Aubrey K. McClendon: Our gas supply is definitely growing and probably somewhere in the 2% to 3% to maybe 4% range. We think that’s a great thing for both the industry as well as consumers. Over the last couple of years, gas got a bad rap as being a volatilely priced commodity and some people thought its price was too high. We believe that it’s an amazing product that burns cleanly and also trades right now at about half the BTE value of oil, so we think consumers ought to love the situation that they are in.
From a supply demand perspective, what we see is that during the wintertime, LNG importation into the U.S. will be dramatically reduced from what it’s been in the past, as other parts of the world call that gas away with higher prices, many of which will be linked to oil in some way. In the summertime, we’ll probably take in a little more gas than perhaps in the past, as we are the swing storage provider to the world.
David Tameron (Wachovia Capital Markets): Could you talk about what you are doing at Colony Wash, the Texas panhandle? Can you talk about the horizontal program that you mentioned in the prepared remarks and the press release?
Aubrey K. McClendon: The Colony Wash area is in Wichita County, Oklahoma and it’s a homegrown prospect that we drilled probably 10 wells to date and have had very nice results. We have a large number of wells left to drill in that area. One nice benefit to it is it’s a little bit oilier than some of the other wash plays that we’ve been involved in.
Joe Allman (JP Morgan): In terms of the sale of the Woodford package, is that related to lease expiration issues in any way?
Aubrey K. McClendon: No, it is related to the fact that we have some other plays that we have allocated more capital. It’s been clear for a couple of years that some other companies are more excited about it than we are. We are going to let them express their excitement by buying some of our leaseholds.
Joe Allman (JP Morgan): In terms of the Deep Bossier, your production right now is relatively small. Can you talk about how many wells that’s coming from? Can you talk about any differences in geology that you see right now versus the EnCana acreage?
Aubrey K. McClendon: Our production is zero, so that meets your definition of relatively small, and that is coming from zero wells also. But we do have two wells completed and three wells drilling and from a geological perspective, we think it’s obvious that there will be other accumulations found in the trend. Hopefully some that are as good as the Amarosa field that EnCana and Leor have discovered. It’s an incredible discovery in wells that have come in at 50 to 66 million cubic feet of gas per day. There is nothing to toot our horn on yet except we have a lot of acreage and we’re right in the middle of the road and hope to get run over by some 50 million a day wells here in the next year or so.
Joe Allman (JP Morgan): You increased your forecast for the share count. Can you talk about the reason behind that?
Marcus C. Rowland: There’s a couple of small reasons and it is up a minor amount. The first reason is because we are putting out some additional common shares in our assumed preferred stock induced conversion, so the share count went up slightly as a result of that. The continuation of stock grants as part of our executive compensation program as we get larger. Every employee in the company receives some stock grant and as the number of our employees increase, and particularly our highly paid technical staff, a large part of that compensation comes from additional stock grants. It’s just a normal course of business for employee count to go up with the large production increases and the amount of reserve increase. Everything is shifting up and to the right, and the minor amount of shares is part of that.
Monica Verma (Gilford Securities): Could you talk a little bit about the monetization of your conventional resource plays and potential for MLP?
Marcus C. Rowland: In our conventional plays, and the way we monetize those is we produce them and hopefully grow them as well. In some of our older areas, they do present opportunities to do the asset monetization that we’ve talked about coming out of our Appalachian assets. For example, in the Huguenin Field in Kansas and then the West Panhandle field in the Texas panhandle, we have assets that decline at 3% to 5% per year on a terminal basis that had decline curves that are 50 years of age or often more. They are the perfect assets that a financial buyer would want to evaluate when trying to buy a stream of cash flow from production. It will be just through production of our assets, as well as potentially down the road in 2008 or 2009 putting some of those low decline rate wells into an asset monetization program. It probably will not be an MLP but instead will be a financial monetization.
Kent Green (Boston American Management): On MLP and other monetization of outside assets which could be detached, when do you figure out that you want to sell it into these tax deferral type situations or whether you want to own part of the MLP and the GEP because of its potential in the future?
Marcus C. Rowland: We’ve been clear that it is not our intent to form any producing asset MLP. We think that there are some potential governance issues and conflicts that might exist with our business strategy if we were to form our own production MLP. Instead, we’d rather go either the prepayment, the VPP, the NTI, or an outright sale of those assets, again carving out deep right rights and development rights and essentially selling a stream of existing production into what will generally be labeled either the financial market or an MLP market. Where we see the opportunity for us though is to take a very latent type of asset, which is our midstream asset base, where we are growing it in excess of 100% per year, and form a separate MLP, which ultimately will become a public MLP but not initially. It will use that marketing to raise the funds to continue to grow that asset, and then as it becomes a little bit more mature and the growth rates drop perhaps into the 30% to 50% per year forecast, then to take advantage hopefully of the public market.
Whether we remain the exclusive GP or not from a financial standpoint, we are going to remain the operator and these assets will be managed by Chesapeake and Chesapeake employees, and the financial outcome with respect to either a private partner or ultimately public partners, will be just like every other MLP. There will be incentive distribution rights and there will be independent governance, all of which is yet to come and we are not close to doing that. There is a big distinction in our mind between a midstream MLP and a producing asset MLP, and we don’t have any plans to go into the producing asset MLP market.
David Heikkinen (Tudor, Pickering & Co.): Could you compare and contrast the prepay accounting asset sale with the VPP?
Marcus C. Rowland: The VPP and the prepay are virtually synonymous. Neither one are taxable at the moment of the monetization and for book purposes, both are treated as deferred revenue rather than an asset sale. VPP and prepayment accounting is essentially a deferred revenue accounting, and what you are contrasting are those two against an asset sale, where the asset leaves your books and there is no further income statement treatment in the future.
|
More:
