How can we know the truth?

It seems that we've reached one of many times during the oil and gas watch where it is very difficult to discern what the truth is. On the one hand, we hear of Chesapeake's issues, with the issues of low pressure on Devon's Medina and Ashland wells and stories about Anadarko basing it's future plans on the results of the Mill Creek well in Coshocton County. On the other hand, we have a bunch of smaller players who are frantically active right now, which you would normally think is a sign of excitement and hope. How can we know the truth? Or, are we left to guess and speculate?

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Permalink Reply by Graham on August 24, 2012 at 5:55pm

We wait.

Permalink Reply by craig on August 24, 2012 at 6:19pm

If you total up the amounts that have already been spent in our areas, then add on all the money lined up to be spent, you can make a good argument that good times are soon coming. Steel mills don't spend 100's of millions of dollars to upgrade and expand unless there is good reason. The same can be said for various local industries. When they break ground for the shell cracker plant, then you will know for sure.

Permalink Reply by Frank Nesmith on August 25, 2012 at 8:50am

I don't know how true it is, but a Beaver County politician told me that the Shell Cracker plant is really uncertain right now. He says the final decision is dependent on the Act 13 appeal and that the 2 recent meetings there were to gain public support in hopes of getting people to pressure the communities into not supporting the challenge. Basically, if the decision on zoning is upheld by the court, Shell is gone to greener pastures.

Permalink Reply by Ron D. Jockefeller on August 24, 2012 at 9:46pm

Hi Glenn.  There is enough public information extant to answer some of your questions with certainty right now.  But uncertainty IS a big part of "the truth".  I will share some thoughts with you.  Please feel free to ask follow up questions.

Chesapeake's issues are quite real.  The company (CHK) carries too much leverage, has huge capex requirements, and is conducting a fire sale of its best assets.  The upside of the shale gas revolution is lots of gas.  The downside of lots of gas, if you are a producer like CHK, is low natural gas prices.  CHK is genuinely in deep trouble.  By the time the firm has sold off most assets, sold preferred shares for certain regions, etc., it's hard to know how much value will actually be left for the CHK shareholders.

In the first 6 months of 2012, CHK sold $4.7 billion worth of assets.  It expects to close on another $7 billion in asset sales within 6 weeks by the end of the 3rd quarter.  And it needs another $3 billion plus or minus a billion in additional cash from asset sales that close in the 4th quarter.

Regarding Devon's wells in Medina and Ashland, Devon was foolish to waste money in those counties in the first place.  That region's oil is thermally immature.  It's not like there was a problem with well engineering or with completion techniques, there is a problem with the geology.  Devon (which doesn't make a lot of mistakes, BTW) and every other producer in those counties will stop drilling and will let their leases expire.  If you are a landowner in Medina or Ashland, unfortunately you are too far west of the play.

I have no insight into Anadarko for you, but I would note that it is not just the smaller players who are active right now.  Every producer is active.  Producers are excited and hopeful.  But even they do not know "the truth".  What matters in market based economies and to oil and gas producers is return on invested capital.  No other industry throws around as much capital as energy.  And the upstream producers often spend *billions* of dollars over many years in a new play and still do not know "the truth" as measured by an IRR until way after they have committed and spent all that capital.

So YES, you are left to guess and speculate.  But you are in good company, Glenn.  The CEOs, CFOs, COOs of the producers, the equity investors, the debt investors, the petroleum engineers, geologist, the reservoir engineers, the midstream guys, the refiners on the east coast, the petrochem companies, etc. are all guessing and speculating.  Some guesses are better than others (ahem: Devon), and some speculation can be very astute.

Depending on what county you are in, there may be a lot less guessing and speculating.  But it will be another 2 years until well completion techniques are perfected, midstream takeaway is in place, and then finally "the truth" will be (mostly) known.  Of course by then, your current lease offer (if you have one) may have evaporated like it just did for those too far west.  Alternatively, it may have tripled if you are in the middle of the light oil window.  You can wait until you have certainty on "the truth" - but what if the truth turns out to be worse than you expected?  What was "the truth" for leaseholders and landowners in Ashland and Medina?

