A&D Intelligence

Let me disclose up front: I know Rob Curnock, Rob Curnock is a personal friend of mine, and current Texas District 17 House representative Chet Edwards (Dem.) is no Rob Curnock. That fact is significant to the oil and gas industry.

Texas District 17 should be on the hot sheet of every U.S. oil and gas producer affected by federal energy legislation. With heated debate in Washington on windfall profits taxes, capital gains taxes and opening up drilling in presently off-limits U.S. areas such as the Outer Continental Shelf and the Arctic National Wildlife Refuge, every seat in the Congress counts when determining the future of energy.

Every E&P in the nation should know Rob Curnock’s name.

Texas District 17 is notable in that it encompasses Johnson and Hood counties of the Barnett shale to the north, Robertson, Madison and Limestone counties of Deep Bossier fame to the south, and the population center of Crawford in the middle, the home of the current president’s ranch and where he will retire when the new Congress takes over.

Unfortunately, Democratic presidential candidate Barack Obama has come out gunning against the oil and gas industry in his campaign, portraying the industry as the bad guy causing rising energy prices and parlaying voter sympathy with proposals to stick it to ‘em. It’s hard to be nonpartisan when you’re under attack.

As Obama’s Texas spokesman, Edwards too hitches his horse to Obama’s detrimental policies. His voting record parallels the Democratic hard line of no new reserves in legislatively off-limits areas.

Congressional leaders Nancy Pelosi and Harry Reid have already shot across the bow with failed legislation for a windfall profits tax and held their ground on a Republican push-back to open up offshore reserves. Combine Obama with a Democratic Congress and the oil and gas industry should prepare to hunker down and weather the hurricane. Combine sometimes-Republican presidential candidate John McCain with a Democratic Congress and the oil and gas industry should button up for a tropical storm.

Either way, the oil and gas industry suffers under a Democratically-controlled Congress. Texas District 17 hangs in the balance with a two-vote swing in the U.S. House.

Although represented by Edwards since 1990, ushered into office when Texas still voted predominately Democrat, Texas District 17 polls at 64% Republican. Imagine the opportunity. He has been largely unchallenged by any significant candidates during that time and certainly held the financial advantage.

Curnock is a well-known small businessman in the district’s population power base of Waco, the first candidate to come out of there in memory. He has high visibility in the area and is well connected. Importantly, Curnock is passionate about conservative issues and has worked in political roles for two decades, including as election judge and on Gov. Rick Perry’s small business task force. He owns royalties in oil and gas wells. He believes the hands of the energy industry should be untied so it can meet our nation’s energy needs.

With two-thirds of the population base already voting Republican on other tickets, the Texas District 17 House seat is ripe for taking. The effort requires money to campaign.

With three months to go to the vote, producers and service providers with operations in the district should open up their political earmarks without delay and fund Curnock’s campaign. Energy companies nationwide counting votes in the House of Representatives should look to Texas District 17 as a Republican vote in the next Congressional session and donate now to the energy friendly candidate.

Every House vote counts on U.S. energy policy. Every energy campaign dollar swings the momentum. Wake up. Texas House District 17 will affect U.S. energy producers one way—or the other.

Rob Curnock For Congress

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

After Encore Acquisition Co. went fishing for a big fish to bite at its unexpected “seeking strategic alternatives” exercise, apparently nobody wanted to pay the required premium to take the producer off the table. Instead of an outright sale, Encore will offer up its noncore assets.

Encore CEO and president Jon Brumley states, “We have been studying strategic alternatives at Encore that would bring the most value to our shareholders. The board and management have decided that a sale or merger of the company is not currently in the best interest of our shareholders. The energy and credit markets became very indecisive during the second quarter. Due to timely acquisitions, a put-based hedging strategy and our financial flexibility, Encore Acquisition Co. has always excelled in times of market indecisiveness.”

And, “The plan is to divest of non-core properties, drop down properties into Encore Energy Partners, and purchase puts struck at $110 per barrel for calendar year 2009. We expect the divestment of the non-core properties and the drop down will pay off most or all of our bank debt, and the puts will ensure that we have good cash flow in 2009. The main advantages of this strategy will be to situate Encore for a larger drilling program in 2009 and to increase our acquisition capabilities for long-life properties in our core areas.”

So here’s what’s core: “We will be focusing on increasing our drilling program in our 240,000-acre Bakken /Sanish play from two rigs currently to six rigs by the middle of 2009, exploiting the high rate of return development wells in our West Texas JV, and drilling our growing Haynesville, Lower Cotton Valley and Bossier potential in North Louisiana and East Texas.”

By omission, what does that leave? How about Midcontinent assets in the Anadarko Basin in western Oklahoma and the Arkoma Basin in eastern Oklahoma and Arkansas? No mention of Big Horn Basin and Powder River assets in Montana and Wyoming. Or goods in the Paradox Basin in Utah.

Be quick, before they drop down.

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

XTO’s CEO Bob Simpson started it, you could say, with his thinly veiled comments during XTO’s quarterly report conference call. “That’s ridiculous,” he said, referring to estimates by an unnamed company predicting 250 trillion cubic feet of gas in place for the Haynesville shale. Said Simpson: “Nobody in their right mind has the foggiest idea” so much gas in place exists. For reference, that compares with 50 Tcf estimated for the Barnett shale.

That unnamed person, of course, is Chesapeake Energy’s CEO Aubrey McClendon, who has confidently touted the big number in the hot new shale play, in which Chesapeake has the commanding lead.

Simpson continued to say “hype artists in the shale plays” are creating a tailspin in natural gas prices. “You have to be careful following some of these people. It’s dangerous. Our credibility is on the line with that kind of hype.”

McClendon took it personally. In his conference call Friday, he fired back:

“As to recently expressed doubts about our calculations for Haynesville gas in place, if you had studied the 100 existing Haynesville logs and taken Haynesville shale cores from your first four vertical Haynesville wells and had been able to evaluate them in your own proprietary shale laboratory, then maybe you would have been able to do the same math for gas in place and recoverable gas that we have.

“Our experience and analysis tells us that on average every square mile of core and Tier 1 Haynesville shale has an average of 180 billion cubic feet of gas in place. From that gas in place we are estimating that we will recover about 52 Bcf per square mile to the drilling of eight wells per square mile. This would result in per well average recoveries of about 29% of gas in place which is consistent with expected Barnett recoveries although Barnett drilling is 50% more dense than planned Haynesville drilling.

“With about 3 million acres in (core area identified by Chesapeake), that’s about 4,700 square miles. At 52 Bcf of recoverable gas per square mile, that equals about 245 Tcf of recoverable gas in the Haynesville, exactly consistent with what we have predicted from the beginning. So instead of this number being hype, it is an entirely reasonable number based on thorough scientific examination reinforced by actual drilling results to date. Those who have followed Cheseapeake know how conservatively we have historically been in estimating the initial potiential of the Barnett, Fayetteville, Woodford and Marcellus shale plays. Our approach with the Haynesville has not changed.”

McClendon highlighted one of its last two out of 11 wells drilled in the play as producing 14 million cubic feet per day after one week of production, completed with eight stages on a 24/64th choke. He said out of 2,000 wells Chesapeake has drilled into shales, “this is the best shale well we have ever drilled. We know of no other well in any other shale play that has averaged more than 9 million cubic feet per day over the first several weeks.”

Negative comments about the Haynesville last week “had some people express concerns to us,” he said. “When you consider who all is involved in that play and the well results to date, its not very smart to start dogging that play because the well results to date are so exceptional and are only going to get better over time.”

So there. That’s some good smack coming from some heavy hitters. Maybe Simpson will keep it fun and announce another billion dollar deal to add to its YTD total of some $10+ billion—maybe this time in the Haynesville.

Got left out of the land rush for the Fayetteville, Barnett, Marcellus and Haynesville shale plays? No worries. Plenty of opportunity exists in the Rocky Mountains where just a few players are now tapping the potential, says Shannon Nome and Patrick Johnson, research analysts with Deutsche Bank in a 46-page report titled “From Shale to Shining Shale: A primer on North American natural gas plays.”

The report notes six emerging Rockies plays that are particularly worth watching: Gothic, Cody, Cane Creek, Baxter, Pierre and Lewis.

These plays are at depths of 3,000 to 16,000 feet with multiple pay zones and initial production rates as high as 12 MMcf/d so far. The Cane Creek and Pierre shales may hold multiple Tcfs of reserves. The Baxter, Gothic and Cody are still in the testing phase with lots of unknowns. The Manco is currently in production and commingled with other formations and just now being tested as standalone.

Here is what the analysts say about each:

Cane Creek: “While perhaps the most unknown of the six, the Cane Creek Shale stands out as the highest-performing play based on recent well results. The formation consists of stacked shales, interbedded with sandstones and carbonates. The total organic content of Cane Creek can be up to 28%. The formation is estimated to have resources of several Tcf. Delta Petroleum, the play’s only known operator, has drilled several producing vertical wells, and is in the process of drilling horizontal completions which should improve recoveries. We expect DPTR to comment on its latest drilling results near term.”

Gothic & Cody: “Bill Barrett is the main operator in the Gothic and Cody shales. In the Paradox Basin Gothic Shale, the company is partnered with Williams and is currently shooting 3-D seismic to identify horizontal test well locations. Another potential pay zone that lies above the Gothic Shale is the Hovenweep Shale, where BBG plans to drill a vertical test this year. In the Cody Shale, Bill Barrett and partner Devon are assessing test well results and 3-D seismic. Should the company develop the Cody Shale, it will be required to build infrastructure in the Montana Thrust Belt.”

Pierre: “The Pierre Shale is operated by Pioneer Natural Resources, the top producer in the Raton Basin and the only company to release results from the shale to date. XTO and El Paso hold acreage adjacent to Pioneer and are assumed to be testing the shale. So far, Pioneer has drilled 10 vertical wells targeting one zone. Although this shale is still being tested, Pioneer estimates it has up to 21 tcf of gas in place. Significant upside may be realized following the drilling of horizontal wells which will test the four remaining zones inthe Pierre Shale. Pioneer sees 1,200 drilling locations based on 80-acre spacing.”

Baxter: “The Baxter Shale is an overpressured reservoir in the Vermillion Basin, which is located within the Greater Green River Basin. It has one of the largest gas in place resources of any US shale, estimated to be 440 bcf/sq. mile. However, Questar, Kodiak and its partner Devon have not been able to fully exploit the shale due to the high well cost and low IPs. We expect further drilling tests from Kodiak and Devon in the Baxter over the next 12-18 months.”

Lewis: “The Lewis Shale, a sandy siltstone with four pay intervals, is commingled with the deeper Mesaverde and Dakota formations in the San Juan Basin and the shallower Almond formation in the Greater Green River Basin. Operators typically complete the Lewis as a secondary zone. In the San Juan Basin, the main players are ConocoPhillips, BP, Chevron and XTO. Within the Greater Green River Basin, Continental Resources, BP and Anadarko are assumed to be testing the Lewis Shale, due to their large positions in Wamsutter.”

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

“The Haynesville requires very deep pockets,” that according to Shannon Nome and Patrick Johnson, research analysts with Deutsche Bank in a 46-page report titled “From Shale to Shining Shale: A primer on North American natural gas plays published last week. At $6- to $7 million per well, the cost of drilling up a sizeable acreage position quickly exceeds a smaller player’s ability to fund.

“For this reason, we believe M&A and/or ongoing joint venture announcements will be prevalent, as larger, better-funded entrants seek to consolidate positions within the play, or to initiate footholds outright.”

Using Chesapeake Energy as an example, the analysts forecast the company will require more than 5,000 wells to fully develop its current 440,000-net-acre position on 80-acre spacing. With a 60-rig all-out program, it will take some $35 billion and 15 years to drill out this position—before considering additional outlays for leasehold or infrastructure.

Says Nome, “Given the steep financial requirements, but also the massive reserves potential and production ramifications, we believe a play of this scale is sufficiently large to attract the attention of a major integrated company, and would therefore not be surprised to see future joint venture and/or M&A announcements along those lines.”

Like Shell did in the Montney, announcing last week they intend to buy Duvernay in one big cash chunk. Or BP taking a big Woodford position from Chesapeake days later for $1.75 billion—the “high end” of expectations, according to the DB analysts. Are the majors on the move? Are they coming to Haynesville?

They surmise Shell and ExxonMobil at least have “starter” stakes in the Haynesville, to which I can confirm at least for Shell for some family acreage in the southern part of the play they leased for $125/acre two years back. I doubt if they knew about Haynesville then, so just count them lucky.

Nome and Johnston conclude, “While these sophisticated, yet large and less-nimble entities clearly have the financial and technical resources to be a dominant force in domestic shale plays, to date it has been the independents leading the way. However, as more datapoints unfold with respect to the Haynesville in particular, the true financial requirements begin to beg questions as to whether this will finally be the catalyst to get the majors interested in scaling back up investment in the U.S. after decades of downscaling.”

While I agree the majors may be waiting and watching for a chance to step in with a big foot, I wouldn’t count on Chesapeake being the bait. More likely it would rather be the Big Fish in the Haynesville food chain, as it is selling and pawning everything in sight to get cash to buy more and drill more (read more in Editor’s Commentary in this month’s A&DW Watch). Chesapeake started the consolidation by JV’ing with Goodrich Resources then—bam—with Plains Exploration. Petrohawk, too, is in the consolidation game with a JV with Mainland Resources.

I predict five players in the Haynesville: Chesapeake/Plains, EnCana, Petrohawk, Devon from behind, and Forest as a darkhorse (I just think they have the hudspah to do it). Everybody else will be dealing. But will Shell grab up the loose pieces?

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

When privately held Midcontinent EOR specialist Chaparral Energy Inc. announced it would buy Edge Petroleum Corp., estimated by one advisor at a deal value of some $510 million, in an aside on their wrap-up conference call Chaparral dropped a tidbit that they might be willing to part ways with some of the newly acquired assets and its own noncore properties.

The two companies are getting married with a lot of debt baggage—about $1.6 billion pro forma—and could use some payola for paydown.

OK City-based Chaparral CEO Mark Fischer says the company might consider divesting assets along the Louisiana Gulf Coast and in the Rockies. Arkansas shale gas properties were not for sale, he emphasized, although they have been considered for divestiture previously.

Edge Gulf Coast assets include 2,011 gross (575 net) acres in southern Louisiana in Acadia, Calcasieu, Lafayette, St. Landry and Vermilion parishes; 25,706 gross (13,563 net) acres in the Mississippi Interior Salt Basin and 44,732 gross (38,340 net) undeveloped acres in the Floyd shale play, although no reference was made to the MS/AL properties specifically.

Additionally, Chaparral holds some 51.5 MMcfe proved reserves in the Texas and Louisiana Gulf Coast with total production of 10.4 MMcfe. Its Rockies assets consist of some 44,000 gross developed acres (15,000 net) and 20,000 gross undeveloped acres (9,800 net). Total proved reserves are 22.3 MMcfe with average daily production of 2.6 MM.

No word as to what properties are specifically offered up, but feel free to ask. Fischer said they wanted to mesh the two portfolios and see what fit before deciding, suggesting South Texas properties from the two companies would likely come together as keepers and result in a Corpus Christi office. “We want to be sure we get our hands around everything before making a decision,” he said.

Not to mention the present 32% of Chaparral shares owned by Chesapeake Energy, bought for $277 million in 2006 at a time when the private needed a cash infusion. If you’re looking to buy into an equity position, CHK is hungry for cash to dig into its Haynesville and the time to sell Chaparral seems ripe.

Yeehaw. Round up them thar loose assets.

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

Every E&P professional with a hand in business development should make reservations now to attend the information-saturated A&D - The Workshop and A&D Strategies & Opportunities conference in Dallas September 3-4 hosted by Hart Energy Publishing.

A&D Watch’s half-day tutorial, A&D - The Workshop on Sept. 3, is the must-attend event for every Business Development team. The workshop is a great primer by some of the industry’s crackerjack acquisition experts for those breaking into business development and those wanting to update their BD best practices.

A&D - The Workshop, sponsored by The Oil & Gas Asset Clearinghouse, is an overview of the upstream Business Development space for newcomer and veteran professionals on BD teams and firms that provide services to E&P A&D. Attendees will hear the Business Development 101 basics on current upstream M&A trends, reserve analysis, negotiating skills, networking, screening acquisition prospects, financing, due diligence, and tricks and traps.

Hear from the experts at A&D – The Workshop. Keep yourself and your BD team in the know and ahead of the competition! Learn more about the Sept. 3 A&D - The Workshop. Click here to register.

Following the workshop and now recognized as “the BEST A&D event in the Industry,” is Oil and Gas Investor’s 7^thA&D Strategies and Opportunities on Sept. 4. The all-day conference features industry players in the trenches offering up-to-the-minute updates and market trends and nuances that affect your dealmaking.

Last year’s event drew nearly 600 of your peers and asset competitors, and seating is limited. Don’t miss hearing about current asset market metrics, buying in shale plays, best practices and pre-emptive opportunities. Learn more about the Sept. 4 A&D Strategies and Opportunities Conference. Click here to register.

Both events will be held at the Fairmont Hotel in Dallas.

Be there. And look me up. I look forward to networking with the industry’s top players. So will you.

Chesapeake Energy Corp. has a knack for putting cash in the bank. From selling non-core assets to volumetric production payments to (proposed) master limited partnerships, the company is now selling a giant chunk of an undeveloped resource play. The fact that Plains Exploration & Production Co. is willing to pay $3.3 billion—half down now and half on the installment plan—for a 20% piece of the action on acreage in the Haynesville shale play suggests the hoped-for gasified gold under them Haynesville hills is more than just a lot of hot air.

The deal involves a 20% working interest in 550,000 Haynesville prospective acres both in northern Louisiana and East Texas for $1.65 billion. Beyond that Plains will fund half of all of Chesapeake’s costs on its remaining 80% share up to another $1.65 billion. In addition, Plains has first dibs on 20% of any more acreage Chesapeake gets in the play.

Chesapeake went to the alter and got married at the hip on its Haynesville operations in exchange for Plains’ up-front endowment payment.

Chesapeake’s CEO Aubrey McClendon suggests the deal values the total 550,000-acreage position at $16.5 billion, leaving Chesapeake with about a $13.2 billion piece.

The late-day breaking news kept the analysts up most of the night working out the details and implications. Calyon Securities’ Jeb Armstrong estimates the transaction equates to a per-unit basis to $30,000 per acre and $1.39-$2.67 per Mcfe of net unrisked reserves, which the companies postulated to be some 23-44 Tcfe.

Armstrong says the deal provides Chesapeake with a quick cash infusion. “While it still had ample liquidity available in its credit facility, the company may have been anticipating that by the end of Q2 it would have been able to raise $1 billion through the formation of an MLP and an additional $1.5 billion through the sale of its 85,000 net acres in the Woodford shale. The Woodford sale may still be in the works. However, spinning off an MLP right now would be extremely difficult. Since it had just tapped capital markets for almost $3 billion in equity and debt, selling a working interest in the Haynesville may have been the least worst way to get cash.”

At J.P. Morgan Research, Joe Allman calculates that Plains is paying $27,000 per acre, inclusive of the incremental $1.65 billion “promote” for drilling costs. Like Armstrong, he says the deal solves a short-term cash crunch for the big gas guys.

“Chesapeake’s aggressive buying of acreage in the Haynesville shale play and other spending apparently led CHK to a short-term cash crunch. Though CHK had to sell down an interest in its premium Haynesville asset, this JV transaction brings in $1.65B of cash, which satisfies CHK’s immediate cash needs. Assuming an additional $1B in cash from its planned midstream partnership, CHK should not need to seek capital from outside sources to fund its current development budget. We view this transaction as a significant financial improvement for CHK.”

Analysts at Tudor, Pickering, Holt & Co. Securities call the transaction a “transcendent moment” for the Haynesville play and pinpoint that Plains is paying some $30,000 per acre for “some of the play’s best acreage.” They suggest Plains paid full value on current metrics.

“Using the NPV of the $1.65B in drilling costs (assumed to be fully funded within 4 years) coupled with the upfront cash, PXP is effectively paying $3.03B for 110K net acres ($27.5K/acre). Under our Haynesville assumptions (50% acreage productive; 80-acre spacing; 6 Bcfe wells; $8/Mcf LT gas; $7MM well costs), PXP is paying NPV10 and is therefore betting on higher acreage productivity or gas prices. While we are not ready to change our underlying Haynesville assumptions, we must acknowledge PXP’s management team has an envious track record of buying/selling well.”

As the TPH gang succinctly puts it: “Giddy up!”

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

Got Haynesville and/or Bossier shale?, ask the analysts at Tudor, Pickering, Holt & Co. Securities Inc. ” You need some…  it’s very valuable.”

Seems nobody making well reports are quite sure about whether the Haynesville shale and the Bossier shale in northern Louisiana and East Texas are one and the same or different-just-stacked. Geologically speaking, they are separate formations married at the hip, but the Bossier may extend further west than does the possibly prolific Haynesville. Seems everybody’s quite sure that both are worth tapping.

Thus the coinage “Bossierville,” first put in print by the TPH team but who give credit to Core Labs at a technical presentation. TPH had more to say on the shale and the companies involved in it. Following are excerpts from their report:

“This is the real deal.  We’ve touched base with every public and private player we know and truly believe this play is indeed the next big thing.  Recent weeks have shown Haynesville mania in full force.  Some believe results from one well by PVA literally creating billions of equity value, but we believe the crescendo of impending well news makes the Haynesville the best place to invest for potential upside, near-term news, and step change value creation. 

“This is similar to what happened around the Barnett when EOG really highlighted that play back in 2004 and KWK, CRZO, etc…became fast followers. Best Haynesville/Bossier levered names: GDP, HK, XCO and GMXR. For catalyst-hungry investors, we strongly believe that HK and CHK will both have results out in next ~3-4 months and real upside remains for Haynesville-levered names.

The Haynesville shale is located between the deeper Haynesville lime/conglomerate and the shallower Bossier shale.  The Haynesville distinguishing characteristics are higher porosity, total organic content and deeper depth.  This combination leads to higher gas in place and we believe likely leads to higher “free gas” (vs. adsorbed gas) in the shale.  Higher pressure and free gas may be leading to the higher initial flow rates, higher sustained flow rates, and shallower long-term declines.  All these factors lead to our confidence in increasing our typical well profiles.

Typical well profiles: At this point [the report was published in mid-June], PVA is the only disclosed initial production (IP) rate of 8 mmcf/day (10-15 mmcf/d expected).  However, our industry moles have repeatedly confirmed rumors of IPs of 10-20+ mmcf/d suggesting EURs of 4-10 bcfe.  Previously, we were modeling EURs of 4 bcfe (gross), $7MM well costs, 80-acre spacing and assumed 1/3 of acreage was productive.  We now know those numbers are too conservative and as such are increasing our type curves.  Our new Bossierville type curve is a 6 bcfe gross EUR; 80-acre spacing; 50% of acreage works for $7MM well costs.  This methodology is consistent across every single company mentioned below. Over time there will be haves and have-less (probably some have-nots), but we honestly don’t know how to differentiate the companies… yet.

How to play? Lots of companies with acreage have not yet talked about the full extent of their Haynesville acreage, because it is simply too early to know the best drilling/completion recipe. Also adding acreage alone doesn’t create value, companies need to significantly accelerate rig count to create real asset value (watch the dayrates on 1500 hp rigs, big moves coming). The most levered names to the play include GDP, HK and GMXR with 50+% of their NAVs associated with Haynesville.  XCO has the “cheapest” multiples in the play and CHK owns the most acreage with 500k acres.

Companies: We previously assigned Haynesville value to CHK, HK, XCO, GDP, GMXR, STR. We are now rolling in value for APC, XTO, DVN and EP. For all companies, we are now assuming the 6 Bcfe typical well. A summary of our assumptions and valuation for each company follows:

GDP – We are increasing our NAV 56% to $80 for the company’s 66k net Haynesville acres.  In our modeling, Haynesville has ~415 locations developed over the next 13 years.  The total value of Haynesville to GDP is $45/share or 57% of the overall NAV.  This makes GDP the most levered of our coverage list to the Haynesville.   

GMXR – Tied with HK for second most levered name; Bossierville accounting for 50% of NAV.  NAV moves +$31 to $84.

HK – Second most levered name to Bossierville, accounting for 50% of HK’s NAV.  HK has talked publicly of 155k net acres in the play with goal of 300k net acres.  At this point, we believe their hard working landmen have taken them to ~200k net acres and we assume 50% of that acreage works.  Our NAV moves +$23 to $61.  Getting another 100k acres (per their plan) only moves value a couple bucks…d oubling rig count and accelerating the pace of development adds $20/share.

XCO – We are increasing our NAV 37% to $41 as our increased type curve adds $11/share. Haynesville valuation for XCO assumes 125k net acres (101k net announced), 50% of their acreage productive on 80-acre spacing, for ~780 locations developed over the next 12 years.  Haynesville represents 34% of XCO’s overall NAV.

