CHK investor presentation Utica update

CHK%20Latest_IR_Presentation%20062512.pdf

   This is the first time I've seen CHK break down production for Utica wells into oil, wet gas & dry gas. See page 12 of the presentation. Also, I thought it interesting that Utica well results closely align with Eagle Ford results, shown on an earlier page. 

   CHK updates their investor presentation at least monthly and posts it on their website. The Utica production numbers are pretty impressive, in my opinion. If one annualizes production of each commodity and multiply by current market prices, the total annual production value per well gets quite large. Left unsaid is the production decline rate, purported to be large. They probably don't have sufficient data yet to speculate on decline rates.

   Of course, payout to landowners will vary widely based on lease terms, unit size, acreage in the unit, etc. But these results represent the best solid data I've seen.

BluFlame

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0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 25, 2012 at 8:37am

Page 23 is more telling of the marco issues that CHK is having.  $194,000,000 in hedged losses in oil is bad news.  But liquids production in the Utica looks good, so at least there's that.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 25, 2012 at 8:43am

Let me add another thought here.  Production so far looks good.  You're right about lacking data for decline.  The one thing that we don't lack data on is CHK's consistent over estimation of recovery.  They've been wrong pretty much every time that they put out EUR numbers and the culprit is the formula that they use.  Without getting into cumbersome detail about the math I'll just say that their model includes a function that has each well producing for literally an infinite amount of time, which obviously isn't how nature works.  So landowners should get nice royalties and hopefully this will bring in money, jobs and a renewed sense of importance to a big chunk of Ohio.  But as an investor I'm extremely skeptical of what CHK tells me, given their past.

Permalink Reply by Bluflame on June 25, 2012 at 9:01am

Marcus,

  Very interesting observation. Yes, I also question the EUR's. The only thing we can know for certain (hard to imagine they'd be so foolish as to be dishonest) is the initial production data. And I did not get to Page 23 of the presentation. 

  So far, we've seen excellent initial production results from CHK in Carroll & Harrison counties. We've also seen really good initial production numbers from Anadarko in Noble County. If we can extrapolate results from those wells to the real estate between them, the Utica Shale COULD be a grand slam home run. I realize this is a s-t-r-e-t-c-h, but I'm from the "glass half full" school.

  To CHK's credit, Mr. McClendon did say last year that the Utica would be "geologically similar, but economically superior" to the Eagle Ford.  That looks feasible. BTW...I'm also an investor.

BluFlame

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 25, 2012 at 9:09am

It's hard for you to imagine them being dishonest because you're probably a really good human being.  You assume that they don't flat out lie.  They do, and in spectacular fashion.  I'm posting a link to an article written by a gentleman who is a quantitative analyst and is pretty damned smart.  It's very, very heavy into the mathematics of shale gas and EUR.  I'm warning you now, it's a tough read.  But he's honest about production, decline and most importantly EUR.  The formula they use is simply an accounting trick and it makes no sense in the real world.  This article focuses on dry gas alone, so it will not necessarily apply to big portions of the Utica.  However, if they continue to use unrealistic models to set EUR numbers there's going to be fallout eventually.  http://seekingalpha.com/article/656651-can-shale-gas-ever-be-profit...

Permalink Reply by Bluflame on June 25, 2012 at 3:01pm

Hello again Marcus,

   As an engineer myself, I am suspicious of all esoteric formulae such as the one presented in Seeking Alpha, asserting to accurately describe a complicated process. All are dependent upon assumptions made about the variable data, constants and the time frame of the integration. These concerns were duly noted in the article.

   I'm more confident than you in published production numbers. After all, if publicly-released production numbers were dishonestly inflated either lessors would be overpaid or  howling like banshees at underpayment. Either way, the O&G companies shoot themselves in the foot. 

   More realistic, in my opinion, is to take whatever initial production data is published (such as on page 12 of CHK's report) and project volume over the first 5 yrs using various production decline models. Using the data from the three CHK Utica wells noted on Page 12, I believe there is a good chance they will be very profitable even at today's reduced commodity prices. High early-on revenue makes discounted cash flow models look good, more so with current low interest rates.

   Still lots of unknowns:

1. Real production decline rates

2. Will new drilling/fracking technology improve current yield rates of ~10%?

3. Is re-fracking possible/effective in horizontal wells as production declines?

4. What is the cost of succeeding wells (following the initial well) drilled from the same pad and using at least some of the same surface processing devices?

