01
Jul

CHK – A Swing For The Fence That Worked, Still First Inning Here

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CHK & PXP Announce Haynesville JV

Anatomy of the deal:

Plains Exploration (PXP) Pays Chesapeake (CHK) $1.65 billion for 20% of CHK's Haynesville Shale (H.S.) leasehold.

  • This amounts to 110,000 acres of CHK's now 550,000 acre H.S. position,
  • On the surface this equates to $15,000 per acre,
  • But PXP is carrying 50% of CHK's drilling and completion costs up to an additional $1.65 billion,
  • This carry boosts the per acre value to $30,000 per acre.
  • CHK's average acreage cost so far in the H.S. has been recently estimated to be about $10,000 with recent buys landing in $20,000+ territory. 
  • CHesapeake goes on to point out for the mathematically challenged that this transaction establishes a value of $16.5 billion for their H.S. leasehold.
  • CHK's TEV as of the close (7/1) was $49.6 B. Back out the check from (PXP) of $1.65 B and that leaves Total Enterprise Value of just under $48 billion. Take out the H.S. piece and you are under $32 B. $32 billion for the most active driller and third largest gas producer in the U.S. with #2 positions in the Barnett and Fayetteville Shales, yada, yada, yada.
  • Nice trade Aubrey.

A Look At Their Reserve Comments:

  • Well spacing: 80 acres. I've been assuming 60s. This leads to a slightly smaller bump to the well inventory but the 6,875 horizontal locations is nothing to sneeze at.
  • EUR's of 4.5 to 8.5 Bcfe. I've been using an average of 5.5 Bcfe recoverable per well. They comment that they are comfortable with the 6.5 Bcfe for the core area which means the wells are bigger than that. 
  • But this is the kicker. CWC (Completed well cost) of $6.5 mm now with the assumption that costs fall 10% when they get the process down to a more routine nature.  Put that number up against the mid point of the recovery range and you've got $1/Mcfe development costs. That's world beater. IRR's should be in the high double digit range if you assume CHK's hedge levels and at the strip they would be well into the triple digits. But when you take into account the carried interest, well, the IRR just goes ballistic as F&D falls through a $1/Mcfe.

The Plan: Drill fast, drill deep.

  • at least 12 rigs by YE08
  • at least 30 rigs by YE09
  • up to 60 rigs by YE10
  • wells here take about 60 days to drill down over 10,000 feet and then across another 3 to 4,000 of lateral section implying each rig could drill up to 6 wells per year although it will probably be a hair under that in the earlier periods. The exit rate rig count for 2010 would imply over 360 wells per year, adding net reserves to CHK in excess of 1.3 Tcf (per year). 
  • if anyone can get the rigs its (CHK). Good news for (NBR), (UNT), (UDRL) and probably the rest of the onshore land drillers and completion companies. Where the manpower and steel for this will come from (as CHK and PXP are certainly not alone (read on) is hard to say. 

What This Does For Other H.S. Play Valuations. The Top 15 looked at from the perspective of acreage positions valued at $30,000 per acre and divided by the outstanding share counts relative to current stock prices. At these valuations you are almost getting the rest of HK for free! Personally I think this yard stick is overzealous but it does serve to point out another angle on the Haynesville leverage story. See Tuesday's post for a look at H.S. leverage to current reserve size. 

haynesville-play-per-share-value-070108.jpg

In a nutshell this deal will lead to another round of gains for the Haynesville levered and even those more speculative names like (QBIK) that we continue to hold (although this news may provide a nice exit point as that position out paces reality). CHK gets to de-lever both from a financial as well as a risk stand point and receives a source of funds obviating the need for further near term capital market transactions. We continue to hold calls and the common for (CHK) and (HK) as well as a number of related players (see the Holdings Wiki Tab for a full list).

Joint Company Conference Call: Wednesday, 9 am EST.  

Raw Notes From The Conference Call:

Aubrey Comments: What is becoming "America's largest gas field, and 4th largest gas field in the world" 

$2.5 billion invested here; worth $16.5 billion

Think 250 Tcfe in place in the H.S., 5x the Barnett Shale

Formation present over 3.5 mm acres defined in the core most likely

This is from 70 penetrations evaluated by their core center

Homogenous, thick, over pressured

8 horizontal with IP 5 to 15 mm/d on very restricted chokes with high pressures (6,500 psi)

6.5 Bcfe for now but that will go up 

Pursuing similar strategic partnerships in the Marcellus and Fayetteville. Think Fayetteville shale assets are worth $15 billion or $30 per share.

