27
Jan

CHK Updates Ops To Swing New Deal

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CHK Reports Preliminary Production & Reserves; Updates Haynesville Activity & Hedges; Announces $500 Million Senior Note Deal.

  • 4Q08 Production:
    • 2.315 Bcfepd (92% natural gas). Up 2% sequentially and 14% year over year once you get everything on an apples to apples basis (adjusted for VPPs and asset sales )
    • This is just above the high end of the 4Q guidance of 2.23 to 2.27 Bcfepd.
  • Reserves (preliminary)
    • Reserves grew 11% to 12.1 Tcfe (which is where they were at the end of 3Q and no doubt stalled from reaching 12.5 by a ceiling test writedown).
    • Reserve Replacement (new reserves added vs production and asset sales of 239%, this will be seen "as expected for them" and upper quartile among the large caps for 2008.
    • Writedown of $1.8 billion due to low year end oil and gas prices. This is non-cash and does not affect the reserves, simply an accounting rule they and all E&Ps are required to follow. The charge would have been smaller had this been 2009 when the new 12 month pricing rules go into effect. Not a big deal.
    • Finding & Development Costs:
      • Not given in the press release nor was final capital spending
      • but I'd bet the all in number is close to $3.50 per Mcfe (so-so)
      • and the drilling bit only F&D will be close to $1.50 per Mcfe (after impact of the reserve writedown)
      • F&D drillbit costs should fall substantially next year.
  • Haynesvillle Shale Update: Bigger wells.
    • The average IP for the last seven wells is 16 MMcfepd, rising from the previous set of wells that were closer to 10 MMcfepd.
    • The last two wells which have been completed but not yet hooked to sales were 22 MMcfepd (its not clear if these two are included in the previous bullet).
    • Rig count in the play is now 20 with an average of 25 rigs expected for 2009 which is up a couple of rigs from their last update.
    • Potential well count implies net reserve adds of just under 600 Bcfe. That's 25 rigs on average with a spud to spud time of 60 days (I think they can beat that), an 80% working interest (paying the equivalent of only 50%), a 25% royalty, and their middle of the road EUR estimate of 6.5 Bcfe 8/8ths. 
    • Note: CHK entered JV with ETP to build the 178 mile, 42 inch, 1.25 Bcfgpd capacity Tiger Pipeline stretching to Carthage, Texas with an in service date of 2011.
  • Hedges: Increasing Coverage
    • 2009:
      • 42% of expected production covered with swaps priced at $7.87,
      • 40% covered with collars with floors at $7.32,
      • minimal hedges subject to knockout swaps
    • 2010:
      • 37% with swaps at $9.44,
      • 12% with collars with floors at $6.41,
      • 241 Bcf (nearly a third of 4Q gas production) subject to knockouts. I for one think that's smart, may go over like a lead balloon with analysts, but I really don't see them being trigerred in 2010 (triggered in a range of $5.45 to $6.75 over the course of the year. )
  • Cash at Year End: $1.75 billion (note that that is year end, not as of yesterday, and its also apparently not a net number...see next bullet)
  • Announces $500 Million Senior Note Offering. 
    • Would not be surprised to see this double in size as well, $500 mm seems to be a trial balloon.
    • Due 2015
  • Use of proceeds: to repay the revolver (which they charged up to $1 billion just after the end of 3Q while that was still possible as the financial markets looked to be melting down).

 

  • In A Nutshell:
    • Good to see their Haynesville wells improving; would like to see if they walk up the EUR's to match as the 6.5 Bcfe type curve assumes lower initial production than what we are now seeing.
    • So if the debt deal is to pay down bank debt the $1.75 billion listed in the cash and cash equivalents in the operations update is what, funny money? I kid because I love.
    • To me they are doing this because the debt window is open, at least temporarily, and the market has an appetite for high yield paper from gassy E&P names if HK's deal last week is any indication.
    • CHK wants the flexibility, I "really" get that.
    • The market wants them to "really" live within cash flow. I don't think they want to believe that. 
    • I think they should have sold it as helping to pay for their share of the Tiger Pipeline mentioned above (although that may service to worry people about long term gas prices). 
    • The problem I have with the deal is not really the deal itself. I mean, in this age of $50 billion here and $1 trillion there, the fact that we are swapping low cost revolver debt for high cost high yield debt (it will price well over 10%) should no long raise an eyebrow, right?
    • The problem I have with the deal is that it is CHK going back to the capital markets again. So soon. After another asset sale and another VPP made everyone feel it was safe to go back into the deep end of the shale, here we are again raising money.
    • After pointing out how much cash there is at hand and that no debt matures for 5 years...here we are again raising money.
    • After promising (again) to live within cash flow...here we are again raising money.
    • As you know, I'm a big fan of Chesapeake and I'm a shareholder.

      • I love their ability to buy acreage and later monetize it for 10x.
      • They never drill their best well at the beginning of the play so reserves rise and costs fall over time and that's nice. I love the fact that they can get VPPs done through their clever friends at R&D  for over $4 per Mcre in this climate.
      • But I'd like a little more thoughtfulness that even if your game plan isn't growth for the sake of growth, and I know its not, that sometimes it just doesn't pay to produce an extra Mcfe because it's there or to do a deal because you can but that a promise is always a promise.

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