[joeltrout]

May 5, 2008
Chesapeake Energy Corp., Oklahoma City, (NYSE: CHK) has retained Meagher Oil & Gas Properties Inc. to sell all of its remaining properties in the Arkoma Basin Woodford shale.

The package includes approximately 85,000 net acres in Hughes, Pittsburg, Coal and Atoka counties in Oklahoma. Production is approximately 40 million cubic feet equivalent per day. Potential net reserves are more than 2 trillion cubic feet equivalent. The sale is part of the company's plan to monetize assets to fund increased capex. Contact Teri Williams, 918-481-5900, ext. 224.

Chesapeake recently sold long-lived producing assets in Texas, Oklahoma and Kansas in its second volumetric production payment transaction to an undisclosed buyer for $622.7 million. Proved reserves are approximately 94.3 billion cubic feet equivalent to be produced over 11 years for $6.63 per thousand cubic feet. Current net production is approximately 47 million cubic feet per day.

Chesapeake is operator and will retain drilling rights on the properties below currently producing intervals. Combined, Chesapeake anticipates receiving more than $1.5 billion from the two transactions, making anticipated proceeds for the Oklahoma properties close to $900 million.
Sincerely,
Oil & Gas Investor's
A&D Watch

Sorry no link since it was an email.

I am not sure what to think about this. Either Chesapeake is getting ready to do a huge capital investment somewhere (maybe Haynesville Shale) and they need to raise that capital or...the Woodford Shale isn't as great as many believed and Chesapeake is walking away while prices are relatively high.

[seahorse2]

Interesting. I hope you will help me understand something. How do gas companies normally pay for/finance new expenditures? Can they not use existing wells like the ones being sold to finance new development or is it normal to simply sell and use the proceeds for new development? Or, does it depend on the philosophy of the company? Is CHK a pay as you go company?

[joeltrout]

Interesting. I hope you will help me understand something. How do gas companies normally pay for/finance new expenditures? Can they not use existing wells like the ones being sold to finance new development or is it normal to simply sell and use the proceeds for new development? Or, does it depend on the philosophy of the company? Is CHK a pay as you go company?

My understanding is that they have to raise capital just like any other company whether it is a gas company, a regional bank, solar company, etc...

I think Chesapeake is needing capital to further explore new areas which is very captial intensive. The daily revenue that they are receiving off the Woodford might be a lot compared to other fields but might not be enough for a large sum needed to get into a new area such as the Haynesville or something else.

So Chesapeake can sell it off for a high price and then reinvest that money into a new shale play.

It also ties up many Chesapeake employees that have to maintain field operations. After selling the Woodford shale, Chesapeake can direct all those field hands, landman, geologist, engineers, drilling contractors, etc... to other places.

joeltrout

[copious.abundance]

http://www.arkansasnews.com/archive/200 ... 46096.html

The company said it will sell its remaining Arkoma Basin Woodford Shale properties for more than $1.5 billion "to redeploy capital to higher priority areas in the company's operations," according to the company's statement.

[ardisbartle]

May I ask if there is any indication who purchased these Arkoma Basin Land properties? Any guesses? Thanks

[joeltrout]

May I ask if there is any indication who purchased these Arkoma Basin Land properties? Any guesses? Thanks

When I find out I will let you know. At this point I don't believe they have sold the assets.

joeltrout

[TheDude]

Seems they had some financial woes related to a "hedging program." How's that work?

Chesapeake Energy Swings To 1Q Loss On Hedging Losses ...

DOW JONES NEWSWIRES

Chesapeake Energy Corp. (CHK) swung to a first-quarter loss on an unrealized loss related to hedging activities.

The company announced that it would sell assets with proved reserves for $623 million and retain drilling rights on the properties. That sale was expected to close Thursday. It also said it intends to sell all of its remaining Arkoma Basin Woodford Shale properties, about 85,000 acres in Oklahoma, for $1.5 billion.

The independent oil-and-natural-gas producer reported a net loss of $132 million, or 29 cents a share, compared with net income of $258 million, or 50 cents a share, a year earlier.

The latest results included an unrealized after-tax mark-to-market loss of $704 million from the company's oil, gas and interest rate hedging program, primarily the result of higher oil and natural gas prices. Excluding items, earnings were $1.09 a share.

Revenue rose 2% to $1.61 billion.

Analysts' mean estimates were for per-share earnings of 93 cents on revenue of $2.12 billion, according to a poll by Thomson Reuters.

Chesapeake said average daily production jumped 31% with total natural gas up 33% to 187.8 billion cubic feet and oil production growing 28% to 2.746 million barrels. In February, the company predicted production of 2.68 million barrels of oil and 198 billion to 202 billion cubic feet of natural gas in the first quarter.

Average realized price for gas fell 2.3% but climbed 22% for oil.

