Leslie’s Notebook

EnCana Corp. is one the biggest shale and tight-gas players in North America. It likes to get in early, keep quiet and let others grab the attention. In the hot, hot Haynesville play in northern Louisiana, it now holds 370,000 net acres. Its joint venture partner, Shell Oil Co., holds another 220,000 acres.

EnCana USA president Jeff Wojahn estimates the company’s average cost per acre in the play will be between $2,000 and $5,000 per acre–well below the amount other companies have reportedly paid for leases in the past month. 

 An investor at The Oil and Gas Conference hosted by EnerCom Inc. in Denver this week asked Wojahn, “Since you got in early and paid less per acre than others are now paying, why not just flip that acreage and make a quick bundle?” 

“Yes, we could turn it around quick for a higher cost per acre, but we look at long-term value as well as return,” he replied. “Besides, what would we do with the resulting higher tax bill?” Investors and analysts laughed.

For much more on shale plays and how they are impacting U.S. A&D activity, attend our 7th annual conference, “A&D Strategies & Opportunities,” in Dallas on Sept. 3 and 4. Go to www.HartEnergyConferences.com. 

–Leslie Haines, Oil and Gas Investor, Editor in chief, lhaines@hartenergy.com 

Here are some choice comments from XTO Energy chairman and CEO Bob Simpson, speaking at the 13th annual EnerCom Oil and Gas Conference in Denver this week. The rapt and over-flow audience frequently laughed at some of his comments, that touched on all aspects of the U.S. natural gas scene.  

 On shale M&A: “The majors are pretty much sitting on their thumbs, but they’ve got to be watching this [shale boom]. Yeah, BP bought that Woodford stuff from Chesapeake for $1.7 billion. That pretty much validates it. This shale thing is real, so the next [M&A] event is coming.”

On the Bakken shale: “The Bakken is a new franchise for us. I saw where one company’s market cap went up $2 billion based on one well announcement there, so I’m thinking, one well is worth $2 billion! So I sent my guys up there to check it out, and I hope to have one of those soon!”

On the so-called land grab: “We’re known as a good capital allocator and trust me, I’m not into being a land-grab player. But I think there’s some value there. Next year I don’t want to be showing you my acreage or an acquisition. I want to show you a well announcement.” 

On hedging: “When oil was running up to $140 and gas to $13, people were saying to me, ‘Gee, I hope you are not hedged’ Now that the prices have come down, The Street is saying, ‘Gee, I hope you are hedged.’”  

On a potential gas glut: “U.S. onshore gas production is up 8%. Everybody is asking me, Are we going to drown in gas? But this year we just got back to the production we had in 2001! Do I believe we can continue that growth of 8%? No. The underlying decline curve is great. If we stopped drilling for a year, we’d lose four Barnett shales. It’s easy to fall for the trap that all these shales add up…but in truth, some gas is disappearing at the same time.”  

In the latest volley between two industry titans who dominate North American gas production, Chesapeake’s Aubrey McLendon and XTO’s Bob Simpson, Simpson spoke out at the 13th annual EnerCom Oil and Gas Conference in Denver.

After outlining details on XTO’s recent $10-billion gas-asset grab that will double the company (See OilandGasInvestor.com and the magazine for even more details), Simpson started extolling the virtues of gas shales. They are no doubt very exciting for XTO, investors in the industry and for the country, he said. But, he referenced the recent dust-up on conference calls, when he made a few negative comments to dampen shale hype, while CHK’s McLendon came back saying, “Don’t diss the Haynesville.” 

Both companies are in the Haynesville–and other shales–in a big way.

“This is an interesting time. We’ve had these shales plays developing and we are finding these giant discoveries and fields,” Simpson said.  “But not every acre is alive. An acre in Tarrant County [the heart of the Barnett shale] is worth 20 times what an acre in one of the western counties is worth. And that is going to be true in every one of these other shale plays.

“They are not a blanket play–well, they are geologically, but they won’t be in production–but it is being communicated to the investor as a blanket play. It’s not quite that simple.

“The oil sands in Alberta would be an analogy. If oil prices are what they are, why don’t they triple production up there? Well, we all know why–it’s the lack of infrastructure. The same is true for these shales. Until the infrastructure is there, you’ll have displaced production.

“The Marcellus will be the worst–the infrastructure there was made for long-lived, itty, bitty wells. It can’t handle these new wells doing 3-, 4-, 5 million a day. 

 ”Look, I was fussing about some numbers, but we don’t know yet–I didn’t mean to be negative on the Haynesville itself.”

–Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com   

As oil and gas prices rose to unexpected highs throughout the first six months of 2008, E&P companies and commodity traders that hedged part of their production at lower prices—or were shorting commodity prices, thinking they would soon fall—have been caught, well…short. Many could not make margin calls. Others are now reporting mark-to-market or derivative losses on paper, or unrealized losses.

            It’s happened before. In first-quarter 2008, Devon Energy Corp. (NYSE: DVN) reported a non-cash, pretax loss of $780 million from being on the wrong side of oil and gas derivative instruments. Chesapeake Energy Corp’s (NYSE: CHK) paper loss from hedging in the first quarter was $704 million.

            EnCana (NYSE: ECA) just reported a second-quarter loss of $400 million from its commodity-price risk-management positions. This included a $308-million, after-tax loss on gas hedges, and a $92-million, after-tax loss on oil and other hedges. The realized losses in the second quarter reflect the dramatic increase in oil prices in the past year and natural gas prices as well, the company said.

            The biggest blow-up so far has been that of Tulsa-based midstream firm SemGroup LP, which transports, stores and distributes oil and refined products. A fund owned by Carlyle Group and Riverstone Holdings holds 29.3% in SemGroup.

            Following a $2.4-billion loss on energy trading reported in July, including short positions that bet that oil prices would fall, on July 22, 2008, the U.S. subsidiaries of SemGroup filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Two Canadian SemGroup subsidiaries also filed for creditor protection under the corresponding Canadian law.

            Affiliated MLP SemGroup Energy Partners LP (Nasdaq: SGLP), which went public in July 2007, has collapsed after its parent’s bankruptcy filing, with its units plunging from nearly $30 to less than $8 in late July.

            The bankruptcy affects producers that sell their production to SemGroup. For example, Calgary’s Enterra Energy Trust (NYSE & TSX: ENT) now says it has a potential financial exposure of up to US$10 million, primarily from oil and gas sales to subsidiaries of SemGroup LP in Canada and the U.S. during June and July 2008. A financial instrument held in Canada with SemGroup offsets a substantial portion of this exposure.
            In Oklahoma, Enterra’s U.S. unit sells roughly 900 barrels of oil equivalent per day to SemGroup. In Canada the trust sells approximately 1,000 barrels per day to SemGroup. In addition, Enterra participates in a joint venture crude oil blending facility in Canada with SemGroup.

            Another creditor is Alerian Capital Management of Dallas, which has taken control of the general partners of the MLP, along with another investor, Manchester Securities, according to court filings.

            Meanwhile, as major New York investment banks continue to struggle and their credit ratings decline, that also might affect their counterparties with whom they trade physical oil and gas, and commodity- and interest-rate swaps.

            In June for example, S&P Ratings Services downgraded XL Capital Assurance Inc., a surety provider for Municipal Gas of Georgia, a utility, for a series of natural gas supply prepaid bonds. The rating on the gas prepay is tied to the gas supplier, which is Merrill Lynch Commodities Inc.

            S&P said ratings on the bonds could be revised if the outlook on Merrill Lynch or another counterparty is revised.

–Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

I recently came upon a new Haynesville shale website that has info on Louisiana regulatory hearings, public education programs scheduled in Shreveport and elsewhere, and background information and maps from geologists.

