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CHK Notes

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June 16, 2008

CHK / GDP Joint Venture In The Haynesville Shale: CHK will pay GDP to enter and jointly develop their Haynesville acreage in the Bethany-Longstreet and Longwood fields in Cado and DeSoto Parishes (this is in the heart of the area where CHK has been active).

  • CHK pays GDP $178mm for 10,250 net acres ($16,950 per acre)
  • CHK also paying for 7,500 acres of deep rights at Bethany-Longstreet for an undisclosed sum to a third party which gives them roughly 50/50% interest with GDP in the two fields.
  • CHK will operate with 1 rig schedule to start in 3Q and a second to be added 4Q for the JV
  • The partners see drilling up to 440 horizontal HS wells here.

July 9, 2008

CHK Announces 25 mm share secondary.

  • Dilution: 5% assuming the shoe (3.75 mm share over-allotment) is exercised,
  • Raising $1.5 billion,
  • Use of proceeds: "temporarily" repay indebtedness.

 

  • Why do it now? I agree with the surmises of some readers last night that the play is better than (CHK) has disclosed. Unlike a majority of a E&P companies they do their core analysis in house which gives them the advantages of speed and privacy. They mentioned on the call that having achieved their initial 500,000 plus acres they would not stop but would continue acquiring acreage and since they believe there is core acreage and then there is all the other, less prospective moose pasture there is no time like the present.
  • Why Not Package The Recent Haynesville Shale News With The Secondary Announcement? Would you in their position? Probably not. You'd want the stock to run, as it did to get the highest price for those new shares. They addressed well costs, acreage to hold the leases and drilling plans but left open their appetite for more acreage just saying that they continue to lease. I had thought that 
  • Acreage - how many wells does it take to hold their current 550,000 acres?  860. That's with 1 well holding each section  (square mile or 640 acres) as per Aubrey's comments on the last CC. They should be able to accomplish that sometime during 2012 assuming they reach their year end target of 60 rigs by the end of 2010. Each rig should be able to spud 6 wells per year giving them at least 360 wells per annum assuming no drilling efficiencies which will not be the case as they never drilled their best, most efficient or cheapest well at the beginning of a play.
  • What Will It Cost? If you look at drilling costs alone and forget further acquisitions then we are talking about $6.5 mm completed well cost initially, that's a total drilling cost of $5.6 billion to drill up and hold the acreage on a gross basis. That falls to $2.2 billion when you take into account their carried interest from the (PXP) deal.  
  • Didn't They Just Do A Deal? Yes, on March 26th they announced a secondary offering raising a little over $1 B at around $46 per share, having broken the Haynesville news on the 24th. And then the stock went on to break $70. So far, Chesapeake has invested about $2.5 billion in the Haynesville Shale. The PXP deal and current leasing activity values (CHK)'s acreage position at $16.5 billion. I'd take that trade all day long.   
  • In A Nutshell: I'm a little surprised they announced it today after the beating the group and their stock has taken from recent highs. Especially in light of the $1.65 billion they just took in from (PXP) and the roughly $1.5 billion I expect to hear about in asset monetizations potentially as soon as the 2Q call (July 24). Another bout of short term pain for shareholders as they continue to roll ahead with acreage acquisition, I presume a majority of which will be in the Haynesville. I could have done without this as I'm long July calls which will get crushed at least initially but after a brief bit of pain, I expect the stock to recover fully and retest its recent high probably in the next two to three months.

July 9, 2008

CHK Closes Secondary. Priced 25 million shares (28.75 million if the overallottment is exercised which I'm sure it will be) at $57.25 raising $1.645 billion. They should get some positive comments from the selling syndicate analysts starting today through Monday although those may be taken with a grain of salt by the Street for the next several days. I expect CHK to raise production guidance on their 2Q call but that will be too late to save my July dated positions. I hold longer calls and the stock as well and expect CHK to revisit its recent highs within a couple of months. 

December 8, 2008

CHK Reduces CapEx, Shelves Its Shelf.

Capital Budget Reduction:

  • Drilling budget falls by another $2.9 billion for 2009/10. Rig count will fall from 130 at present to 110 to 115 by early 2009. This is down from a peak of 158 this past summer.
  • Acquisition budget falls $2.2 billion for 2009/10. They are really putting the brakes on buying acreage which should be welcome news to analysts.

Reserves:

  • 2009: 13.5 to 14 Tcfe targeted by end of the year, up from 12.1 Tcfe as of 3Q08. Mid point of guidance and a $3 billion capital budget implies a low, low 2009 F&D of $1.20 per Mcfe. This would be an improvement on the $1.35 F&D cost generated so far in 2008.
  • Note: 2009 year end would still likely see reserves boosted to close to 20 Tcfe

Production Growth: Falls With Spending.

  • 4Q08: volume range unchanged.
  • 2009:  5% growth down from 16% previously
  • 2010: 13%, also down from 16%

Recent Share Registrations Squashed

  • 1St Shelf - Pulled. That’s a potential 6% dilution that won’t be hitting the market.
  • 2nd Shelf (the so called acquisition shelf). Cut from 50 million shares to 25. This will be used from time to time to pay for lease hold acquisitions. If all 25 mm shares were issued this would represent 4% dilution.
  • ZComment: People obviously hated these deals. Before the today’s conference call was announced last Friday, the shares had fallen 51% since the November 26th close, when they announced the stock offerings.

Asset Monetization Update:

  • VPP #4 - Midcontinent - $450 mm for 100 Bcfe (or $4.50 per Mcfe vs CHK’s $1.20 per Mcfe F&D cost). They expect to close this one by year end.
  • S. Texas deal is off line. This is now expected to become VPP #5, with a closing date in 1Q09 and a price tag of $450 mm for 80 Bcfe ($5.60/ Mcfe). 

Hedge Update:

  • 2009: 76% of expected gas production hedged $8.20. Only 12% of this hedge position is in the dreaded knockout swaps and those concentrated late in the year.

Closing Thoughts:

  • Reserves / Production: 16 years (that’s pretty long and getting longer)
  • P/ 2009 CF = 1.4x. Very low, in fact, in unheard of territory. This is using CHK’s new numbers which should be pretty easy to beat and pretty solid given the large hedge position taking a majority of the sting out of lower natural gas prices.
  • The Street has CFPS of $8.84 for 2009 at present and this will have to come down about 8% to get to CHK’s new ‘09 numbers, but again, the stock price has already discounted a much worse scenario at this point.
  • This is pretty much what I was hoping for. Shelving of the primary shelf being key. I’m not surprised by the hit to production and think they have set a very beatable bar given the productivity of the Haynesville Shale. I would have liked to see mention of regional gas curtailments but maybe we’ll get color on that on the conference call.

Conference Call: 9 EST, available in the "Events" portion of the "Investors" section of their site at www.chk.com.

1/5/09

CHK - VPP #4 - Anadarko/Arkoma Assets

  • 98 Bcfe with associated production of 60 MMcfepd,
  • $412 mm proceeds or a stout $4.20 per Mcfe,
  • retained deeper drilling rights on some of the package
  • This deal is in line with prior expectations and done in a timely fashion closing on 12/31/08 as previously promised

 

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