Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on March 4, 2011 at 16:54

I don't see anything to support interest by Chesapeake in extending leases or drilling in 18N - 12W.   Chesapeake put their north Caddo and Bossier parish leasehold up for auction over a year ago.  There were no bidders.  Their most northerly well drilling in Bossier Parish is in 16N - 12W. Currently Chesapeake is recording leases in Sabine Parish for sections in 10N - 14W & 13W, 9N - 14W & 13W, 8N - 14W, 13W & 12W and 7N - 13W.  Most of their recent well permits are for the SW corner of the Play on the LA. side.   The majority of completed wells in Sabine are better than the Conger well.

Permalink Reply by TAURUS on March 5, 2011 at 3:55

I'm thinking that what they put up for sale was in Townships 19N and above - not 18N and down. I had a conversation about this with CHK's Jeffrey Mobley a while back.

 

I see plenty to support interest in drilling in T18N/R12W - namely the production of a significant amount of nat gas. Now, what they'll re-lease it for and what the royalty percentage will be if they let existing leases expire and come back - that's a different story.

 

The Conger well and some of these others in the North part of the play are still better than many of the wells I deal with up in the Marcellus, Appalachian Basin, etc. and those wells still manage to make money. Granted, the lease bonuses are minimal in comparison, and the royalty percentage is significantly lower.

 

Talking about the wells down in Sabine being better than the Conger well. I have an interest in well #241400 in S7/T7N/R13W. They leased that up about a year ago ... maybe a tad more while NG was still in gutter for $5400.00 an acre and 25% royalty with a full exhibit if you asked for it. Devon ended up being the operator on that and drilling a James Lime well that IP'd at 350MCFD - which is nothing.

"COMPLETED 7-12-10; GAS; JAMES LIME RA; 350 MCFD; OPEN CHOKE; 340 BWD; 990# FP; 1000# CP; PERFS 6898-10,011' MD"

 

The well next door to that in Section 7 -#241002- done by Forest Oil appears to have IP'd at 1,559 MCFD.

"COMPLETED 9-5-10; GAS; HAYNESVILLE RA; 1559 MCFD; 8/64 CHOKE; 226 BWD; 6153# CP; PERFS 12,874-16,576' MD"

 

Now compare that to the Conger well- #239947- and it's IP of 6,502MCFD at a 12/64th choke:

"COMPLETED 1-15-10; GAS; HAYNESVILLE RA; 6502 MCFD; 12/64 CHOKE; 6520# CP; PERFS 10,858-14,977' MD; 10,801-10,840' TVD"

... and she's putting out between 65 & 88.8 million cubic feet per month as per the reporting on SONRIS:

RPT DATE	LUW CODE	STORAGE FAC	DOC USE	WELL CNT	OPENING STK	OIL PROD(BBL)	GAS PROD(MCF)	DISPOSITION	CLOSING STK	PARISH
12/01/2010	615870			1	0	0	69228	0	0	BOSSIER
11/01/2010	615870			1	0	0	77843	0	0	BOSSIER
10/01/2010	615870			1	0	0	65777	0	0	BOSSIER
09/01/2010	615870			1	0	0	81325	0	0	BOSSIER
08/01/2010	615870			1	0	0	88810	0	0	BOSSIER

 

The fact that there is substantial Nat Gas here isn't even in question. There it is. The current economics may not be great but if CHK has PXP paying the drilling costs while CHK gets 80% of the revenue, it seems foolish to let this asset fall off the books. At least if it were HBP'd they'd have an asset to sell later. If they let it fall off it's just GONE with nothing to show for the millions of dollars per section that they spent. They'd lose less if they went ahead and either drilled it or re-upped it to drill later.

 

Both pages 3&4 of that pdf I attached show the large area that CHK hasn't gotten to yet as far as HBP drilling. To think that they're going to let much of the acreage that they've not gotten to yet "fall off" lease seems contradictory to Aubrey's constant reference to their 525,000 acres of the best asset in the world. No where in any presentation from CHK that I've read, has CHK said they intend to dump much in the way of leasehold in the Haynesville. If you've read something from them that's different I'd love to read it.

