Replies to This Discussion

Permalink Reply by Mac Davis on September 2, 2009 at 8:31

It would vary a lot based on drilling depth and other drilling costs, production rates, decline rates, interest rates, etc. It would probably vary a lot across the Haynesville shale area, and vary vs. other production areas as well.

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Permalink Reply by Parkdota on September 2, 2009 at 11:57

I read yesterday that that some companies would break even at around $4-$4.5. Right now their doing great bc of hedging which will last for some until the end of 2010. By then prices are going to be over $6 with some estimating around $7. So, by the fall/winter of 2010 they can still make money when the hedge contracts expire.

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Permalink Reply by w.r. frank on September 2, 2009 at 14:25

Actually, Mac is correct, but you can't overlook the NG Strip when making a decision to drill or not. Today's Henry Hub Spot price was $2.24/mcf. Terrible, but only the royalty owner gets spot unless he/she cares to hedge future production over which he/she has no control.

For the E&P company, the 2010 NG Strip today is $5.54 and the 2011 NG Strip is $6.54/mcf. So if E&P wants to drill and hedge the first two year's production, the average price would be $6.04. A good core HS well with an initial IP of 12 to 15 mmcfd will make lots of $ at $6.04/mcf with ZERO severance taxes until 2 years or payback.

It is Spot vs. Strip and Contango!

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Permalink Reply by Les Bamburg on September 2, 2009 at 16:42

Parker, my economic modeling suggests a NYMEX price of $3.06/MMBtu would generate a 10% rate-of-return while a price $2.66 would give a 6% ROR.

The Haynesville Shale is second only to the Marcellus Shale in the most economic gas developments in the US.

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Permalink Reply by Bobi Carr ("parker") on September 3, 2009 at 2:40

Les,

So in a way, the bad news of low prices is still good news for our area in that drilling should continue here even if prices remain depressed.

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Permalink Reply by Les Bamburg on September 3, 2009 at 2:52

Parker, yes - that is the reason you have seen the rig count increase for the Haynesville Shale even as most other areas decreased in count.

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Permalink Reply by Grillin' - MmmMmm on September 3, 2009 at 9:27

Man Les, I wish I could get down to those numbers! I can't smidge or smudge enough to get below $4, including acreage costs and operating/gathering costs. But a lot of that has to do with decline rates and cost escalation rates. Many years spent at large int'l oil/gas companies has probably drilled enough conservatism in me to where I'll never get too optimistic!

I hope you are right and I am wrong on this one!! Mo money for everyone! Well, once we get over this glut!

While hedges are a way of keeping a "constant" in the pricing formula, one must remember there is still some risk in hedging. Specifically, you are counting on the counterparty to still be around. Remember about a year ago everyone was worried about who was on the other side of those hedge contracts? Well, things seem, repeat seem, to be better in the financial world but believe me, below the pretty gloss that everyone has put on the surface, there's some really nasty stuff floating around in the financial/banking world. Commercial loans/lending/real estate has yet to pop its bubble. There is still a lot of caustic assets floating from bank to bank. And while many think happy days are here again, there is a very good chance we will experience a "double dip" downturn, much like we had in the 30's. Enough gov't spending, some conflagration of bad loans, unemployment still in double digits, real estate market in a shambles and even with "cash for clunkers", auto manufacturing is not in great shape! So, writing a hedge contract with an exposed company still gives you exposure!! Just not to gas pricing, but to the larger macro economic picture!

And we thought dry hole risk was bad!!!

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Permalink Reply by Les Bamburg on September 3, 2009 at 9:53

Mmmarkkk, drop the acreage cost - that is sunk and not part of "Decision Case" economics for drilling a well.

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Permalink Reply by Grillin' - MmmMmm on September 3, 2009 at 15:02

Some of it is sunk for now; but there will be some extensions or renewals to pay in some areas. But even zero'ing it out, I don't get below $4. Probably op costs appreciation, gathering and transport fees and the like! But again, I really hope I'm dead wrong on this one!!

I'm starting to choice some oil plays for now. They're looking good right now.

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Permalink Reply by Bobi Carr ("parker") on September 3, 2009 at 16:06

Mmmarkkk,

If your are correct and cost are $4 and above and the HS and the Marcellus Shale are presently the most economic wouldn't it stand to reason that if prices don't rebound the companies will choke back or shut-in wells to the point that prices will have to rebound?

I'm always looking for the silver lining, but it just seems like they CAN'T produce for too long if the wells aren't economical. Am I missing something?

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Permalink Reply by w.r. frank on September 3, 2009 at 16:27

You have to look at each company. For example, CHK and XCO have drilling carry so their F&D costs in the HS will be very low.

My numbers are about $3.55 so I am in between Les and Mmmarkkk. I have tried to use LOE, etc. from published statements or conference calls. Even with no drilling carry, HK has very low LOE and other costs and, of course, some of the best wells.

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Permalink Reply by Les Bamburg on September 3, 2009 at 16:19

Mmmarkkk, I have all those items included - opex, gas transport, etc. One key is the opex is much lower for 12-18 months before compression is required. This helps the ROR.

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