But with the recent New York Times article and the recent announcement that Barnett shale royalties may be cut by as much as 25 per cent, I've gotten a bit more interested.
I said from the beginning that natural gas would have to get above $5.00 before it became worthwhile for a retail investor like me.
Now, with this most recent article from a very credible source, it looks like my original comment remains valid.
Management suggests that its land position, given the superior reservoir potential of the Utica shale, could be worth between 75% and 101% of the company's total market capitalization. Using the values suggested in the earnings release, Chesapeake estimates its land position is worth between $12,000 and $16,000 per acrem. That seems high, especially after we reviewed an investment analyst's report on another E&P company with meaningful exposure to the Utica shale, including acreage it owns in partnership with Chesapeake.Citigroup, on the other hand:
"Given that the Utica Shale is an emerging play, there are very few transaction comparables available to use as an anchor for our valuation. Even so, according to our research, over the past twelve months, transactions in the Utica Shale have been completed for an average of $2,200/acre ranging between $1,500 and $3,600/acre (i.e. most recent transaction implies $3,600 per acre; announced in 3Q11). In comparison, CHK indicated that its 1.25 million net leasehold acres in the Utica Shale could be worth $15 to $20 billion, which implies a value of $12,000 to $16,000 per acre."One caveat: analysts have been very wrong, most notably in the Bakken.
If the analysts are wrong here, it is in their under-estimation of the oil play in the Utica. Anyone who doubts that just needs to see how much a Bakken acre has appreciated in the past couple of years.
"Analysts" generally only repeat what they are told while claiming knowledge. Their ignorance is amazing.
ReplyDeleteWriters who quote analysts are worse.
This is highly misleading, probably due to ignorance:
"Notice the wording of the two announcements. Also, Chesapeake projected that a $7 per thousand cubic foot (Mcf) gas price for the life of a Haynesville well with an economically ultimate reserve (EUR) volume of 6.5 billion cubic feet (Bcf), the company would earn a 42% pre-tax return. About a year later, with natural gas prices firmly locked in a $4 per Mcf range, the company said the return would only average in the low single digits. The company cautioned, however, that if the EUR was only 4.5 Bcf, then the return would be zero. Recently, Chesapeake reduced its activity in this shale basin."
CHK reduced its rig count, as planned for years, because the land it wants to hold is hbp.
CHK, in 2008, used a range of EUR's from 4.5 to 8.5, with 6.5 as the midpoint. That was precisely on target, or slightly conservative.
Some Haynesville operators with similar acreage, or shared acreage, have indicated that the results are exceeding the type curves and the returns are decent at $5 or so. IIRC, one used a ROR number of about 42% at $5.
As CHK stated when they announced the play, some rock is better than other rock, Texas is mostly worse than LA, and CHK picked some of the best acreage. CHK also picked up some that didn't work or was marginal or poor at current gas prices. That is what they expected. That is why they "risk" the acreage. Some won't work.
Of course a poor well won't work with $2.50 gas. No one ever said that it will. CHK said that they wouldn't.
A year or so ago, CHK said that it did not intend to drill dry gas wells until gas was $6, except to hold leases.
CHK prefers drilling oil or liquids rich gas wells that have a 100%+ rate of return instead of gas wells that have a 40% ROR. So even at $6, don't expect CHK to drill many gas wells.
CHK probably (cautiously) understated the Haynesville potential. They also did not highlight the Bossier potential that is just above the Haynesville in many places, and about as good in some places. So, the play was bigger and better than CHK said in 2008. But, prices collapsed. Why? Because of the Haynesville gas, which went from nothing to the biggest producing gas field in the US in 3 years, and the economy collapsed.
But, the most absurd thing in the Rigzone post is the headline. "Shale Gas"? No. They quote, " the Utica Shale will be characterized by a western oil phase, a central wet gas phase and an eastern dry gas phase." Yet they call it "shale gas." Ignorance.
CHK mostly leased in the liquids rich wet gas or nearby oil windows. Gas will push the oil out.
Lease prices vary with location and time. The Utica play is about as big as the Williston Basin. The analysts and writer have no idea what the value is, or the rock, or the product. On the other hand, CHK does know what it is doing.
CHK would not have said what they did if they were not confident that a buyer is willing and able to pay that price. That could change with oil prices or economic collapse, but CHK is very confident.
Look for a JV announcement this year. A sophisticated buyer will write a big check.
The Williston Basis JV will probably be announced in 2012. CHK will be the story of the year in the WB in 2012. The price will impress.
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