[joeltrout]

Seems they had some financial woes related to a "hedging program." How's that work?

I don't know their exact scenario but I figure they hedged their gas at a lower value than the current market price and have to pay back the difference between the two.

For example our company bought some assets back in 2005 and started hedging 2-3 years out 80% of their oil for around $50. Which means they get paid $50/bbl on 80% of their oil production no matter if the price is $5/bbl or $500/bbl.

So now that oil is worth $124/bbl. Our company gets paid $124/bbl but since they hedged 80% they have to pay back the difference to whoever they bought the hedging contract from.

Hopefully that makes sense. If not let me know.

joeltrout

[rdsaltpower]

For all you nat gas fans, a littte ditty from West Virginia. http://www.wvgazette.com/News/200805290738

[Cashmere]

"While we hold a less significant amount of the liability in the verdict, we do believe it sends a profoundly negative message about the business climate in the state," Rotruck said. "The reality of this decision is that nobody in West Virginia, similarly situated, has a guaranteed right of appeal in the judicial system."

Hah! The "profoundly negative" message is . . .

1. You will not be allowed to rip off our citizens.
and
2. You will not be allowed to harass them with endless litigation when you get caught ripping them off.

"The court's decision to not even address the substance of an appeal in a case of this significance ... is unprecedented and contrary to the most basic principles of fairness," he said in a news release last week. "We firmly believe in the merits of our position and will continue to vigorously pursue our arguments before the U.S. Supreme Court."

Translation:
"This is a lot of money, and no matter how piss weak our case is, we expect a court to fawn over us.

[rdsaltpower]

Cash, I agree completley. Part of the sum I figure was accumulated when Columbia Natural Resources ripped the citizens and then sold out to Chesapeake.

[keeter]

Your thoughts on these notes

Chesapeake Conference Call

[Carlhole]

CHK has been a great stock to own this year and it looks like it's going to continue to be one. It has dipped down as crude has fallen off its highs so, if you like it, get ready to buy soon.

[zberry]

FWIW, the energy trading service that I subscribe to said that they will probably issue a buy on CHK next week. They want to see what happens to crude early next week.
The recommendation was basedly mainly on heavy insider buying by the CEO.

[smallpoxgirl]

My thought on those notes is that I can't see them without a password.

[joeltrout]

Aubrey is crazy but he is also the most knowledgeable guy when it comes to natural gas because he surrounds himself with all the talent.

Maybe I shouldn't have turned down a job at Chesapeake right after college. The stock options would be pretty nice right now.

joeltrout

[copious.abundance]

... estimated in-place reserves.

Yes yes yes I know, it's only in-place reserves.

But that makes it another nice target. Kinda like the Bakken, but with more gas.

--> World Oil Magazine <--

[...]

ESTIMATION OF RESOURCE POTENTIAL

The resource potential estimations assume that oil and gas in the Woodford Shale are indigenous, and were calculated based on organic carbon concentration, organic hydrogen concentration, organic matter type, thermal maturity and facies volumes (thickness times area), While this is not an assessment of recoverable oil and gas, it does estimate total gas-in-place and oil-in-place through mass balance calculations based on the concentration of organic hydrogen in the source beds. The data suggest that total in-place gas in the Woodford Shale is on the order of 830 Tcf and total in-place oil is on the order of 250 Bbbl in the southern midcontinent. These volumes include 130 Bbbl of oil-in-place in the Anadarko Basin region, and 230 Tcf of gas-in-place and 120 Bbbl of oil-in-place in the Permian Basin region.

In the Anadarko Basin region, the estimated gas potential is 600 Tcf in the area of probable success, an area that includes the Anadarko and Arkoma Basins. The estimated gas potential is 0.24 Tcf and the estimated oil potential is 70 Bbbl in the area of possible success, encompassing the Nemaha Uplift, Marietta and Ardmore Basins, Arbuckle Mountain Uplift, southern flank of the Anadarko Basin, and frontal zone of the Ouachita Tectonic Belt in Oklahoma. About 4.4 Tcf of gas-in-place and 60 Bbbl of oil-in-place are estimated for the area of local success, which includes most of the northern and central Oklahoma Platforms.

In the Permian Basin region, the estimated gas potential is 220 Tcf in the area of probable success, which includes the Delaware and Val Verde Basins. The estimated gas potential is 0.11 Tcf and the estimated oil potential is 35 Bbbl in the area of possible success, encompassing the Central Basin Platform and northern flank of the Pecos Arch. About 9 Tcf of gas-in-place and 84 Bbbl of oil-in-place are estimated for the area of local success, which encompasses much of the shelf and platform provinces and most of the Midland Basin.

Although estimates of the volume of undiscovered hydrocarbons are inherently problematic because of the assumptions that must be made to complete the calculations, the mass balance approach yields orders-of-magnitude for in-place oil and gas, and provide a consistent means to compare and rank different areas of interest as to their hydrocarbon production potential.

