that it has sold all of its interests in the Arkoma Basin Woodford Shale Play in Oklahoma, which represents approximately 90,000 net acres. These properties have been producing approximately 50 MMcf per day.

Chesapeake received $1.75 billion in cash from BP. The company intends to redeploy the capital in its Haynesville, Barnett and Marcellus shale plays.

It is interesting news that Chesapeake would give up its interests in its own backyard to focus on these other plays. It really shows their desire to move fast and heavy. They've got a ton of cash to deploy and a somewhat more narrow focus. Should be interesting.

Good "Big Picture" Map

With all of the news coming out about the Haynesville Play, it can be confusing to keep it all in perspective. I found this map on an investment site and thought it did a great job of putting things in perspective. It is current as of mid-July with the notable addition being the big announcement from Petrohawk of their test in Bossier Parish (the blue star).

Tuesday, July 15, 2008

Mainland/Petrohawk Deal

I just want to scream! I've been wanting to pick up some Mainland Resources (MNLU.OB) stock for the past few weeks, but I kept waiting for it to come down. Too late now! Today, Mainland and Petrohawk (HK) announced a joint venture deal for Petrohawk to assist in (and fund) development of Mainland's acreage in the Haynesville Shale. Mainland will retain rights in the shallower formations to drill in the Cotton Valley and Hosston formations.

The JV deal, in which Mainland will transfer 60% of the Haynesville leases to Petrohawk, calls for Petrohawk to the be designated Operator of the development. For the first well drilled in the Haynesville Shale, Petrohawk will fund 100% of the costs. The second well will be funded 80% by Petrohawk and 20% by Mainland, and the third well will be 60/40. Additionally, Petrohawk and Mainland will enter into an arrangement for Petrohawk to gather and market Mainland's production from the shallower leases.

Earlier this year, Mainland, which is a newly formed company, purchased 2,695 acres in the East Holly Field in DeSoto Parish for the purpose of exploring the Cotton Valley formation. As luck would have it, just a few months later, news about the Haynesville Shale broke and Mainland found itself sitting on prime acreage that it acquired for very little cash. The price of Mainland has been rising steadily over the past few months and the news of the Petrohawk deal sent it up more than 12% today. I am guessing that this news makes the stock rather fully priced, but I've been wrong before. In any case, Mainland ($6.55 as of 7/15/08) has done pretty well for a bulletin board stock that was trading at just over $1 in March 2008.

Monday, July 14, 2008

Funny Shirts

And now for something completely different: I happend upon a site that sells a couple of funny Haynesville Shale related t-shirts. One says, "a landman leased my property and all I got was this lousy t-shirt" and another is a mock athletic practice shirt that says "Property of Haynesville Shale, XXXL."

I guess this expresses the two opposing views of the Haynesville Play as information becomes available: 1) I got screwed by signing too early and 2) I got rich by waiting. Web site: http://www.cafepress.com/haynesville.




Wednesday, July 9, 2008

Is a Cubic/Chesapeake Deal Coming?

I saw this drawing in a recent Cubic Energy (QBIK.OB) presentation. The orange on the map is Chesapeake Energy, the blue is Goodrich Petroleum and the yellow is Cubic. Chesapeake and Goodrich recently struck a joint venture deal whereby Chesapeake will operate Goodrich's leases in this area. Assuming the blue area now goes orange, it appears as though Chesapeake has Cubic completely surrounded.

Is a deal between Chesapeake and Cubic upcoming? I'm just speculating, but a few things give me the idea: 1) Chesapeake is flush with spending money from its recently signed joint venture deal with Plains Exploration, the recent issuance of new debt and an upcoming issuance of new equity. 2) Chesapeake is deal happy. They are cowboys with big egos. They like to win. 3) A Cubic deal would probably be relatively small to Chesapeake. 4) I bet they want to fill in the holes in their leasing map. Controlling Cubic's leases would give them a lock on their core area.

What does a deal look like? I don't know, but I imagine Chesapeake will be putting up the cash and the expertise to drill the wells.

Monday, July 7, 2008

GMX Increases Interest in Haynesville

GMX Resources, an Oklahoma City E&P "pure play" company, announced today that it has increased its focus in the Haynesville Play. (For more information about GMX, check out this information filled presentation, complete with charts, logs and maps, for the Collins Stewart Conference on July 8.) While the announcement indicated that GMX is excited about their Haynesville acreage, it did not include any results from test wells (they haven't drilled any yet).