Marcellus - 2 Horizontal - 9 mmcfgpd combined . Holy Smokes.  See proving up $15 billion and $30 value per share here later this will with another monetization deal like yesterday's

Will not do a minority interest in the Barnett (where they are #2)

Aubrey outlined $150 per share of value. Saying the PXP deal is the first step in highlighting this value.

Last 2 Words on the Haynesville: 

  • Chose PXP due to their knowledge and trust of each other and PXP's deep roots in LA. They have over > 4,000 landmen in the field.
  • HS will develop much more quickly and easily. Their will be a core area and a non-core area.   CHK is in the core like they were in Johnson and Tarrant County.

PXP Comments:

Consistent high porosity throughout, overpressured, excellent recovery factors in all the wells they have seen to date.

See doubling their reserves in the next three years at $1.85 / Mcfe. 

Production growth rate at 5-8%. This HS JV is expected to send their production growth rate > 20% per year beginning in 2009 for the next several years. 

Capex increasing in 2008 to 1.5 b and to 1.75 b in 2009.

Q&A 

Joe Alman @ JPM - question defining the H.S. - the deal covers zones below the cotton valley.

8 horizontal wells - all 8 in LA, won't be drilling any in Tx for 90 days.

80 acre spacing? - could go to a closer spacing over time.  

Tudor Pickering - capital allocation for PXP

Completion methodology - laterals from 2,900 feet to 4,000 feet, 5 or 6 stage fracs, thinking 1 stage every 650 feet.

Production Growth: chance they will ratchet up guidance,

wells will be drilled on 640 acre units to hold acreage

PXP has no plans to issue equity.

 

 

 

 

25 Responses to “CHK – A Swing For The Fence That Worked, Still First Inning Here”

  1. 1
    Wyoming Says:

    Z,

    Re the hedge. Don’t remember the facts but it was at a much lower $/MCF level last I heard. Also, the volume hedged will be a lot lower with the incremental production added. I.E. hedge to prodction rate is seperating. Am I wrong in my thinking?

  2. 2
    bill Says:

    Z,

    excellant analysis

  3. 3
    Wyoming Says:

    This should also be pin action for CRR I would not think they would try sand at this depth.

    Thin options, looks like someone pulled in 200 Sept. 60 calls.

  4. 4
    zman Says:

    Crys – I’m not close enough to the (PXP) story to say. They are on the cheap end of E&Ps at present and their numbers will be going since they are out of pocketing a good percent of these costs so maybe I should do some more homework here.

    Wyo – Agreed re hedges which are close to 70% and around $8 for 2008 and a similar $ value but lower percent in 2009. Aubrey is figuring on being his own worst enemy in terms of price, growing supply until prices either fall or the U.S. becomes a net exporter of gas. I’d be on the former and not the latter but that soon as the rebuild is off to a poor start. The increased production is not in their guidance and as such is not in their hedges…we’ll see on the 2Q if they are still boosting the volumes but even if they are the recent high prices will drag their avg hedge price higher so its not a bad idea.

    Agreed also good thing for the likes of CRR. I think WFT will be seeing their rates come up here too. The PVA guys couldn’t say enough nice things about WFT ‘s work on the Fogle well.

  5. 5
    zman Says:

    Thanks Bill – these guys make my job easy.

  6. 6
    ellwodo Says:

    Great analysis. (Love the “mathematically chalenged” comment, I guess Aubrey knows his analysts). From a quick look it seems as if XCO is second (after HK) in Haynesville valuation as % of stock price. So far it has been relatively a “stealth” Haynesville player. Would you expect it to start getting a higher profile?

  7. 7
    zman Says:

    Elwo – from that measure XCO is indeed stout. Despite their acreage position I have never thought of these guys as having much to do with the Haynesville, they did not sound enthusiastic as I recall on their last call and did not play it up as the second coming of natural gas like so many others have done. The stock has shot up and I sold out too quickly, not being as familiar with it and wondering all the while why it was so cheap based on growth rates and prospects in the Marcellus. Once I bailed it shot the moon so I don’t know that I’m the a great thinker on the name. I think it benefits from this like all the other will on Wednesday but as to a higher profile, a higher profile than the other names or than its own past, I really can’t guess. I’ll look into their last presentation to see what it was about their acreage that they were so unenthusiastic about.