  BTW, thanks for the "probably a really good human being" compliment. If I could only convince my wife.....!

BluFlame

   

  

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 26, 2012 at 3:01am

It's really gratifying to have this discussion with someone who so clearly understands the mathematical side of things.  I'm very bad at math but have tried to train myself to understand at least the portion of math that concerns my job.  The EUR from the Barnett has been shown to be highly over estimated.  Individual decline curve analysis shows group decline over estimates remaining reserves by 42%.  That's a big over estimation.  Because of the survivorship bias the overall EUR is impacted less because the stronger wells meet or exceed that estimate of the reserve.  Bad wells, however, don't survive long enough to make a long term impact because they are left off the chart once they are dead.

Here's another interesting piece:http://www.firstenercastfinancial.com/commentary/?cont=3193

 

Permalink Reply by Bluflame on June 26, 2012 at 3:58am

Marcus,

  I read the very interesting article thoroughly and have a few comments:

1. Berman's comments about IP non-correlation with EUR are persuasive. Leaves me scratching my head for a viable method of predicting well performance.

2. The article is 2 years old. I wonder if he's had different thoughts in the interim.

3. The Barnett, Haynesworth & Marcellus are all dry gas plays. Different set of economics with wet gas & oil plays such as Eagle Ford & Utica.

4. Good news about deep horizontal shale wells in general is the lack of dry holes. Production from shallow Ohio vertical Clinton and Oriskany Sands wells depend on the well poking into pools of liquids and gas. Mostly educated guesswork resulting in many dry holes. Of course, offset by much lower drilling cost.

     I just read another article this morning about the economics of a 10-well pad in the Marcellus region drilled by CNX. Costs were ~$4.8million per well. Seems like similar set-ups in the Eagle Ford and Utica would be a good investment despite steep production declines. I calculated/guestimated 1st year revenue from the CHK Utica wells in Carroll County Ohio in the $15-$20 million range dependent upon production decline rate. This was based on the data CHK posted in the investor report. (Assuming honesty on their part! We know, of course, Mr. McClendon would never resort to unscrupulous practices!)

 

     Enjoy our dialog....nice to converse with someone who is rational, knowledgeable and has done his homework.

BluFlame

Permalink Reply by Bluflame on June 26, 2012 at 4:15am

Marcus,

 BTW.  For what it is worth, I am a McClendon fan, which likely puts me in a rapidly-declining minority of CHK shareholders. CHK was just awarded a "best company to work for" award for the 3rd consecutive year. Despite the negative publicity, I believe he is a good human being. We would not be having this dialog were it not for him. 

BluFlame

Permalink Reply by paleface on June 26, 2012 at 4:25am

 I don't think CHK and other companys would be in any trouble if the Whitehouse would have indorsed natural gas.

Permalink Reply by Bluflame on June 26, 2012 at 4:37am

   I don't know, Paleface. I have more confidence in the private sector to sort out investments without WH or other political interference. Witness the disastrous results of WH support for solar energy investments.

   Frankly, I believe the current situation is an instance of the O&G companies being "victims of their own success" in developing a hugely successful energy resource no one dreamed of a few years ago.

  I believe demand will eventually catch up with supply and stabilize commodity prices. In the meantime, gasoline prices this morning where I live are hovering at ~$3/gallon!

  As another GMS member is fond of posting, IMHO!

BluFlame

 

Permalink Reply by Schnoozie on June 26, 2012 at 4:53am

This Whitehouse will do anything, say anything, true or not, for votes.

Peroid. Go ask Gov. Brewer how she liked her Hope and Change yesterday.

 

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 26, 2012 at 4:34am

I used to like Mr. McClendon as well, but I sold my shares at $32 and never looked back.  I put in a short order at ~$20 and covered around $16.  I should have waited two more days and hit it below $15, but I didn't want to be too greedy.  As far as the economics go it's really hard to predict anything beyond what they make on the peak day of production.  Next April when the production reports come out we'll have two years of data on the wells that were in production in 2011.  

As far as finding a viable method for calculating EUR I'm at a loss.  Obviously publicly traded companies need a way to tell investors what assets they potentially have, so there needs to be some sort of method of calculation.  0<b<1 as an exponent seems to be the right plug in, but as you said these esoteric math problems are suspect.  Properly understanding the hyperbolic type curve used for decline is paramount.  The current model doesn't work, but what's the alternative?  

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