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Haynesville Gas Wells to Be Bigger than Barnett's -- Chesapeake CEO

The Haynesville Shale in northwestern Louisiana could hold the key to U.S. energy independence, Chesapeake Energy Corp. CEO Aubrey McClendon said last week. The CEO, who has long led one of the loudest cheering sections for domestic natural gas prospects, claimed Wednesday that the emerging shale could be three times more prolific in estimated gas resources than the Barnett Shale of Texas.

"Haynesville, more than any other gas field, will enable our country to realize that we are blessed with natural gas resources and the use of natural gas will reduce our dangerous dependence on foreign oil," said McClendon. "Haynesville holds an estimated ultimate recovery (EUR) of 250 Tcf, with over 700 Tcf in place. By comparison, the Barnett holds about 50 Tcf EUR."

McClendon's "confidence" in the shale's potential comes from tests that Chesapeake has drilled in the play, he said. "We know the formation is present over a large area, with about 3.5 million acres in the core area. The prediction comes from two years of study of the area, during which time we analyzed over 70 penetrations of the Haynesville."

Chesapeake's eight horizontal wells to date have tested at 5-15 MMcf/d, McClendon noted. "We can contrast that with the 3-6 million from the very best Barnett wells," he said. "Haynesville wells will be in a class of their own. If the Barnett wells are called monsters, I'm not sure what to call the Haynesville wells. Maybe 'triple X' monsters. And they are likely to get better over time as they always do in shale plays."

McClendon's comments came during a conference call to discuss Chesapeake's agreement to share costs and some of the future income from its Haynesville Shale leasehold with Plains Exploration & Production Co. (PXP). PXP, which up to now has been weighted mostly to oil, bought a 20% stake in Chesapeake's 550,000 acres of Louisiana shale for $1.65 billion in cash and agreed to fund half of the drilling and completion costs for Chesapeake's 80% stake until another $1.65 billion has been paid. The deal, which would give PXP around 110,000 net acres in the play, has an implied value of $26,500-30,000/acre. Chesapeake would continue to acquire more acreage, and PXP would have the right to a 20% stake in additional leasehold.

The partnership would fund "a substantial portion" of the company's leasehold costs over the next few years and provide "finding costs from this play of less than $1.00/Mcfe," McClendon said.

The companies plan to develop their leasehold using 80-acre spacing, which could support drilling up to 6,875 horizontal wells. Assuming a per-well estimated ultimate reserves (EUR) average between 4.5 Bcfe and 8.5 Bcfe, the leasehold could hold net unrisked unproved reserve potential of 23-44 Tcfe after deducting the assumed average 25% royalties, said Chesapeake. The Oklahoma City-based independent now is using five operated rigs in the play and plans to operate "at least 12" rigs by the end of the 2008, "at least" 30 by the end of 2009 and "up to 60 rigs" by the end of 2010. Under the planned rig allocation, the companies could drill 600 wells more over the next three years.

PXP was chosen to partner with Chesapeake "because of our long relationship with its management team, its successful record as an effective industry partner in major projects and strong historic presence in the Louisiana energy industry," said McClendon.

PXP CEO James C. Flores said that at an $8/Mcf New York Mercantile Exchange gas price, the addition of the Haynesville Shale position would give PXP an organic production growth rate of more than 20% compounded annually; reserve growth would be more than 10% compounded annually. "We now anticipate our current net proved reserves of 600 million boe will reach approximately 1 billion boe by 2012."

Based on initial drilling results, Chesapeake expects its average Haynesville Shale wells to ramp up at more than 10 MMcfe/d and average a recovery rate of more than 6.5 Bcfe for a drilling and completion cost of around $6.5 million.

There's been a rush to secure leaseholds not only in the Haynesville play but also the adjacent Bossier Shale in East Texas, and for good reason.

For example, an EnCana Corp. executive in June said his company had a "couple of wells" testing in the Haynesville play at more than 5 MMcf/d (see NGI, June 23). Penn Virginia Corp. reported in May that its first horizontal well in the Bossier Shale tested at a rate of around 8 MMcf/d (see NGI, June 2). A pilot horizontal well drilled by Petrohawk Energy Corp. in the Bossier Shale began flowing in late June at an average rate of 16.8 MMcf/d, the Houston-based independent reported last week. Denver-based Forest Oil Corp. also has increased its acreage position in the region to 143,000 gross acres (113,000 net) through some private acquisitions and leasing activity. About 113,000 gross acres (90,000 net) are "prospective" for the Haynesville/Bossier trend, Forest stated. Most of Forest's acreage is in Harrison County, TX, and in Red River, Webster and Bienville parishes, LA. Current production in the region is 75-80 MMcfe/d, and by year's end Forest expects to increase output to 85-90 MMcfe/d.

"The acreage grab, which has propelled Haynesville names in the past few months, has been phenomenal," wrote Friedman, Billings, Ramsey & Co. Inc. (FBR) analysts Rehan Rashid and Michael Jones. "The purchase price...far exceeds what Chesapeake paid Goodrich Petroleum Corp. only three weeks ago ($17,370/acre), when we include an approximate four-year capital commitment, which requires PXP to pay 40% of (50% of Chesapeake's) cost to drill the roughly 200 or so wells per year."

In mid-June Chesapeake agreed to jointly develop Goodrich's acreage in the Bethany-Longstreet and Longwood fields of Caddo and DeSoto parishes, LA. Chesapeake agreed to pay Goodrich $178 million for the deep rights to 10,250 net acres of leasehold. The transaction gave Chesapeake a 20% working stake in 25,000 net acres in the Bethany-Longstreet field and a 50% working interest in 10,500 net acres in the Longwood field.

By FBR's calculations, Devon Energy Corp. holds the most cards in the Haynesville Shale, with net acreage of 515,000 acres. Chesapeake is in second place, according to FBR, with an estimated 499,250 net acres, followed closely by EnCana, which has around 414,500 acres. Petrohawk is on their heels, with an estimated leasehold of around 275,000 net acres. FBR estimates 16 producers have a combined leasehold of around 2.4 million acres in the Haynesville Shale. Adding together the Haynesville shale and the shale/tight gas sands of the Bossier play in East Texas, the 16 have a combined leasehold of around 2.429 million net acres.

David Tameron, an energy analyst with Wachovia Capital Markets, called the Chesapeake/PXP transaction "brilliant" and "a prudent, home run deal." It "serves as a reminder why Chesapeake's management is often so highly regarded by the Street." And Goldman Sachs analyst Brian Singer said he was re-reviewing his earnings estimates for Chesapeake following the news. "We view the transaction positively for Chesapeake shares despite the recent rally, due to valuation as well as management's willingness to offset increased capital spending via more conventional asset sales," Singer wrote.

Not all energy analysts are ready to put the Haynesville Shale at the top of the shale heap.

"We remain skeptical that these per well reserve recoveries are achievable across a wide-ranging Haynesville Shale drilling program," said analysts with SunTrust Robinson Humphrey/the Gerdes Group. "Our current best estimate of Haynesville Shale economics suggests a +4 Bcfe of reserve recovery for a drill/complete cost of $7 million, which implies the capital productivity associated with Haynesville Shale development is only modestly superior to Cotton Valley development [in East Texas]. Notably, assigning a $30,000/acre valuation adds an incremental $2.4 million in per well costs assuming 80-acre spacing, thus equating to an approximate $9 million all-in Haynesville Shale well cost."

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