This Doesn't Sound Good
The article below was sent to me. I am somewhat bothered by the "10-year, 100 percent fixed-fee gathering agreement." That seems to eliminate any competition or motivation to keep gathering costs down. Given the concerns we already have about CHK's higher-than-average deductions for their royalty owners, this does not sound good to me. Does anyone else have a better interpretation of what this means?
Midstream paying $500 mln cash
* Involves 220 miles of pipeline in Louisiana
HOUSTON, Dec 16 (Reuters) - Chesapeake Midstream Partners L.P. CHKM.N> said on Thursday it plans to buy a natural gas gathering system and related assets in the Haynesville Shale from a subsidiary of
Chesapeake Energy Corp (CHK.N: Quote, Profile, Research, Stock Buzz) for $500 million cash.
The acquisition will be financed with a draw on the partnership's revolving credit facility of about $250 million plus $250 million of cash on hand.
The partnership will acquire Chesapeake's 100 percent ownership interest in the Springridge system which consists of 220 miles of gathering pipeline in Caddo and De Soto Parishes in Louisiana .
At closing, the partnership will also enter into a 10-year, 100 percent fixed-fee gas gathering agreement with Chesapeake Energy.
After the deal, Chesapeake Midstream will have about $500 million of additional borrowing capacity on its credit facility.
The deal is expected to close before the end of this year. (Reporting by Anna Driver in Houston; Editing by Tim Dobbyn)
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Replies to This Discussion
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Permalink Reply by JD on
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Les B,
First, it is highly dependent upon which gas sales pipelines/markets are relevant to the production in question.
I think we have an idea of which pipelines are the most relevant. That would be the affiliated ones.
rates are structured to recover capital investment over an extended period of time
Do you honestly think that the operators look at the big picture and charge royalty owners accordingly? They are predicting there will be up to 8 HS wells per section (they tell bankers and shareholders this on a regular basis). So... should they only charge the royalty owners 1/8th of their anticipated capital investment recovery charge on the first well because they feel/know they can recover the other 7/8th later? Or do they take an aggressive approach and try to recover the bulk of that amount on the first well?
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Permalink Reply by Les Bamburg on -
JD, the interstate gas sales pipelines (ie Gulf South, Tennessee, Texas Gas, Columbia Gulf, CenterPoint, ETC, etc) are not affiliates of any of the producers.
The transportation/service rates are generally determined based on capacity required rather than number of wells. For example Producer A contracts with a 3rd party to provide 300 MMcfd of gathering system capacity plus install the lateral lines to each well pad. So Producer A will develop sufficient production to utilize this capacity since he pays this cost regardless. Remember that Haynesville Shale wells decline rapidly in rate.
Transportation fees are not charged exclusively to royalty owners but rather apply to the entire production stream. Most gathering systems are installed and operated by 3rd parties such as CenterPoint, Kinder Morgan, Enterprise, ETC, etc with fees determined on an arms length basis. Even some affiliated transactions mirror 3rd party contracts as the gathering companies have been structured for future sale with the fees already in place.
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Permalink Reply by JD on
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Les B,
The gas sales pipeline companies you mentioned are not the ones I am most concerned with. When the operator, the offtake pipeline company, the gathering company etc... are affiliated companies that concerns me.
With that being said, you win the debate for now. It is now time to celebrate the season. Merry Christmas to all!
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Permalink Reply by sesport on
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JD - While I agree that those kinds of affiliations are "suspicious" to everyday Joes like us, when handled in the manner Les referred to ( at extremely looonnngggg arms length ), it is not illegal. Approval for these affiliations must pass muster with the SEC and I'm sure the IRS has codes regulating such as they do for the transaction of business arrangements for not-for-profit orgs ( with which I'm somewhat familiar).
I'm sure if you search at the SEC or IRS websites for answers to your questions regarding such affiliations you'll begin to understand the complexities.
Not saying that I agree, or disagree, with these practices, it's just the way it is FOR NOW. Know someone who can move mountains to get it changed? (kidding)
best & Happy Holidays to you, 80)
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Permalink Reply by Henry on
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sesport,
If this is so (and I don't doubt you), how do we explain why some companies seem to have higher deductions than others do?
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Permalink Reply by Henry on
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Jay,
Are you sure Chesapeake isn't deducting from you? On their monthly statements, they only show one price. That is the price AFTER deductions have been taken. You never see the gross price on your monthly statements. You cannot find out the gross price, without calling them and spending days playing telephone tag.
(And why aren't you submitting your prices for my survey??? Gotcha there.)
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Permalink Reply by sesport on
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Henry - Sorry ... busy.
Anything that I could offer to answer that would be wide & wild speculation on my part not to mention of the IANAE quality. Maybe someone highly qualified will take a look & answer shortly.
I can only think of a question in response. Are transport costs regulated?
80)
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Permalink Reply by Henry on
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sesport,
Forget transportation costs.... what the heck are you doing up at this hour on Christmas morning???
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Permalink Reply by Les Bamburg on
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Sesport, regarding gas transport costs:
Interstate Gas Pipelines (Tennessee, Texas Gas, etc) - highly regulated by FERC
Intrastate Gas Pipelines (Kinder Morgan, LIG, etc) - Lightly regulated by state agencies such as the TRRC
Gas Gathering Systems (CEFS, KinderHook, etc) - Unregulated
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Permalink Reply by sesport on
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Thanks, Les, most appreciated. Would seem to me that, with the exception of the gathering systems, we might look to those various agencies to find some answers. Wonder if the info about gathering costs is "proprietary?"
Henry, in answer to that last question...
"When out on the lawn there arose such a clatter
I sprang from my bed to see what was the matter..."
lol, Merry Christmas to all! 80)
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Permalink Reply by Spring Branch,mineral owner on
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On my most recent revenue run, for the Moran 34 in 14/13, Section 34, Exco Resources charged me slightly over 17.75% of my gross monthly royalty for gathering and transportation. Lord help me when the pressure declines sufficiently to require compression. They will be confiscating 25% of my royalty. Can anybody tell we whether these crooks charge at the same rate for alternate unit wells as they do for unit wells? If so, this will surely be a hell of a profit center for them, at my expense! Also, there are so many adjusting entries on my monthly revenue runs from most of the Operators that it is quite difficult to tell exactly what they are doing. I believe this is done to cause the most confusion possible.
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