Tuesday, November 16, 2010

Questar Announces 2011 Capital Budget, Well Economics Update

OK, I'm having trouble calling the company QEP Resources, which is the new name for Questar E&P, which was spun off from the Questar earlier this year.  If there is one thing we don't need is more natural gas companies that go by their initials (EOG, SM, XTO, SWEPI, J-W, NFR) or quasi-acronyms (EXCO, BEUSA).   "Questar" sounds like a made-up word to me, but it makes more sense than initials.  That complaint aside, the company formerly known as Questar announced a capital budget of $1.05 billion for its E&P business in 2011.  Not surprisingly, that figure is $110 million lower than the 2010 budget.  

The press release didn't offer many specifics beyond that 60% of the budget will be directed towards the company's Midcontinent operations, which is the Haynesville region, the Texas Panhandle and the Woodford Cana in Oklahoma.  Currently, Questar is running seven rigs in the Haynesville and two each in the Panhandle and Woodford.  Haynesville wells cost between $8.5 and $9.5 million, while Panhandle wells cost $7.0 to $8.7 and Woodford wells run between $6.5 and $8.5 million.  On the surface, the well count and the midpoint of the cost ranges imply that approximately 68%, or around $714 million of the capex budget will be spent in N. Louisiana, but that's just my rough calculation.

What the company did state is that its capital budget will come from operating cash flow.  In other words, Questar won't have to sell any assets or float any debt or equity to fund its growth capital.

The company also provided an update on its Haynesville well economics in a recent presentation.  While not specific on the slide below, you can estimate that the company needs gas prices to be around $4.25/MMBtu to get the industry standard 10% minimum internal rate of return (IRR).  The return goes to zero at around $3.50/MMBtu.   To set the context, the Henry Hub spot price closed at $3.68/MMBtu today, up 12 cents.  The good news for Questar is that the company's 4th quarter production is about 72% hedged at $5.25/Mcf (close but not quite a MMBtu).  In 2011, only about 40% of the company's gas production is hedged at an average price of $4.91/Mcf.  Absent further hedging, the rest will be sold into the spot market.  In 2012 and 2013, only around 15% of production is hedged at a price just south of $6/Mcf.


As noted above, Questar is estimating a 6.0 Bcf ultimate recovery for its Haynesville wells.  In calculating decline, it is using a 0.9 b factor, which is the lowest (i.e. steepest decline) of the basins in which Questar drills (Pinedale = 2.0, Bakken/Three Forks = 1.7, Woodford Cana Shale = 1.5, Granite Wash/Atoka = 1.0).  But the Haynesville Shale has the highest EURs for Questar and 50% of the recoveries are estimated to occur in the first year and a half, which is considerably higher than any of Questar's other plays.  While that speaks poorly to the decline curve, it sure helps the internal rate of return, which is time-weighted.

The upshot is that if natural gas prices stay in the toilet, expect Questar to ratchet back its capital spending in 2011 and beyond because of its exposure to the spot pricing market.  

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