[...]

[TheDude]

UPDATE 1- Chesapeake sees other companies cutting gas spending

NEW YORK, Sept 23 (Reuters) - Chesapeake Energy Co (CHK.N: Quote, Profile, Research, Stock Buzz), which has cut its spending on natural gas well drilling, expects other energy producers to begin reducing exploration spending in coming months.

"While we may be the first, we will certainly not be the last," Chief Executive Aubrey McClendon said during a conference call on Tuesday.

On Monday, Chesapeake, which says it is now the largest U.S. natural gas producer, announced it had cut its capital expenditure for drilling 17 percent through 2010, trimming its forecast for gas production growth.

Natural gas producers had ramped up exploration and production activities during the first half of the year, when natural gas futures NGc1 prices nearly doubled, reaching a peak at $13.69 per thousand British thermal units in early July.

Since then, natural gas futures have slipped more than 40 percent to trade at about $8. When that price goes below $7.50, production at many wells becomes uneconomical, McClendon said.

"If those prices stay out there for very long the industry will have to restrict its capital expenditures," he said.

NG companies are trimming their fleet by 200 rigs from 400, out of a total of 2,018 for both oil and NG operating in the US. Nate Hagens estimates this will entail a drop of ca. 5% for NG production: The Marginal BTU - She's a Bitch (TOD). This with 65.6% of GOM NG still shut-in. Next storage report should be interesting.

[emersonbiggins]

The shale plays are going to be hurt the most by this. Hopefully, we get some stability in the wellhead price, and soon. Volatility kills.

[ROCKMAN]

Dude,

That "200" rig count drop...did that number come out of the TOD thread? I'll repeat my response to that thread here:


There are some important facts which need to be considered in analyzing CHK’s press release.

Above all else EROEI has no bearing at all on drilling decisions. This isn’t to say that EROEI isn’t as low or worse then some calculate. Drilling decisions are based on economic return and not net energy return. But this doesn’t mean EROEI is not related to drilling costs on some level. Drilling/completing costs have almost doubled since the UNG play took off. Productivity has also jumped in many trends. But the process is still utilizing the same materials as it did when it started. Thus the same energy utilization. In fact, given the increased productivity in many trends as a result of improved technology EROEI should have improved over the last 2 to 3 years.

With regards to falling NG prices being behind this move that statement is 100% BS. Go back up and look again at the chart of CHK stock price vs. NG prices. Big run up in stock value when NG spiked last spring. But look at the NG prices back in 2007. On average, at or slightly below where they are today…at the end of the “low price” season. While CHK stock benefited greatly from the high spring prices, the decision to drill those wells were made at lower NG prices than exist today. NG prices are not “low” today…they are just lower then the very anomalous spring prices. Today they are still above the “high season” prices of last January. I don’t make a business of predicting NG prices but consider this: this is the time of the year when much NG is shipped to storage for the winter demand peaks. The majority of GOM NG is still shut in. Anyone think CHK is projecting low NG prices this winter?

As I’ve pointed out before, public oil stocks are valued on Wall Street based upon the reserve growth (in volume…not $’s). Profitability does have a role but it’s minor compared to asset growth. Consider this scenario: if CHK eliminated all capex today their profits would shot through the roof. But would you buy the stock? All you would gain would be dividends. But stock value would steadily decrease as reserves depleted. So you’re making 4% or 5% dividends but will never get your principal back if you hang on to it till the bitter end. Any one want to buy CHK on that basis?

As far as the “analysts” expecting other UNG players to power down you should reserve judgment for a while. I consult for one of the major UNG players in the country and 2 months ago they decided to expand their rig count by almost 50% in 2009. These folks are not stupid. And they are rather conservative in their economic analysis. This is just speculation on my part but from various bits and pieces I think the CHK announcement was primarily do to a lack of credit. Notice they say they are going to expand their drilling efforts in the Haynesville Shale. This is one of the most expensive plays in UNG. But it appears to be one of the most profitable. Also note that they are not pulling out of the Marcellus Shale. They are looking for a partner. If the play isn’t profitable for them at 100% of the cost will it be profitable at 75% of the cost? As far as choking back existing production due to low NG prices will see. It’s been my experience over 33 years that when prices drop operators almost universally do everything they can to produce more. Once the well is completed it becomes a strictly cash flow business. I’ve never seen an operator not sell NG or oil because the price is lower than the cost to develop the reserves. In fact, I’ve seen many operators produce wells for short periods on time when net income was less than zero. It was done to maintain the leasehold (most leases expire in 30 days if there is no production) and to avoid plugging costs (at least for a while). The hope was for prices to increase or for someone to come up with a new idea about drilling another well on that leasehold.

Analyze the CHK words as you like. But it doesn’t pass my smell test.