  8. 8
    ellwodo Says:

    XCo – I attended their shareholders meeting in Dallas and got the impression they were very enthusiastic. They were going to their board later that day to get approval (which they got) to increase their capex for Haynesville by 900 million (? can’t remember exact amount) or so, just as they had previously done in March for Marcellus. I think the main difference so far between them and chk, hk, etc is that they are sticking to self funded capex for the play, no new debt or equity offerings. It means they are mving slower, but I think the fundamentals favor them. As you point out, at the extrapolated Haynesville valuations the current HK market price gives you the rest of the company for almost nothing, but I’m not sure the rest of HK comes close to XCO’s “rest”, which includes significant Marcellus acreage. Disclosure: I’m holding XCO Sept 35s (and stock) and will probbly be adding Sept 40s tomorrow if I can get in anywhere reasonably. I think XCO is the Cinderella at this dance. I’m enjoying flirting with her sister HK, but XCO is the one I want to take home.

  9. 9
    zman Says:

    Elwo – thanks for setting me straight there. Will do a little digging. Must have my wires crossed with another name on the lack of enthusiasm. Will take another look.

  10. 10
    crysball Says:

    Z,
    Reading the ‘tea leaves’ don’t you think it makes sense for CHK to pursue a similar strategy in other Shale plays (the logical next best being MARCELLUS SHALE], where it has a large acreage position , but no real presence on the ground. The NUTSHELL benefits you outlined above:” CHK gets to de-lever both from a financial as well as a risk stand point and receives a source of funds obviating the need for further near term capital market transactions” are very powerful plus other aspect , SPEED to get cashflow back………….sooner than if they did it themselves at a much slower pace.

  11. 11
    irished Says:

    I think we went to the second/third inning on CHK. What a cash cow ZMAN. Outstanding job as always!!!

  12. 12
    esemscott Says:

    Hi there, I’m a newbie here and looking for an entry point. What’s the best way to follow your action?

    Thanks.

  13. 13
    irished Says:

    radio check

  14. 14
    rseidman Says:

    Anybody home?

  15. 15
    zman Says:

    you guys are on the wrong post.

  16. 16
    zman Says:

    CHK/PXP call just ended, went on a little longish in my book, said 400 people were on it which is a lot. I’m thinking the stocks will start to bounce, again oil market willing, in the next little bit here.

    QBIK now over $5

  17. 17
    zman Says:

    Thanks Sane. Nice to see the numbers are back to not matching at all.

    Boss – API is a parallel set of numbers issued by the American Petroleum Institute. The two match up over time, API says their numbers are more accurate as the EIA’s numbers include a hefty chunk of “modeling”

  18. 18
    md Says:

    what are API numbers

  19. 19
    zman Says:

    All comments from the CHK call are archived on last night’s note at the bottom on the report tab

    Re PXP – probably the spending and once it started to sell some holders assumed something was bad about the deal. They did pay up for those acres, that is true, but the deal will change the complexion of the company in short order, much quicker than a similar deal would have in a place like the Barnett.

  20. 20
    zman Says:

    RE NFX and OII July – I plan to shed them next week. Monday’s are a good day for E&P press releases and the stock all but ignored upgraded guidance and the Malay production ramp from 2 weeks ago. They have other news they could offer up to the market pre 2Q, not saying they will but they could. I am already in longer dated $65 calls here as well but would rather not scud out the position.

    Re OII – again, will look to punt next week. Don’t expect catalytic news pre the call there. Will take longer dated calls for hurricane optionality next week.

  21. 21
    zman Says:

    Texana – in yesterday’s post I bought them small to enter when they upped capex guidance due to increased drilling activity in a number of plays. Have not written a great deal about beyond what is in the Holdings Watch today, but I like the simplicity of the concept. It is cheap, it is a rig company like NBR with spare capacity and is adding new rigs and it is in all the hot plays. It has an E&P arm that is also in those same hot plays. That one I’m not close to but have past experience there and I think the simplicity of the story can appeal to the masses during hypey times like these.

  22. 22
    texana Says:

    thx, bo common

  23. 23
    zman Says:

    Oil headed higher on the numbers, looks like we are going for a record close here, now up $1.80, near 143.

    Even gasoline up now with the move in oil despite the bigger than expected build in gasoline stocks.

    Refiners a mixed bag here but mostly weaker. I see no reason to enter long positions at this time.

  24. 24
    jazzkool Says:

    Z, I went ahead and sold half of the HK July 45s that I bought for 2.00 for 7.30. Thank you very much. You have been all over HK, to all our benefits.

    HK

  25. 25
    md Says:

    How much importance is given to the Monthly Petroleum Supply report.
    The weekly reports show that product supplied is 1.9% and 2.3% lower week to week and YTD over last year. The monthly report till Apr. 30 show a drop of nearly 4% and 4.5% or over 800K barrels vs. 400K that the weekly report shows. The drop in demand is considerably more than the weekly report indicates and yet it seems that the monthly data does not have an impact on the market

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