Total in $2.3B shale deal with Chesapeake

[admin]

High liquids play in the Utica

[admin]

["Thin profitability, due to low U.S. gas prices, has not diminished foreigners' enthusiasm for the controversial energy resource."]

[sltibbs]

Also, Devon Reaches $2.2B Shale Deal With Sinopec.
http://online.wsj.com/article/BT-CO-2012...05784.html

[TomCrooz]

I have 50 acres of hunting property in Eastern Ohio and can tell you that the oil/gas companies are spending like drunken sailors to secure drilling rights/leases. They are up to 4,500 per acre in upfront money and 20% royalties on what comes out of the ground. I am hopefully sitting on my own little Antelope (I call mine BIGBUCK). This activity is a real boon to the economy as pickup trucks, all terrain vehicles, bass boats, etc are in short supply and flying off the shelves. I can only imagine what a difference the IOC project could make on the locals in PNG.

[Palm]

NG is being pushed more and more as the majors continue to get on board. Guy from Gulf Oil was on CNBC this AM discussing NG usage more and more for large vehicle fleets. Liquids are like gold as economies begin to come back to life (Europe still big question). And with Iran kicking up its heels that region will continue to be seen as a LT risk. IOC is sitting very nicely with its prospects. Will be good when the bit starts to turn at T2.

Crooze, I hope you hit it big on your property. You're right, what the industry means to the Ohio economy is huge. Early estimates of job creation by Chesapeake and others in the industry are probably overstated by a bit, but it will still be big. All one has to do is look what it's done elsewhere (N Dakota, PA, etc.), and it can mean a huge boost for many state's economies.

[kerekesc]

I would really like to know what $2.3 billion buys...other than a certain amount of acerage. In other words, how much gas/oil does Total believe is under their purchase?

[strategyguy536]

I have been playing CHK for years, with mixed results. I have always understood its dynamics, but have underappreciated the degree of the NG glut and the drop to $3. Let me share some thoughts. I'd like to deal with the US NG cos. and then see how IOC might use the US info in a few years.

As noted all over, US NG prices are at about $3/MCF (or MMBTU, if you prefer). These prices are terrible. CHK and others would lose money selling dry NG at those prices, if it were not for what is in the NG. What we often call condensates or NG liquids can be most anything other than the NG itself-- methane. The more complex gases are more valuable, as is oil mixed with the gas. I'll deal with pooled oil in a minute.

Likely all the guys on this board already know this stuff, but let me expound a bit. Chemical companies love these other gases and liquids as feedstock. They pay more for it than for NG itself, but less than for equivalent chemicals from oil itself. Since their chemicals are fungible, can be shipped anywhere, use of NGLs gives them costing and/or pricing advantage.

A word on gas and oil. A lot of oil has NG in it ("live oil"), and the NG should be separated from the oil at the outset. The first process is pretty cheap and simple. It can be at the wellhead or nearby, and it gets the oil into a tank. The second involves a larger "separator" that handles a larger area, maybe a whole field that does a better job on the accumulated gases. And finally both oil and gas are "cracked" at the refinery, where ether comes off the top and asphalt off the bottom. Most any petro gas, all as far as I know, gas can become a liquid under pressure. Propane is a good example.

Another factor for CHK and others today is hedging or advance sales. I am not looking at the numbers now, but I think CHK is selling about 70-80% of its 2012-13 NG at about $5/MCF in this way. CHK must get its balance sheet in far better shape before the hedges expire, and that is its plan, to the tune of about $8B in 2012 alone.

Finally for 2012-13, given all the wonderful drilling experience and seismics, CHK and others are mining these data to get more $$$ per well. They have started shifting toward drilling wells that have OIL concentrations at the outset. They drill to the pools of oil, extract that, and deal with NG both then and later at the appropriate depths and with appropriate techniques. This preference really changes the income statement. While ongoing now, this will not be full effect until 2013.

In the meantime to support its debt and credit facilities CHK is selling off partnership interests at 8-10X what they paid for the same leases, in order both to retire debt and fund further ops.

Longer term (2015-16) the US will likely be exporting LNG to other markets. This will somewhat raise the price for NG in the USA, but not by much at the outset, for it will be a small portion of US production.

A larger impact on US NG prices will be as drilling for pure NG lessens over time, as lease conditions are honored, but production and further drilling for dry NG levels off. (The co. hs to honor the lease or lose it.) In this way, combined with possible further uses of NG: a) replacing with new NG-fired plants or retrofitted coal-to-NG power plants; b) replacing diesel-powered large trucks and locomotives with CHG/LNG engines. This shifts demand and decreases the US NG glut. This too will take time to effect.
Congress has been screwing around with plans to encourage domestic NG use for a couple of years (variants on the "Pickens Plan"?) but the EPA has new rules in effect this week (maybe?) to hammer many US coal-fired plants. About half the US coal-fired plants will have to be altered or shuttered. NG is the likely winner in this, for many reasons-- another treatise.

What does all this mean for IOC? Here is my take:

1. Based on prices paid and sunk in the leases and exploration, seismics, etc., as we all know, IOC has bargain basement costs. (While all past costs are sunk, the support of these costs recur as "cost of capital," either in debt service or OE expectations.) By any measure IOC is cheap.

2. Present global LNG suppliers are getting very wealthy at $14/mmbtu and up Asian spot prices. Qatar and others are ramping up, as are LNG tanker builders. We have some idea, though, of how long it takes to add capacity at the LNG compression facility.

3. If IOC can execute quickly enough it can sell all it can produce at high prices for many years. That window, as well as its resources of trillions of cubic feet of NG, are bait for majors and SMs to deal with IOC right now, and to get a deal done that excludes its major competitors. That is also our bait-- why we shareowners are in the game.

4. In time however IOC and others must expect that many more LNG suppliers will appear with much more volume. The pull of high profits in an otherwise pure commodity business is just too high to expect otherwise. That is why selldowns are important for IOC (besides being the basis for financing, and possibly getting some cash up front).

5. IOC should plan to sell much of its NG under long term contracts to stabilize its financial footings and to assure wide margins, even if not at maximum spot prices. This volume stability also will assure operating leverage, even expansion, at IOC's refinery.

6. As shareholders we should not assume that the stock will quickly rise to $250 because a NAV calculation leads us there. Nor should we plan on margins based on likely current $17-19 spot LNG prices. The PPS will take time to rise to approximate NAV, and the spot LNG price will fall over time. Still, there is plenty of positive algebra for us all, for years.

7. IOC-- get er' done.

[admin]

Thanks for that, strategyguy. Few remarks:
Qatar still has a moratorium on LNG expansion, but I can't see that last. Personally, I think if there is a competitive threat it's Qatar. It's the only big risk there is as these guys can ramp up big time.

I don't really expect the present prices to last as they have a tendency to invite new supplies (I agree with your point 4). Personally I make calculations on the basis of $10 per Mcf. Of course, I hope to be wrong but $10 per Mcf for IOC is very good already.

One thing to keep an eye on is whether contracts can remain fixed to the oil price, that would be quite positive, I feel (if the world economy doesn't implode, that is)