 

So today, they're still expanding their leasehold to the South and paying lease bonuses that are the same or higher than they paid for the leases up here in 18N back in 2008 (and can extend them for less or the same than they're paying in the current environment ) all while it's been proven that there's substantial gas here relative to some of the tracts they most recently leased/drilled in Sabine Parish. I personally don't see why they wouldn't extend the leases up here in 18N/12W so long as they're in that $4000.00 -$5000.00/acre range. They'll likely let those $15,000.00 an acre leases fall off but most of those were the small tracts. The big tracts were leased earlier and for far less.

Permalink Reply by Skip Peel - Mineral Consultant on March 5, 2011 at 4:09

It's the rock quality.  I represent clients who also have substantial unleased acreage in the area you are referring to and I could not find ANY company interested in making lease offers of any amount a year ago.  All stated that they had no interest north of  the southern most section rows of 17N - 12W.  When comparing wells I suggest the following:  Any wells other than Haynesville/Bossier are not applicable.  IP comparisons should include choke settings and pressure readings.  For wells with some production history, don't just look at IP, review actual production.  Many wells, including the Conger, have never come close to sustained production in line with their early IP.  As you say we will know in short order as there will be a lot of lease expiration dates coming up in the next 90 - 120 days.

Permalink Reply by TAURUS on March 5, 2011 at 4:53

Skip,

  

Like you, I have quite a few clients out here that I leased and some who opted to pass on leases for as much as $12,500.00/acre in 19N if you can believe it. I had one ask me about leasing their 16 acres up in 19N earlier this week. I inquired with a CHK landman/friend of mine this week and he said he could probably get it leased for $2000.00/acre +/- but not near the $12,500.00 the client passed on in 2008. Again, it begs the question, "Why lease it at all if you don't intend to drill it?" Right?

 

I understand  your comments on rock quality, etc, etc ... you and I have talked about this at length before and of course I value and respect your opinion.

 

I may be wrong but I think operators tend to give leasehold attention only when they need to. many leases out here that Samson had for $100/acre +/- have expired. Yet no one is rushing in to scoop them up. There's no need to. CHK has the bulk of the leases sewn up around them. To lease them a year ago would have have been "dead money" for at least one year already. Not to mention that you would probably have been dealing with unrealistic expectations. Now coming up on expiration ...perhaps different circumstances. I admit that conventional wisdom is often wrong though.

 

Skip, would your clients be willing to lease their acreage out here for $2000.00/acre with say a 25% royalty and exhibit, on a 3/2 lease? (Not a solicitation .... hypothetically speaking.)

 

It's an amazing thing to be paid hundreds of thousands or even a million plus dollars for walk around money and have the prospect of not even giving up a thing in exchange for it if your lease expires. Lots of people missed the boat out here.  We didn't. ;-)

Permalink Reply by Skip Peel - Mineral Consultant on March 5, 2011 at 5:14

Twin Cities has not recorded a lease anywhere in Bossier Parish since Oct. 4, 2010.  That lease and all those going back well into the summer are for 17N - 13W.  If your Chesapeake landman friend actually takes that lease in 19N, I would be surprised.  The bonus amounts and the total expended to acquire leases in the area of 18N - 12W are chump change to CHK.  And they have walked on much larger investments a number of times just in this play.  IMO, any interest in this area is several years off under a best case scenario.  If you are right, then we shouldn't have to wait long before, "operators tend to give leasehold attention only when they need to".  The "need to" time is here.  And Chesapeake has not recorded any new leases or lease extensions north of 16N through Feb. 28.

Permalink Reply by TAURUS on March 5, 2011 at 5:38

I don't think I'll have to worry about my friend at CHK taking that lease as the client probably won't accept $2000.00/acre. Afterall, he turned down $12,500 - granted that was a dumb mistake and he admits it.

 

I agree with you, the "need to time" is here. Thus the reason for this thread - to monitor it as it actually happens.