CHK – We are increasing our NAV 16% to $101.  CHK has been the leader in the Haynesville and has quickly amassed 500k net acres.  Haynesville now accounts for 20% of CHK’s NAV.  As the Great American Land grab is nearly over (CHK at 500k goal), we believe CHK will begin announcing well results potentially as early as their Q2 call.  However, we believe meaningful well news/type curves will almost certainly be revealed at their first ever analyst day this fall.

EP – We are increasing our NAV $1.50/sh, or 8% to $27 as we roll in previously unassigned Haynesville value at our 6 bcfe typical well. Our Haynesville valuation for EP assumes 27k net acres, 50% of their acreage productive on 80-acre spacing, for 170 locations developed over the next 8 years.

STR – Yesterday we increased our NAV by $5.50/sh (to $79) for STR’s 30k acres of Haynesville potential.  Gut feel says risking their acreage by 50% too punitive as conservative company probably already heavily risking.

XTO – Following yesterday’s announcement, we are rolling in new value for the company’s 100K net Haynesville acres.  The Haynesville exposure increases the XTO NAV by $6/sh to $102 and represents 6% of XTO’s overall NAV. 

APC – We are increasing our NAV $7/sh to $104 as we roll in 100k net acres, 50% productive on 80-acre spacing, for 625 locations developed over the next 9 years.

DVN – DVN not talking about it yet, but without a doubt they are testing.  At this point, we are rolling in credit for their 137K net Carthage acreage (why wouldn’t Carthage have potential in the middle of the play?).  We have not giving credit for 190K net acres in East Texas that may be prime for “Bossierville” exposure.  Our NAV moves up $7 to $152, which could prove conservative as more acreage could be productive.

 Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

It’s been said that one entrepreneurial-minded person founds a business on passion and drive, the second generation builds the business, the third generation works there because their family expects them to do so, and the fourth generation doesn’t know anything about the business and sells the “stock” their daddy and granddaddy owned.

In the case of the Hunt family fortune, the first great grandchild to legendary oilman H.L. Hunt—Albert Hill III—sued the caretakers of the fortune and found himself disinherited.

It’s a shame, because he could have been the annointed one had he positioned himself and not felt so entitled.

In Sydney Sheldon’s novel “Master of the Game,” a diamond empire is created through risk and malice and the daughter of the founder spends her entire life trying to groom an heir apparent with no success and great heartache. Such is the case with the Hunts.

Once considered the world’s richest man, Hunt Petroleum founder H.L. Hunt started by taking poker winnings some 80 years ago and betting them on an oil well. Since his death in 1974, his nephew Tom Hunt, now in his 80s, has run Hunt Petroleum and is the keeper of the family trusts that control the flow of wealth to the heirs.

First great grandson Al Hill III, now in his late 30s, could have been the prince-in-waiting had he played his cards right. Instead, he partied too hard in his trust-fund-supported youth and later became the family whistle-blower over perceived injustices and conflicts of interest within the family hierarchy. He is trying to have his uncle Tom removed as chairman and trustee.

Tom, once H.L.’s right-hand-man, whether innocent or guilty of such accusations, likely saw no heirs-in-waiting capable of captaining the family ship, and decided to sell the assets to Fort Worth neighbor XTO Energy and disperse the funds. Hunt heirs will get to participate in the upside by retaining 23 million shares of XTO as part of the deal.

Al III, unfortunately for him, lawsuited himself out of his piece of the fortune through his disinheritance.

Imagine what an MBA and BS in Petro Engineering might have gotten Al III. King in waiting for the family fortune. If you’ve got complaints about how the ship is being steered, it’s much more effective to be captain than pirate. He could have apprenticed his way to the top all these years and then had the control to correct any of the injustices he is now suing over.

Here’s my advice to Al III: Drop the lawsuit and the attitude and humbly ask forgiveness of the family. While it’s too late to save the heirloom assets (XTO Energy is going to get them regardless of the lawsuit), that action will save your piece of the proceeds and the monthly trust dividends. Then do what great granddad H.L. did—take your stake and bet it on a play (Haynesville, Muskwa, Marcellus, maybe even the Pierre sound like good odds). A new Hunt legacy could be yours to create.

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com