Break even # - 5.5BCF

According to this report, there are 34 rigs operating in the Haynesville.  Absent time related lease maintenance, with current Nat. Gas prices averaging $2.50 for the next year, given $10M well cost, after royalty - break even number is 5.5 BCF!  Not sure that 80% of all Haynesville wells will ultimately produce 5.5 BCF - so what does that tell you about the Haynesville? 

 

 

 

Haynesville Shale Rig Count

Haynesville Shale Rig Count

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Replies to This Discussion

Permalink Reply by RBH on April 26, 2012 at 5:04

Totally agree with you. Everything in this business is cyclical...especially oil and gas prices. Governmental issues and pushing clean gas will help but take some time + hot summer or cold winter.  Patience is a virtue.

Permalink Reply by Les Bamburg on April 12, 2012 at 2:50

John, based on the hedged natural gas prices, projected EUR's (for alternate wells) and typical well costs operators are likely generating double digit returns and positive earnings on the alternate wells being drilled.  If there is no improvement in the forward NYMEX curve then are likely to see a significant decrease in the drilling of alternate wells by the end of 2012. 

Permalink Reply by john goodday on April 12, 2012 at 3:28

I'm not sure our math &/or calculators are the same.  If there really were "double digit" returns on the alternate unit wells, wouldn't you see an increase in drilling rather than a plummeting rig count?

Permalink Reply by Les Bamburg on April 12, 2012 at 7:22

John, it depends on each company's hedge position, quality of acreage and alternative economics in other plays.  Some operator's have significant positions in the Eagle Ford Shale, Marcellus Shale, Bakken Shale or Granite Wash that generally generate higher returns and earnings.

Permalink Reply by Mattie on April 12, 2012 at 3:46

With respect to the comment about "hedged volumes":

None of the larger players need to actually drill and produce NG at this time in order to match volume against "hedged" positions - most are not actually "hedges", but instead NG "swaps" (financial derivatives contracts) wherein the positive differential (margin/spread between the hedged/swap price and actual "settlement price" of Index, less basis) equates to profits, regardless if there is any physical delivery of gas.  Unless physical delivery is required, such as a VPP (Volumetric Production Payment), which CHK has done frequently and for extended periods of time (3-5 years+), it is simply a financial settlement.  In the VPP cases, if the producer has over-committed volumes over a longer horizon (unlikely, but history does have a way of repeating itself), the producer would need to successfully drill new wells to keep up - even there, they have the alternative option to purchase existing 3rd party gas at the going rate (spot price) to replace or supplement what they don't physically drill, produce, and deliver from their own E&P efforts.       

 

Permalink Reply by Hale Yayuh on April 12, 2012 at 8:57

So, then, why are they drilling alt wells?

Permalink Reply by john goodday on April 12, 2012 at 9:13
GOOD QUESTION!
 
 
 
Click for
Chart
 Current Session Prior Day Opt's
Open High Low Last Time Set Chg Vol Set Op Int
May'12 1.976 2.069 1.971 1.983 15:58
Apr 12
1.983
 -0.001 183302 1.984 217001 Call Put
Jun'12 2.102 2.174 2.081 2.096 15:58
Apr 12
2.092
 -0.013 88890 2.105 143584 Call Put
Jul'12 2.240 2.304 2.215 2.223 15:58
Apr 12
2.218
 -0.029 74541 2.247 194589 Call Put
Aug'12 2.325 2.385 2.299 2.310 15:58
Apr 12
2.306
 -0.028 32978 2.334 60866 Call Put
Sep'12 2.368 2.429 2.344 2.353 15:58
Apr 12
2.350
 -0.027 26298 2.377 101113 Call Put
Oct'12 2.458 2.517 2.433 2.441 15:58
Apr 12
2.439
 -0.026 29284 2.465 148104 Call Put
Nov'12 2.740 2.787 2.714 2.718 15:58
Apr 12
2.719
 -0.030 11705 2.749 55564 Call Put
Dec'12 3.093 3.135 3.061 3.067 15:58
Apr 12
3.068
 -0.030 9253 3.098 53163 Call Put
Jan'13 3.248 3.275 3.220 3.227 15:58
Apr 12
3.230
 -0.032 10586 3.262 71935 Call Put
Feb'13 3.261 3.283 3.237 3.239 15:58
Apr 12
3.242
 -0.032 1301 3.274 18736 Call Put
Mar'13 3.244 3.270 3.210 3.216 15:58
Apr 12
3.218
 -0.033 3939 3.251 30442 Call Put
Apr'13 3.225 3.264 3.192 3.198 15:58
Apr 12
3.201
 -0.033 4271 3.234 4
Permalink Reply by Les Bamburg on April 12, 2012 at 15:04

John, I think I already answered that question.

Permalink Reply by Les Bamburg on April 12, 2012 at 15:06

Mattie, most producers want to viewed as producers (ie hedged) versus speculators.

Permalink Reply by Dion Warr, CPL on April 27, 2012 at 10:44

Les B:

 

Totally agree with your statement.  "Speculator" implies a party making a trade on a commodity (whether direct contract or derivative) with virtually no intent in possessing the commodity or taking physical custody or delivery.  By definition, a producer must (or must be able to) meet at least one of those conditions.

Permalink Reply by Mattie on April 13, 2012 at 5:10

Les,

I agree with your last statement - all traders would like to be considered in that vain.....if for no reason other than the new trading limit rules, plus the accounting rules changes of the past few years. 

Regardless, producers are rarely required to back up "hedges" with physical delivery - that's all I was trying to point out.  Yes, all producers enter into these swaps/hedge positions with intentions of locking in value to meet budget targets covering "existing" and future wells.  But, many players (including my own company) have regularly unwound financial positions and taken financial profits well before expiry when the benefits of keeping the hedge positions in place lose their upside (i.e. < $2.00 Nymex).  Unless we go to a 1950's mindset of "flared gas" to extract the liquids & oil, and basically give away the NG product for nearly -0-, then prices should not stray too far below current value. 

So, back to the main topic of discussion, while the E&P companies have "hedge dollars" to improve their overall financial bottom line, it's not necessarily the best use of capital to use those dollars to continue to drill dry gas wells in a "glut" environment.   Oily shale gas plays are the biggest threat to improvement for the Hayneville marketplace - more "gas on gas", plus enough profitabiity to warrant/defend E&P continuation of some dry gas activity.       

Permalink Reply by dan dugdale on April 13, 2012 at 18:24

The benefits for the new Shell natural gas to diesel plant that has been discussed coming to Louisiana would be huge.  I think this plant could eventually help with the price of NG.

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