As it is a Friday night, I will leave you with this allegorical video in which you may compare Tone Loc's "truth" in his discovery of Shena's true gender with Devon's discovery of the oil immaturity in Medina.

"That Medina's a monster..."

Permalink Reply by Glenn C. Keith on August 24, 2012 at 10:21pm

Ron and others,

Thanks for the insight. For Ron, what is your opinion on the Guernsey County area? I know Anadarko has a couple nice wells in the southern portion of that county and are currently fracking a well just over the county line into Coshocton county (Mill Creek). There are several drillers in Guernsey County and more may be known there soon. What is your impression of that area? Thanks.

Permalink Reply by Ron D. Jockefeller on August 24, 2012 at 11:12pm

My pleasure, Glenn.  Bearing in mind that there is still enormous uncertainty in the play and that my opinion is informed, but is only informed, like everybody else's opinion, on relatively few actual data points - I think that Anadarko's Mill Creek well could be incredibly good.  And I am very bullish on Guernsey county and generally more bullish as one goes from SE to NW.  

I would also add that if Mill Creek is NOT very good, that doesn't imply that the immediate area is a bust.  Devon's wells in Ashland and Medina were a bust because of the geology, which means that there is no way to get commercial hydrocarbons from that region (short of waiting a few million years for the oil to mature).  However if Mill Creek comes in below my rather lofty expectations for it, there could have been a problem with the well engineering, the drilling, the well completion, etc.

In shale plays like the Barnett and Eagle Ford as the years rolled by from the initial discovery wells, the producers in the region learned more and more from each and every well.  That means that each year the cost to drill went down, the speed of drilling went up, the initial and total estimated production from the newer wells went up, and the IRRs for wells went up.  And guess what else went up?  The land and lease values.

Think of all the variables a producer must consider:  lateral length, number of frack stages, type of frack fluid, types and blend of proppants, time spent fracking, and now in your area a new variable - time to rest the well after fracking it.  There are dozens of other variables.  Optimizing them to develop the highest IRR wells is a process that starts out with some educated and some random guesses.  Then the producers try something new with the next hole and see if that helped or hurt.  Rinse and repeat.  Along the way the producers will spend $8 million drilling a hole and then will ruin it by trying to rest it for 4 days instead of 4 months or by using oil instead of water based fluid or by using the wrong size proppant or another hundred ways I don't have space to type out.

Eventually after about 100 wells, the producers will have a good handle on optimal well design and production techniques.  I really like the area where Conshocton,Guernesy, and Tuscarawas come together, and I expect that you will not have very long to wait for some additional data points.  There should be an announcement in mid-September from at least one producer close to you.  I'm very hopeful for some big numbers and more light oil, condensate, and NGLs than natural gas.  Wells that produce mostly liquids are worth way more than wells that produce mostly gas.

See pages 11 and 12 of this presentation dated August 22nd (two days ago) for a couple nice maps of the area that are extremely current.

If you are a landowner nearby, my view is that the rewards of sitting tight and waiting for additional information on new wells far outweighs the risk of loss by not signing now and potentially finding out that lease offers will decline or be withdrawn entirely.  However I'm not giving financial advice, and such a decision is based on each individual's personal utility function.  As an example, someone who needs cash ASAP to pay college tuitions has much less utility in waiting a year for a higher offer and getting kicked out of college in the meantime.

I've seen a lot of posts on here suggesting that some people are idiots for not holding out to top tick the highest possible offer.  I completely disagree with that thinking.  If you are independently wealthy already and have a couple thousand properties and are negotiating leases on all of them simultaneously, then OK, you can afford to attempt to get top dollar for each.  But life doesn't work that way.  Most people have a single property.  Only a few offers come in, then they disappear, then they reappear at a higher price, or not at all.  You only have one life, and your decision should be made with regard to YOUR needs and YOUR cash requirements.