First, GMX has increased its leased acreage to 27,500 acres in the Haynesville Play by closing leases on 7,300 net acres in Texas (Harrison, Marion and Cass counties) and Louisiana (Caddo Parish). This is not really new news, however, because the preliminary agreement was announced earlier. With an announced 80 acre density, this implies 344 well sites.

Additionally, GMX announced that it increased its capital expenditure budget from $195 million to $271 million. Much of this additional capex will be used for drilling and lease acquisition in the Haynesville Play. The capex increase will allow the company to drill between four and six horizontal wells in its Haynesville acreage.

Interestingly, from a corporate perspective, GMX announced that it has refocused its drilling program to focus on gas shale. The company has a strong presence in the Cotton Valley area, so it is natural to focus on the Haynesville Shale that lies below much of its existing acreage. GMX will also deploy two Flex "purpose built" rigs in early 2009.

Thursday, July 3, 2008

The Downside of Drilling

This past Sunday’s New York Times featured an interesting article on the leasing frenzy going on in the Marcellus Shale fields located in the Catskill Mountains region of upstate New York. The Marcellus Play is mostly located in Pennsylvania and has been drilled for years, but with the advent of horizontal drilling and other new technologies combined with high natural gas prices, producers are pushing into New York to lease property and drill the Marcellus Sale. Although not quite as frenzied as what is going on in the Haynesville Shale (the article noted $2,500/per acre bonuses and 12.5% royalties – amounts now considered to be bottom fishing in the Haynesville Play), landmen are scurrying around the region to lease properties for drilling.

While the article noted the economic boom for the land owners, it focused on some of the negatives associated with drilling, including pollution, noise, groundwater contamination and the social impact to neighboring communities. The Shreveport Times has already touched on the subject in an editorial, but in the frenzied environment in northwest Louisiana and northeast Texas, I fear that too many people are blinded by how much money they can make and are not considering the big picture.

In leasing property, especially small pieces, it is important to specify what activities can take place at the surface. It is also important to include indemnifications from the entity leasing the property (that are upheld by the ultimate lessee – many of the leases are subsequently sold off) protecting the landowner if something bad happens. Land owners must also communicate with neighboring owners to make sure they are not going to allow activities that will negatively impact your property.

Bottom line: it is absolutely vital that landowners 1) work with an attorney to develop the lease and 2) communicate with their neighbors.

Petrohawk First Test Well Update

On Monday June 30, Petrohawk announced the results from its initial horizontal well in the Haynesville Shale.

The well was placed in production on June 29 and produced at an impressive rate of 16.8 mmcfe per day with casing pressures of 5,600 PSI on a 26/64” choke. The well was drilled to a depth of 11,005’, and the horizontal portion was 3,880 in length. The completion of the well included eleven stages of fracture stimulation.

The well, Elm Grove Plantation #63, is located in the Elm Grove Field in T16N-R11W-S9 in Bossier Parish. The Elm Grove Field will be the hub for Petrohawk’s Haynesville Shale operations.

In the announcement the company also noted that it has accumulated 275,000 net acres in the Haynesville Shale. It is currently drilling three horizontal Haynesville Shale wells and expects to have six rigs drilling wells in the Play by mid-September. Petrohawk expects to have ten rigs operating in the Haynesville Shale by year end 2008.

Wall St. Journal Article (CHK/PXP)

The Wall Street Journal picked up the news of the Chesapeake/Plains deal and offered additional news gleaned from the conference call that accompanied the announcement (Link to print version of article).

The article notes that the agreement between Plains and Chesapeake values the 550,000 acres of leased property at $30,000 (another analyst, Rehan Rashid of Friedman, Billings, Ramsey estimates the value to be $25,600/acre). Given that Chesapeake estimates that it paid $2.5 billion for the leases, the deal values the property at six times (!!!) what they invested. Clearly, they executed lots of leases that paid low bonuses before the news of the Haynesville Shale broke.

Chesapeake got paid handsomely for acting quickly and keeping a secret. Now that the cat is out of the bag and the land owners are becoming more educated and banding together, Chesapeake and other gas companies won’t be getting 6X on their future leases, that’s for sure.

Natural Gas 7/2/08: $13.31

I was a little surprised to see that the price of natural gas continues to steadily rise, closing at $13.31 today. If the price keeps rising, natural gas executives are going to hit the ground in northwest Louisiana and eastern Texas with shovels and pick axes to drill these wells by hand! Expect the leasing activity to continue at a frenzied pace.

