Replies to This Discussion

Permalink Reply by Spring Branch,mineral owner on January 5, 2009 at 14:04

They are flippin to drill your Haynesville, Earl. Or maybe you'd rather they didn.t

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Permalink Reply by Spring Branch,mineral owner on January 5, 2009 at 19:13

KB, for the love of Pete, I used "flippin" because you and Lloyd and others use the term to cover a broad spectrum of transactions, all of which involve the word "sale". I could have just as easily used "stategic reallocation", but for goodness sakes, what difference does it make, really. Corporations running the gamut from pharmaceuticals, to copper miners, to chemical companies , to microchip companies, are constantly trimming (fancy for selling) no growth or low growth assets to redeploy the capital into what they perceive to be higher growth assets. It is especially true in times like this when capital is scarce.

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Permalink Reply by Snake Stewart on January 5, 2009 at 16:08

Hey Earl,
Kinda like those stupid pet tricks on Letterman......You just gotta laugh!

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Permalink Reply by Dion Warr, CPL on January 5, 2009 at 7:07

Earl and group:

Notice that CHK close the sale at a discount sales price of roughly $1.35 Henry Hub, $1.85 NYMEX, on spot. The cash strain on CHK is becoming more palpable, IMO. This looks like CHK is becoming more 'pot-committed' (poker term, all other puns unintended) as to their previous HS lease acquisitions, which would be in line with their cheaper 3 year PT leases coming due in 2009-11.

Particularly for Earl's consumption, the 'flip factor' cited in a previous discussion has gone down from about 5X to about 3X. Not good for new leasing going forward in the short term in anything other than established areas currently under lease.

Also, the VPP's 'hedge' is against properties currently in production, not against HS properties by and large (since most of their 550K acres in HS fairway is currently either non-producing or non-producing at the Haynesville interval.)

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Permalink Reply by Lerret on January 5, 2009 at 15:55

You nailed it. CHK is cash short and desperate. Since they were selling their production into MLPs (Multiple Limited partnerships or "Magic Little Pills") wells arent' making them money...

The Anadarko money is ultimately coming from Apache I have been told.

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Permalink Reply by Grillin' - MmmMmm on January 7, 2009 at 11:27

Dion: where do your $1.35 number and 1.85 number come from? My calc's show they sold at $4.12/mcf. Is this the difference between what they sold for and what they could have received by producing to the market?

And the buyer is an old friend of Ward/Aubrey and used to run Kaiser Francis. Smart money investing in a concept at low prices, locking in a good return.

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Permalink Reply by Dion Warr, CPL on January 7, 2009 at 14:23

Mmmarkkk:

Those numbers are the discounts off of the call prices on Henry Hub and NYMEX spot at the time of the post. (HH was at about $5.47/mcf, NYMEX at $5.97/mcf)

The price multiples (on 'flips') came from the Mac on one of his conference calls (speaking as to monetization strategies, cost of 'finding gas' and selling price on interest in the gas (cited by him in the now infamous call an b/w 5X and 10X.

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Permalink Reply by Grillin' - MmmMmm on January 9, 2009 at 2:44

Thanks. In today's A&D market, this deal looks good for CHK. However, it would have looked much better 6 mos ago! And probably better if they just kept the gas. But they really don't have a choice. They have a lot of drilling to pay for and this really is their only option. Borrowing and issuing shares is not an option unless the company is suicidal! I believe they will do at least one more deal like this for their South Texas assets. The VPP structure actually allows them to keep the upside potential because they are only selling a specific volume, not a % of what will be recovered. So if these leases produce 10% more than they think they will, the new owner doesn't get any of that, only the volume specified in the contract. And, if the wells recover less, then the new VPP owner doesn't get the volumes. So they have some limited downside risk but no upside opportunity. Granted, they generally put enough assets in the deal to almost guarantee they will get their volumes but I have seen one case where the VPP owner only go 90% of what they were supposed to get. And it took them longer to get it than anticipated. But most banks get sufficient "cover" on the reserves to where a catastrophe would have to occur to not get what they contracted for.

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Permalink Reply by Dion Warr, CPL on January 20, 2009 at 3:33

Mmmarkkk:

Agree with all of the above. Considering that lenders generally will allow borrowing on 50-60% on producing properties, 30-40% on reserves in place, monies paid on 90+% of value is win-win for both CHK and VPP owner in this case vs. traditional lend / cover model. Particularly in the current climate.

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Permalink Reply by Grillin' - MmmMmm on January 9, 2009 at 2:46

Mike: this is not a sale of a royalty. this is a Volumetric Production Payment whereby CHK conveys a certain volume of gas, scheduled out on an Exhibit to the contract, from specific properties. The VPP owner does not pay any expenses, much like a royalty owner, but it is not a royalty. Many of the reasons why are spelled out in my reply to Dion's post directly above yours.

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Permalink Reply by Snake Stewart on January 5, 2009 at 11:56

Reply by Dion Warr 4 hours ago
..... the 'flip factor' cited in a previous discussion has gone down from about 5X to about 3x.

Hey Dion,
That "flip factor" is at about 8X when you figure in the fact that they leased it for $50 an acre. Not to mention that they have already made their money back on produced gas from the formation. Oh yea, they kept the deep rights too.........12X !

........Not good for new leasing going forward in the short term in anything other than established areas currently under lease.

Drats!!! How much is my land worth now ? (chuckle,chuckle)

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Permalink Reply by Dion Warr, CPL on January 5, 2009 at 12:26

Snake:

Not really insofar as leasing costs, as drilling costs made up the bulk of the money spent for E&P. I'll concede that they kept the deep rights, but again, for a VPP to work, one must have already producing properties (as the value paid is for continuing ORI revenue from a conveyance of limited term (timeframe or actual production payment value target).

VPPs basically fill the bill as part conveyance, part mortgage against future revenue (but without the nagging negatives of a pure debt or a full assignment of proceeds, without the loss of WI (versus a straight up assignment), and without the risk for the purchaser of being in the creditor loop (as the conveyance grants real rights to production, as opposed to a secured first lien).

Bottom line: CHK could have sat on production and gotten $5.50 - $6.00/mcf (or more after economic recovery, over time), but needed the money now and was willing to trade it away at $4.20, and they bear all of the continuing maintenace costs in these properties (as the ORI conveyed to the VC/investment group is free and clear of such costs). Based on that, versus having a partner pay in and commit to additional development costs, or an outright sale at an industry fair market value, I'll stand by 3X.

As always, Snake, your minerals are worth whatever an O&G will pay for them to lease that you will accept, subject to mutually agreed terms and provisions, OR their realized value less well costs, if you can get an operator to drill in your unit(s) without your lease.

I shan't be lured into walking the 'greedy l/o callout' plank, arrrghhh...

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