HOWEVER, if you can afford to wait and if you are actually in NW Guernsey then, for whatever my opinion is worth, I would wait at least 3 months and probably into mid-2013 before signing.  There's stil a lot of upside left in proving up the liquids and light oil windows out there.

Best of luck, and feel free to ping me with any questions.

Permalink Reply by Glenn C. Keith on August 25, 2012 at 6:47pm

Ron,

Thanks again for the detailed insight. You speak with such detail and insight that it leads me to believe your knowledge of the Utica shale play is more than just casual insight drawn from reading a lot. Let me provide you with further information on my own situation, I am already in a lease with Anadarko in the NW portion of Guernsey County near Indian Camp. From what I have been told we are part of a 200 acre production unit. We have been in the lease since last October. A well has not been permitted yet. There are at least three other units relatively close by to this area and Devon recently permitted a well just a few miles north of this area in Knox Township. As previously mentioned, the Mill Creek well is not that far away in Coshocton County. Can you share any further insight into this specific area? Thanks again.

Permalink Reply by Ron D. Jockefeller on August 26, 2012 at 1:03pm

I wish I had more to add, Glenn, but without knowing Anadarko's position and plans, I can't even venture a guess as to what's likely to happen in that area.  Even if I did have significantly more detail, Anadarko's a big company with capex spend all over the place.  It's extremely hard to predict how such a large company will act in such a small area without being told directly.

Permalink Reply by Bluflame on August 26, 2012 at 11:24am

Ron,

  Thanks for the post of the Enervest presentation. I hadn't seen it before. Also, I had not seen any map depicting a Volatiles/Light Oil zone. What is the significance of that zone from a financial aspect versus the wet gas zone? What is the definition of a "volatile"?

   If you closely analyze the Enervest map, looking at well results and combine that with the latest Gulfport presentation which I've attached (CHK's wells are included with Enervest's), it suggests that the biggest wells are trending somewhat to the south of Carroll County, into Harrison, Belmont & Guernsey Counties. However, still too early in the process to make any final conclusions about the ultimate "sweet spot".

BluFlame

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Permalink Reply by Ron D. Jockefeller on August 26, 2012 at 12:59pm

Light oil is worth more than wet gas.  And a barrel of light oil is worth more than a barrel of NGLs.  Also, since the US is going to be producing way too much NGLs for the petrochem industry for the next 12 to 18 months, NGL prices are going to be well below their historical correlation to Brent or WTI for a while.

Black v. Light v. Volatile are terms that have to do with the composition of oil.  In general the longer the hydrocarbon chains the heavier the oil.  Light oil without sulfur (aka sweet) is generally worth more since it produces higher value end products when refined.  Oddly, the US refiners are mostly set up for intermediate and heavier crudes now because that's what they expected their feedstocks to be... but now with all this light stuff coming in we might see relatively lower price for light.  Good time to be a refiner.

I agree it's too early to come up with a sweet spot.  The producers haven't even figured out how long to rest their wells after fracking.  For the light oil zone maybe it's 60 days, maybe 120, maybe somewhere in between.  We'll know in another 6 months or so.

Permalink Reply by bret rothwell on September 2, 2012 at 11:53am

The GPOR investor presentation is interesting. Slide 13 comparison of the "Eagle Ford" 1) the Lower Austin Chalk, unconformable on top of 2) the Eagle Ford, which rests unconformablly on 3) the Buda (or Edwards, depending on location).  The EFS is Mesozoic Cretaceous in age and the Utica is Paleozoic Middle Ordovician.

Hmmmmm...some comparison. Stilling trying to sell the Nash as an Edsel.

Permalink Reply by Bluflame on September 2, 2012 at 12:18pm

  Bret, I get your drift! There may be one or two geologists around who could correctly interpret those charts. I'm certainly not one of them. May be in the category of, "If you can't dazzle them with brilliance, baffle them with bull****".

  A great job of baffling!

  BluFlame

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