 

Understand, if my lease is renewed my reaction will be YES! If it's not renewed my reaction will be YES! It's a win, win either way. A blessing for sure.

 

Just finished reading 39 pages of CHK's March Investor Presentation. Interesting. Do you think if they let all this leasehold on the North end of the play they'll actually carve off that shoulder on the Northeast side of the Haynesville Play outline and swing it lower to the South around 16N /12W?

 

Same guy at CHK just said they re-upped a Bossier Parish lease this last week. I'll ask where it was in the Parish. (Not sure if he can say.) But I'll ask ...

 

If the bonus amounts and the total expended to acquire leases in the area of 18N - 12W are chump change to CHK to the extent that it's nothing to walk away from the acreage, then I would think that it would be nothing for them to stay either and at least have something to monetize in the future. CHK is the king at monetizing assets and you can't sell what you no longer own/have leased.

Permalink Reply by Skip Peel - Mineral Consultant on March 5, 2011 at 5:44

It's the rock quality.  No lack of better rock to monetize.  And areas in the southern tier of the play that have productive Bossier in addition to Haynesville.  I think CHK has about reached it's limit for more leasehold prospective for dry gas.  They are off after oil and liquids now.  The CHK map is a "blob" map and not highly accurate.  I think the Petrohawk Core EUR map is more accurate.

Permalink Reply by TAURUS on March 5, 2011 at 12:58

Perhaps .... although I don't think it's their desire to "monetize" it in the sense we've been talking about here. I think they intend to produce it. Page 30 of 39 of the attached pdf in the March Investor Relations presentation may give a tip off to that. (Granted these presentations have some "koolaid" mixed in with them for shareholders and fund managers.) They say there:

"U.S. natural gas producers are rapidly moving to an oilier production base Once producers convert to drilling wells that produce $10-15/mcfe units and finish HBP drilling, why would they go back to drilling natural gas wells if prices increase from $4/mcf to $5/mcf to $6/mcf to $7/mcf? CHK believes this is the single biggest misunderstood aspect of the future bull case for U.S. natural gas... "

Imagine if every residential home builder decided right now to stop building homes due to the glut of homes on the market in the U.S. as well as the falling home prices and instead decided to go build something else like commercial real estate. At some point the glut of residential homes on the market would be bought up, prices would stabilize and begin to climb. The same may be true for Nat Gas and I think that's what CHK is saying in this presentation.

You know, they could get lucky and catch a bounce in Nat Gas prices long enough to lock in some good hedge positions if oil decides to go wild this year and by some stroke of luck pulls Nat Gas up with it. I'm not holding my breath but it's happened in the past if you look at historical prices.

 

I think it would be extremely interesting to look at the Barnett Shale and the events that happened in regards leasing, lease bonuses, drilling etc. relative to NG prices, economic conditions, etc and see the choices that the operators made in each of those cases both as it relates to prime acreage as well as acreage that was on the fringe. Do we have anyone here on the Forum that can speak on these topics who was actively involved in the Barnett?

 

Skip, just curious ...what kept your clients from leasing out here in 2008 when prices were good and the market was here?

Attachments:

• CHKMarch2011.pdf, 1.8 MB

Permalink Reply by Skip Peel - Mineral Consultant on March 5, 2011 at 17:24

They weren't my clients then.  As is often the case, land/mineral owners don't think they need professional assistance until it's late.  Sometimes too late.  Many individuals and groups in the early phase of the play thought "it's my gas, it's under my land and it's not going anywhere".  They thought they had plenty of time to get a good lease contract and that offers would only improve.  Escalating bonus offers in spring and summer 2008 were a special, one time event that was not recognized as such by many mineral owners.  When the leasing dynamics changed, as they always do, many were upset and tended to blame the failure to lease on the companies they were negotiating with.  Unfortunately many tended to put their trust in groups that had inexperienced leadership.  It was a costly lesson.  I hope that those lessons are remembered if the day ever comes around again that companies are interested in leasing the 18N - 12W area.