The most interesting part of the site? The many discussion groups that have been formed, that are arranged by parish.  (There is also one for East Texas, where the Haynesville is known as the Lower Bossier. In recent weeks,  Penn Virginia Corp. brought in a well that tested 8 million a day from the Lower Bossier/Haynesville shale.)

Of note: A person on the site asked, “If people are able to get a 25% royalty from these oil companies, why don’t these landowners negotiate for 100%?” There’s a whole lotta learnin’ to do!

Go to http//haynesvilleshale.ning.com. It’s a window into the Haynesville gold rush.

 –Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

Rehan Rashid, the managing director and head of energy research at FBR (Friedman, Billings, Ramsey & Co. in Arlington, Virginia), spoke in Houston on July 16 about his macro energy views, and he threw in many tidbits about shales.

Rashid has done a bottoms-up analysis of 5 key U.S. shale plays in the news: Haynesville, Marcellus, Woodford, Fayetteville and Barnett. He said they stand to generate massive returns and NAV growth for the main E&P companies involved. He wonders about execution of the huge drilling plans being announced by the E&Ps chasing shales.  He is not worried, however, about rig availability–his concern is tubulars, frac capacity and other equipment prices.

Rashid interviewed shale-oriented CEOs and geologists, studied company reports on drilling plans, well spacing, estimated ultimate recoveries (EURs) per well, gas in place, 3P reserves and other metrics to come up with this:

3P reserves in each play: Haynesville 120 Tcf, Marcellus 68 Tcf, Barnett 55 Tcf, Fayetteville 25 Tcf and Woodford, 14 Tcf. 

Recovery factor in each play: Haynesville 20.4%, Marcellus 19.1%, Barnett 13.4%, Fayetteville 20.5% and Woodford 39.5%. 

Estimated total U.S. gas-shale wells drilled in 2006: 1,000. Shale wells to be drilled in 2008: 2,000. Shale wells to be drilled in 2010: nearly 5,000.

 ”Too much NPV is at stake, so these company CEOs will not let it go by. They will figure out how to produce these shales. I estimate there are about 275 rigs drilling in gas shales right now and we could get to 600 rigs by 2018.”

–Leslie Haines, Editor-in-chief, Oil and Gas Investor, lhaines@hartenergy.com

With all the hoopla surrounding the emerging Haynesville shale play in northern Louisiana, it is easy to focus on certain key E&P companies–and their stock prices–that have jumped onto this opportunity in a huge way.

But the local population and community agencies stand to benefit too. In July’s state lease sale, the Louisiana Mineral Board collected $48.7 million. More than $46.4 million of that came from eight shale leases, and seven of those were in Caddo Parish. The monies will go to the Caddo and DeSoto parish government councils.
Average price was a whopping $30,000 per acre in bonuses and 30% royalty. These numbers have now outstripped the hot leasing action in the most competitive areas of the Barnett shale under certain prime Fort Worth subdivisions where residents are increasingly savvy, and are demanding higher bonuses and royalties.

As the Haynesville gas production begins to grow, it will obviously benefit the area’s midstream companies as well.
Here is one example: Regency Energy Partners LP of Dallas on July 14 hiked its 2008 earnings guidance in part thanks to growing production out of northern Louisiana, where it has gas gathering and pipeline facilities.
It raised its guidance by $35 million to a minimum estimate of $255 from the previous number of $220 million. “The increase…is attributable to favorable commodity prices, additional volume growth in North Louisiana, improved fuel efficiencies and higher condensate and sulfur recoveries,” the company reported.

Meanwhile, a new report from Simmons & Co. International, the Houston investment bank, says that the Haynesville may have resource potential of 90 Tcfe (trillion cubic feet equivalent) if 50% of it is prospective.

Goodrich Petroleum, Petrohawk Energy, Cubic Energy and GMX Resources have the highest exposure to the Haynesville on the basis of their enterprise value-to-net prospective acreage, the report says.

–Leslie Haines, editor in chief, Oil and Gas Investor, lhaines@hartenergy.com