Wednesday, July 2, 2008

More from CHK/Plains Announcement

The Chesapeake/PXP press release had some other interesting goodies. With the announcement, Chesapeake stated that it expects the 550,000 acres it has leased to date to yield between 23 and 44 trillion cubic feet of natural gas equivalent (tcfe), net of an assumed 25% royalty. The company gets to this number assuming 80 acre spacing, which would support 6,875 horizontal wells in its leasehold. Using an estimated ultimate reserves (EUR) of 4.5 to 8.5 bcfe (billion cubic feet of natural gas equivalent) per well, they get to the 23-44 tfce number.

Chesapeake confirmed that the initial production rates on the eight completed horizontal wells is between 5 and 15 mmcfe (million cubic feet) per day on “restricted chokes” of 6,500 PSI (in the Barnett and Fayetteville Shales, Chesapeake often operates with open chokes). This leads to the EUR assumption of 4.5 to 8.5 bcfe. This estimate blows away their experience in the Barnett Shale (2.5 to 3.0 bcfe) and Fayetteville Shale (2.2 to 2.8 bcfe), so you can imagine that these guys are eager to move forward quickly.

Chesapeake also confirmed that it is operating five drilling rigs in the Haynesville Play at this time with the intent of mobilizing at least 12 by year end 2008, 30 by year end 2009 and 60 by year end 2010. This should yield 600 wells over the next three years.

With numbers like these, I would suspect we will haven’t seen the last big deal.

Tuesday, July 1, 2008

Chesapeake/Plains Joint Venture

Chesapeake and Plains Exploration and Production (PXP) made a big announcement this morning of a joint venture where PXP will acquire a 20% interest in Chesapeake’s Haynesville Shale leasehold for $1.65 billion and additionally fund 80% of the cost of drilling in the Haynesville Play up to another $1.65 billion. This amounts to a $3.3 billion investment by PXP and implies a $16.5 billion valuation of Chesapeake’s Haynesville holdings. It proves that sometimes the first mover wins big! (Press release here)

Chesapeake acknowledged that as of June 30, 2008 it has leased 550,000 acres. This transaction implies that PXP will have net claim on 110,000 of those acres. The transaction is interesting as a Gulf player is entering the shale game in a big way riding the coattails of the biggest shale player in the country in Chesapeake. PXP is loaded with cash but lacked the shale experience. Chesapeake is going to need tons of cash to exploit the hundreds of thousands of acres it is collecting in the Haynesville Shale, and it would strain the company to keep going to the debt and equity markets.

I look at it as a win-win deal. I’m sure Chesapeake didn’t want to give up claim to 20% of the acreage it has worked so hard to lease, but this deal is a lot more attractive and less dilutive to the company’s stakeholders. For PXP, they have tons of cash on hand and are buying what appears to be a very attractive asset and the expertise of the most experienced company in the industry. If the Haynesville Shale turns out to be as big a play as everyone thinks, it should be a good deal for both players.

Friday, June 20, 2008

New Chesapeake Presentation

Today, Chesapeake posted a new investor presentation on its web site. It's not new news (in fact, it doesn't reflect some of the company's recent announcements), but it's a pretty good summary of how Chesapeake sees itself. There is a great deal of pro-Chesapeake spin, but the company's strategy is clear: they want to be the dominant gas producer east of the Rockies. You can see that in their behavior in leasing property and doing deals in the Haynesville Shale.

The presentation has a good page on their take on Haynesville.

Did anyone notice that the spot price of natural gas closed at $12.77 today? (The news folks only seem to talk about crude oil prices.) It's held above $12 and been relatively steady for a few weeks. The guys at Chesapeake and the other gas companies must need to keep large bowls around to collect their drool.

Tuesday, June 17, 2008

Encana Reports Progress

Yesterday, EnCana Corporation (NYSE: ECA), a Calgary-based E&P company, announced its progress in the Haynesville Play. The company has leased 325,000 net acres in the play, which puts it among the largest lessees, and it has entered into a 50/50 joint exploration with an even bigger fish, Shell Exploration & Production, to drill in the area. The JV is operating two rigs in the play and expects to have five rigs operating by year end.

EnCana also announced results from a horizontal well drilled in February in Red River Parish. Although the company released little information, EnCana stated that the well flowed at an initial rate of 8 MMcf per day, which rivals some of the best wells in the Barnett Shale.

By bringing in a big hitter like Shell, clearly EnCana is excited about the Haynesville Play.

