The State Journal
21 November 2008
By Rob Cornelius
Lost in the post-election glow, Chesapeake Energy (CHK) kept digging out of its October swoon and sold a big chunk of its natural gas resources in Applachia to Statoil.
Statoil (STO) is the state-backed oil company in Norway, which strangely is an oil-rich nation drilling the North Sea off Europe. But if you watch the diminishing gas and oil returns of that part of the world, you understand why the Norse are looking to buy resources someplace else. And America is a little safer and more predictable than Gabon or Kazakhstan.
Big oil companies of all sorts have printed huge dollars in recent years, but their stock values are based on the market's perception of future production. With oil at $55 a barrel and natural gas selling for around $6.50/mcf, smart money sees now as a good time to plan for the future when $100 oil and $100 natural gas inevitably return.
Statoil wrote a big check -- $1.25 billion now and it will pay just over $2 billion more in drilling costs in the Marcellus shale over the next three years. This gives Stat rights to the gas produced by 32.5 percent of the acres Chesapeake controls here in the Marcellus Shale -- roughly 600,000 acres leased out of over 1.8 million.
Like everyone else in the patch, Chesapeake needs the money to develop its resources. With credit problems too numerous to count worldwide, even profitable energy companies can't borrow the dollars they need to expand.
The situation is bizarre. Chesapeake has billions of cubic feet hedged into the future. In essence, future income is guaranteed for most all the gas it will pull out of the ground for the next couple years. Guaranteed. Even so, Chesapeake can't get loans at reasonable rates, so selling these assets for cash now is a must.
The future drilling dollars Chesapeake got from Statoil are far in excess of those needed to drill that third of the patch. It means that Statoil is subsidizing Chesapeake's exploration in exchange for its share of these reserves.
The best explanation of what all this means comes from the analysts at Seekingalpha.com. If one-third of CHK's Marcellus acreage is worth the $3+ billion above, then the whole holding here in the east is worth more than $10 billion.
Subtract that from the current market cap of CHK stock, and it means you get one of the top couple gas companies in the three other biggest shale plays in America (Fayetteville, Haynesville and Barnett) for only about $15 billion.
Never mind getting maybe the best seismic shop on the continent and whatever oil holdings my fellow conspiracy theorists think this company has yet to prove.
Statoil's releases state it will produce in excess of 15 TRILLION cubic feet of gas from their share of the acreage. At today's price, that's roughly $97 billion worth of natural gas. Extrapolate all the numbers, and they say that CHK should be expecting 30 trillion cubic feet or so just in the Marcellus.
As of the last quarterly report, CHK only claims reserves of 12 trillion cubic feet. This is absurd.
So, when do the Vikings sail into Spencer or Clay or even Glen Easton? Soon enough. The estimates put out by the two companies anticipate production in the region hitting a billion cubic feet of gas per day by 2012.
It will take time. If you listen to any corporate conference calls of companies drilling Appalachia, you hear complaint after complaint about regulatory concerns and how slowly the Marcellus will develop, even with extensive pipelines already in place. Smaller land tracts and local governments not used to this degree of drilling are already slowing the pace.
In Texas and Louisiana, folks don't seem to care about a gas pipeline running through the farm, especially when they are collecting big checks for front-porch sittin'.
Chesapeake's game has always been leverage; it's not a dirty word. But to expand, you have to borrow more money. To borrow more money, you need to have provable reserves. To have reserves, you need to lease land, drill more and shoot more seismic. It's a vicious circle, especially with no credit to spare.
This also shoves off a "difficult drilling environment" to a partner, while Chesapeake keeps the western plays in Louisiana, Arkansas and Texas completely under its control.
Imagine Statoil as the nanny brought in to straighten up the unruly son, Marcellus, while you take the rest of Saturday afternoon and take the other three kids who behave better to a movie. And the nanny gave you $20 to buy popcorn while you're there.
Rob Cornelius covers the stock market for The State Journal. His e-mail address is robcwv@gmail.com.