Replies to This Discussion

Permalink Reply by Frank Nesmith on July 12, 2012 at 11:49pm

I'll admit that I'm no math genius here. What does that mean to their bottom line if this is true?

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Permalink Reply by Marcus Grayson on July 13, 2012 at 9:55am

It means that they're not worth as much as they claim to be.  It means that they've lied to investors about how much recoverable oil and gas they have.  This isn't really news for those of us who study the type curves and formulas that they use to determine EUR.  These companies have over-promised on almost every unconventional field that they've drilled.  It might be time for the SEC to set stricter guidelines for companies when it comes to EUR.  Investors deserve to know what the real numbers are.

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Permalink Reply by Frank Nesmith on July 13, 2012 at 2:35pm

Thanks Marcus. That's what I thought, but didn't want to think they would stoop too. I guess the truth would all wash out in the royalty checks though.

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Permalink Reply by craig on July 13, 2012 at 5:28pm

You sound pretty sure of yourself on this topic. Are you short selling CHK to  make money on the way down? If I felt this confident I would be, but then again I'm not buying their numbers either.

As far as REAL numbers go, no one knows the real numbers. Educated guesses are all we have at our diposal until these wells are producing for a decade or so. 

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Permalink Reply by Marcus Grayson on July 13, 2012 at 11:02pm

I short sold at ~$20 and covered just below $17.  I'm out of the CHK casino for good.  And the REAL numbers are known in the Barnett and Haynesville, which is where most of their absurd estimates came from.  Do some digging and you'll find that this is not really a new issue with them.  They booked reserves in the Barnett based on wells lasting 60 years.  The mode age (the number that occurs the most) is four years.  That's more than bad math, it's an out-and-out lie.  Barnett reserves for all producers is about 42% of the original estimate.  Not to get too technical, but they use something called a b exponent.  Any b exponent >1 causes the equation to go on for infinity, which is obviously not possible in nature.  They used b exponents of 1.4, 1.6 and even 1.8 in their calculations to arrive at these crazy EUR numbers that they'll never be able to meet.  The only b exponent that works is 1>b>0.  That means the formula must have b between 0 and .99 for it to be possible in the physical world.  College math professors could look at their EUR type curves and see the problem with the skewed parabolic shifts.

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Permalink Reply by craig on July 14, 2012 at 12:45am

Statistical analysis is not foreign to me, so I do understand what you are saying.  I also know that statistics can be used to say what you want in some cases, I'll leave it at that.

In essence I'm saying that I don't believe you can use data (accurate or not) from other shale plays and reliably extrapolate them to the Utica and some of the Marcellus plays .....they are very different animals. I believe we will see in the not too distant future that our area will be drilled to 3 or more shale plays, which is a real game changer. 

Don't get me wrong, I have never believed any Oil/Gas companies estimates of reserves and would never base my investment decisions on such data. I don't believe any prospective JV Company would either.

My question is why is so much money being spent to JV with CHK in some of these plays if it is so obvious that they have padded their numbers as grossly as you state? These JV companies don't spend that kind of money without a ton of due diligence, I know from previous experience. Regardless of the truthfulness of any of these numbers, it isn't just CHK that knows there's money to be made. And that is the bottom line. 

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Permalink Reply by Marcus Grayson on July 14, 2012 at 12:51pm

"In essence I'm saying that I don't believe you can use data (accurate or not) from other shale plays and reliably extrapolate them to the Utica and some of the Marcellus plays..."

I agree completely.  This thread was not about one specific play but rather CHK's macro problem.

"My question is why is so much money being spent to JV with CHK in some of these plays if it is so obvious that they have padded their numbers as grossly as you state? These JV companies don't spend that kind of money without a ton of due diligence, I know from previous experience. Regardless of the truthfulness of any of these numbers, it isn't just CHK that knows there's money to be made. And that is the bottom line. "

If everybody pads their numbers (which in the Barnett it looks like they do) then any JV partner goes in knowing that EUR is suspect.  But that doesn't void the opportunity, so they jump in anyway.  Under the right market conditions these shale plays are profitable, and JV partners know that.  It's a gamble, but so is the whole E&P business.

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Permalink Reply by craig on July 13, 2012 at 5:18pm

I wouldn't put too much faith in any organizations estimates at this point in the game. CHK may/may not have overstated, but when these 'independent organizations' release their data you can bet the farm that there is more to the release of  the figures than meets the eye as well as the timing of the release. 

Also, you must remember that this outfit used publicly available data (production numbers) which means data on actual sales. Production numbers do not tell the whole story of a well as what is produced and sold can be a far cry from what they could produce and sell if the infrastructure and demand were there. 

When you are talking mega millions of dollars I tend not to believe anyone in particular as there are too many factors that  weigh on the issue. This includes everyones computer models and depletion estimates, not just CHK's.

One thing we do know is that our area is in a sweet spot.

When CHK gets down to $10/share, I'll be buying it whenever I can.

   

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