Permalink Reply by TAURUS on March 5, 2011 at 18:02

Amen Skip...Amen. They were right about one thing ... it's not going "anywhere" including into a pipeline - unfortunately. While the Barnett Shale saw a re-appearance of the large lease bonus payments in 2008 that may not happen again. The one thing that wasn't fully present then and is now is the abundance of gas Shale plays all over this country.

Someone is going to need to bring some major demand online or take some major supply off the table to move NG prices up from here. Even then it's doubtfull that we'll ever see $20K to $30K/acre lease bonuses again....or even close to those numbers.

 

I'll say this, the next 10 years will be very interesting here in the HS and in the world of energy.

Permalink Reply by Count of Monte Cristo on March 6, 2011 at 10:55

The lease payments that were made in 2008 were a once in a lifetime combination of $14+/Mcf natural gas, easy credit, Wall Street excess, etc.  $14 NG and easy credit are now gone, and the Prescott well that was drilled near Swan Lake effectively torpedoed any substantial HS drilling north of I-20 in Bossier Parish.  That well IP'ed at 5 million cubic feet per day and is now down to around 500,000 cubic feet per day.  There may come a day when the drillers have the technology to deal with the condensate that these northern fringe wells produce, but until that technology is created and NG prices are several times higher than we see now, don't expect much drilling or high lease bonuses in this area. 

Permalink Reply by TAURUS on March 6, 2011 at 12:42

I agree for sure that it was a combination of those things. Once in a lifetime ... not necessarily. Maybe for us it will be but over in the Barnett they  had seen lease bonuses that were stout five figures prior to the HS announcement. Then they went away and came back. Those people caught a second bounce. Will some of us here be that lucky? I think eventually maybe. Things change. Hopefully for the better. I'm not sure if this thought ever goes through any of your minds but it does mine - Isn't it ironic that the best assets in this play are being drilled and flowed down the pipeline at really low prices. Some sections even having multiple stems already. Yet, the fringe/sub-par assets wait to be drilled until prices rise and it becomes economicly sensible to drill and flow them. The folks with sub-par assets will likely get a higher price per mcf for their gas than those with the best assets that are flowing today.

 

I'm pretty sure the Conger well on HWY 80 was drilled after the Prescott wasn't it?  Is the Prescott well the one I'm thinking of behind Lakewood Subdivision? Looking at the production numbers it looks like the Conger well is starting out a good bit stronger than the Prescott Well. I just put the numbers into a spread sheet and found that after the first 5 months of reporting on SONRIS the Conger well has produced 382,983,000 cubic feet of NG as compared with the Prescott well at 262,303,000 cubic feet. So the Conger well has produced almost 121 million cubic feet more than that well in just the first 5 months. You know, that's the first time that I've done that comparison on those two wells. I think my outlook just perked up a bit. I'll be curious to see how the Conger well keeps flowing. So let's say they had their gas sold at $6/mcf during that time. 120,683MCF x $6= $724,098.00 extra in the first 5 months. That's $144,819.60 per month extra x 12 months = $1,737,835.00 extra in the first year if the difference was consistent over the course of the first year. Multiply that one year difference over the course of 8 stems total in a section and it's a difference of $13, 902,682.00 and that's just using the difference in production for the first year of each well if it was level across the board. So let's say they leased a section of 640 acres early in 2008 for $5000.00/ acre = $3.2 Million and then they come back and exercise their option at $5000.00/acre. Now they have a total of $6.4 Million dollars in the leasehold. That's paid for by just the difference in production with an excess of $7.5 Million. That difference would nearly pay for the first stem to HBP the leasehold. That's reason enough to re-up us vs. the leasehold up around the Prescott well.

 

Looks good on paper. I'll be watching my mailbox for a check from CHK between now and mid may. :-)

How soon before expiration do the Lessee's usually send out the checks if they're going to exercise their option?

 

Is it fair to say that the condensate wouldn't be such an issue if the overall volume was there?

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