Chesapeake is currently producing about $775 million per day gross from the Barnett and $500 million per day net. During the quarter Chesapeake averaged $466 million a day net from the Barnett which is a sequential quarterly increase of 13% and a year-over-year increase of 126%.
Chesapeake is running around 45 rigs there and are on pace to drill about 700 wells per year in that play for many more years to come.
The company’s best new Barnett wells continue to be located in southeast Tarrant County in an area of particular leasehold strength for Chesapeake where 2008 drilling has averaged over 3.8 BCFs per well compared to the overall average of 2.65 BCFs.
In the Fayetteville Chesapeake is drilling its best wells ever due to improvements and where the company positions its laterals within the Fayetteville, longer lateral lengths, better completion techniques, and the arrival of certain new 3-D information that help avoid geological pitfalls such as falls.
Today Chesapeake is producing $150 million per day net from the play, are utilizing 17 rigs, many of which are drilling to HPP or 500,000 net acres of leaseholds there.
Chesapeake plans to increase its rig count gradually to about 25 rigs in 2009 and then keep it there for the foreseeable future.
Chesapeake had drilled two very nice horizontal Marcellus wells.
They are located in West Virginia and are today producing at a combined basis of about 7 million per day and believe these wells have a combined EUR of about 11 BCSE. Last week Chesapeake read Range’s announcement of their activity in Southwestern Pennsylvania and their view that horizontal Marcellus EURs of 3.5 to 4 BCSE and their tier one area were reasonable. Based on the company’s study of their area and its own in Northern West Virginia Chesapeake concurs with their EUR estimate. That makes the play very attractive.
On oil and gas hedging, the mark-to-market losses relating to the change in value during the quarter for open hedging positions on future natural gas and oil production generated an unrealized pre-tax hedging loss of $3.4 billion.
This caused the unusual situation of reporting negative oil and gas revenues for GAAP reporting purposes. Remarkably by Friday, July 25th, the mark-to-market position moved in the company’s favor by a staggering move of $4.6 billion in just over three weeks.
Chesapeake had previously discussed the current accounting requirements for derivate securities can substantially distort the reporting of current period financial results for companies such as Chesapeake and this industry.
The recent swings in prices highlight the need and substantial value of the hedging arrangements the company has put in place to mitigate market volatility.
The company has six secured hedging facilities that allow Chesapeake to pledge natural gas and oil properties as collateral for hedges rather than cash and the company also hedges through about 15 other counterparties in the company’s bank group that have collateral pledged from the revolving credit facility which Chesapeake calls para-pursue collateral also removing the need for cash collateral with the hedging program. To be able to weather a negative $6.5 billion mark with no cash margin calls is impressive. The company’s goal in hedging is to capture high margins when prices briefly spike and mitigate risk. The company’s facilities put Chesapeake in the position to safely hedge in excess of 2 trillion cubic feet of gas.
The oil and gas DD&A rate for the quarter ended June of 07 was $2.60 per thousand equivalent. By March 31st of 08 that had moved down to $2.52 and in the current quarter only $2.47.
Year-over-year this important measure reflects a 5% reduction in cost structure in a rising oil field service price environment. This is partially driven by the improved drilling finding costs and partially driven by the company’s new strategy of capturing embedded value gains in the asset base by selling mature properties into VPPs for much more than Chesapeake has invested in them which reduces the full cost tool by much more than reserves are reduced per unit.
Going forward, the Haynesville 20% shale to PXP and the 100% Arkoma Woodford Shale to BP will further accelerate this downward trend.
In fact had those third quarter transactions been effective at June 30th, the DD&A rate would have been as low as $2.30 per equivalent unit. This strategy will help highlight much improved accounting metrics of the return on investment and return on equity going forward better reflecting the real economic returns the company has been creating while also enjoying a decreasing book cost structure that many other ENP companies will not likely be able to benefit from in a rising cost environment.
While the VPPs for tax purposes are treated as loans the transactions with PXP and BP will be taxable and they will cause Chesapeake to pay cash income taxes that are estimated to be between $100 million and $250 million in 2008. Going forward Chesapeake still does not estimate paying ordinary Federal income tax on its normal operations due to the drilling program but future cash income taxes will of course be dependent on additional sales, timing and the structure of any sales Chesapeake does and those could have ordinary tax rates on a portion or all of any such transaction.
The company’s 12.2 TCF approved reserves were valued at current market prices on June 30th at $51.5 billion.
That was at very high prices. Chesapeake had those reserves re-valued today using a couple of different price decks and the number drops to between $37 billion at strip prices and about $34 billion at $9 flat. Those numbers book in per share value of about $58 per share for the approved reserves alone.
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