Monday, June 16, 2008

Chesapeake-Goodrich Joint Venture

Today Chesapeake Energy and Goodrich Petroleum announced a joint venture whereby Chesapeake will pay Goodrich $178 for a percentage of the deep rights in two of Goodrich's key fields, Bethany-Longstreet and Longwood (link to press release). Chesapeake will be the operator of the joint venture and Goodrich will retain its lease rights in the shallower fields through the base of the Cotton Valley sand.

The stock market seems to like the JV, as both companies are up at the time of this post (CHK +3.4%, GDP +5.4%). This seems like a win-win for both companies. The Goodrich acreage is in the middle of Chesapeake's leases, so it plugs a gap in their map. Since they want to dominate the Haynesville Play, it makes sense to take down such a large block of concentrated acreage adjacent to their existing holdings.

For GDP it makes a lot of sense too. They still have economic exposure to the play, but they don't have to raise a ton of capital. They get a capital infusion and can focus on their shallower operations. They are being well compensated for being an early participant in the Haynesville Play.

It appears as though there was competition for this deal, but we're certainly not surprised that Chesapeake won.

Wednesday, June 11, 2008

Natural Gas Prices

While the news has been focused (with good reason) on the price increases in crude oil, I've been following the price of natural gas. The Henry Hub Spot Price (Henry Hub is a location on a pipeline in Erath, LA where spot prices for the New York Mercantile Exchange (NYMEX) are set, and the price set there is the generally accepted price for natural gas in the US) closed today at $12.50 per million BTU (MMBtu). The price peaked last week around $12.70.

But the big news, which is hardly lost on the natural gas companies trying to gather leasehold acreage in the Haynesville Shale, is that the price in January was between $7.50 and $8.00/MMBtu. Six months ago, the price was hovering around $7.00. In 2007, the price got as low as $5.50. A nearly 80% increase in price in six months is a sharp rise by any measure.

While it can be argued that these prices are a bubble or are artificially inflated, the natural gas companies are clearly excited. It means that the leasing activity will continue at a furious pace because they are can't wait to start pumping it out of the ground.

Tuesday, June 10, 2008

Chesapeake Energy: The Big Kahuna

Chesapeake Energy (NYSE: CHK) has positioned itself as the biggest player in the Haynesville Shale. This should be no surprise to people who follow CHK, which has positioned itself similarly in other gas shale plays, including Barnett, Marcellus, Woodford and Fayetteville.

The company’s corporate strategy is to be the biggest player in gas in the US by focusing on onshore properties east of the Rockies. CHK uses its money and muscle to become the dominant player in each play they target. CHK refers to the leasing period in the various shale plays as “the great land grab,” of which CHK has declared itself the winner in each case. For an interesting take on CHK, read the May 12, 2008 Fortune article on the company and its co-founder Aubrey McClendon. Landowners in the Haynesville Play have seen the Chesapeake swagger first hand, as CHK swept in to lease as many acres in the Play as possible.

A few interesting tidbits regarding the Haynesville Play came forward in their presentation to shareholders at CHK’s annual shareholder meeting:

  • CHK now has lease commitments for approximately 500,000 acres in the Haynesville Play. This was CHK’s initial goal, but I’ve heard that they are going to shoot for more acreage.
  • They have looked at data from more than 50 wells that have penetrated the formation. Of course they have no intention of sharing the data with the public, but they seem to be ahead of other companies in terms of collecting lots of data. They also seem pretty happy with the results.
  • CHK has now drilled four vertical and six horizontal Haynesville wells. They expect to complete two more in June 2008.
  • They are currently drilling wells with five rigs and planning for at least 12 rigs by year end 2008 and 30 rigs by year end 2009.

In summary, CHK seems pretty psyched about the Haynesville Play and will continue to be the most aggressive player, especially in attitude, in the area.

Saturday, May 31, 2008

Penn Virginia Announces Results

Penn Virginia Corporation (NYSE: PVA) announced results from a Haynesville Shale test well yesterday. The well, Fogle #5-H, in Harrison County Texas had an initial production rate of 8.0 MMcf per day with a flowing casing pressure of approximately 5,000 pounds. Because of existing pipeline constraints in the area, the well will produce at 5.0 MMcf at 6,000 PSI for a couple of months. PVA expects the well to produce at an initial rate of 10-15 MMcf per day going forward. The well was drilled to a depth of 11,378' with a 3,861 lateral extension.

PVA, which has 53,000 net acres in East Texas has drilled and completed a number of test wells, including four in the deep Bossier Shale and Haynesville Shale (also referred to as the Lower Bossier Shale).