CHK - Chesapeake Energy

[nkp007]

This article was where I found info on marginal costs. Please note the date (last year).

Oil Price Likely to Stay Buoyed by Marginal Costs

May 22, 2012

 

By

JAMES HERRON

The price of Brent crude fell to five-month lows last week, as fears rose about the health of the global economy and the world's largest oil exporter, Saudi Arabia, said it would overproduce in order to drive prices lower.

 

There are solid grounds to believe this trend will continue as the crisis in the euro zone deepens and tensions between Iran and the West ease, particularly after the International Atomic Energy Agency confirmed Tuesday that an accord had been reached over nuclear inspections.

 

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However, many industry observers say the price of oil is unlikely to fall far below current levels for long, because the cost of producing every last barrel of oil needed to meet demand has risen so high.

 

"Costs are still at a very high level because of the complexity of marginal fields," said Pierre Sigonney, chief economist at French oil company Total SA. "We don't expect oil prices to go much below $100 a barrel."

 

The marginal cost of oil production, defined as the cost of pumping the last and most expensive barrel required to satisfy demand, is fundamentally linked to long-term oil prices. If the oil price falls below the marginal cost, there is no incentive to produce that last barrel of oil, so demand will remain unsatisfied until consumers are willing to pay more.

 

The close relationship between the two was demonstrated from 2001 to 2010, when the average annual price of international oil benchmark Brent crude rose 228%, while analysts at Bernstein Research estimate the marginal production cost of the world's 50 largest listed oil companies increased 229%.

 

In 2011, the marginal cost of oil production was $92.26 a barrel for the 50 largest listed oil and gas companies and will reach $100 a barrel next year if it continues to follow the long-term trend, said Bernstein in a research note.

Costs are rising because much of the extra oil added to world supply has come from more technically challenging areas such as deep water or the Arctic, Bernstein said. This has led to "a combination of higher material costs and reduced productivity per well," it said.

 

To be sure, these 50 companies aren't the whole picture.

 

A third of world oil production comes from members of the Organization of Petroleum Exporting Countries. In most of those countries, the marginal cost of production is far below $92 a barrel, although OPEC doesn't publish precise figures.

 

OPEC is pumping crude volumes at three-year highs, and some officials have been talking down oil prices. However, there is a limit to OPEC's largess.

 

Saudi Arabian Oil Minister Ali al-Naimi said he wants to see a price fall to $100 a barrel, which is higher than most consumers would like. If the oil price shows signs of falling significantly lower than that, "we would expect OPEC to start to trim output," to support it, said analysts at Barclays in a research note. The closing price of Brent in London on Tuesday was $108.41, down 40 cents, or 0.4%

 

Outside OPEC, virtually all oil-supply growth is coming from one area: shale oil deposits in the Bakken formation of North Dakota. New technology called hydraulic fracturing has released oil that previously was trapped in impermeable rock, allowing production there to quadruple in four years to 575,490 barrels a day in March, according to preliminary state data.

 

However, it isn't making a big dent in international prices because getting it to markets outside the U.S. Midwest has been difficult.

 

The speed of the boom means there aren't enough pipelines, and the oil has to be shipped expensively by train, said Eurasia Group analyst Nitzan Goldberger.

 

As production has increased, "rail transport costs have tripled over the last 2½ years because of rail-car shortage," she said.

 

Labor and equipment shortages, and tighter environmental regulations, also have raised drilling costs, Ms. Goldberger said. An average Bakken well's costs have increased to $10 million in 2011, up from about $6 million in 2010, she said.

 

The effect of the cost inflation can be seen in the price of Bakken crude, which sold at a discount of about $30 a barrel to U.S. crude benchmark, West Texas Intermediate, in the last four months, but has traded at a premium to WTI this month, Ms. Goldberger said.

[compoundinglife]

http://finance.yahoo.com/news/chesapeake-moving-risk-taker-profit-172300750.html

[ItsAValueTrap]

Labor and equipment shortages, and tighter environmental regulations, also have raised drilling costs, Ms. Goldberger said. An average Bakken well's costs have increased to $10 million in 2011, up from about $6 million in 2010, she said.

Is this a faulty statistic?

 

The shale companies have been drilling wells with longer laterals.  The new wells are more productive than old wells.  A better statistic would be $ / Mcfe of reserves, or $ / first year production.  There is uncertainty as to the costs since these companies don't know the decline curves of their new wells.

 

The presentations from UPL, SWN, etc. indicate that production costs have been coming down.

[17thstcapital]

My two cents on this discussion of marginal cost for oil production......

 

Everyone in the press seems to be using the Bernstein report from May 2012 to get to this average $92/barrel marginal cost figure so I'll stick to that specific report. 

 

- the MC by company range was wide - from below $30 to above $90.  Don't recall how they came up with $92 as the average/median.

- their MC est for CHK was below $40

- however, note that cash costs range by company are significantly lower - anywhere from $10 to $45 for an average/median of $39.65

- their CC est for CHK was around $10

 

(don't know why CHK estimates are so low.  btw, their price target for CHK in that report was 17, below the then market price of 18.44)

 

So while MC of $92/b (and growing) does suggest a theoretical floor for oil, cash costs are much much lower which tell me that there's always potential for lower oil prices in the short term.

[txlaw]

XCO CC is worth listening to for you guys who are in CHK (I'm one of them).  Doug Miller said that the deal is a win-win for both XCO and CHK the way it has been structured.

[nkp007]

Earnings out today. I'm tweeting the conference call in case anyone wants the snapshots.

[txlaw]

Earnings out today. I'm tweeting the conference call in case anyone wants the snapshots.

 

Is your twitter handle the same as your name here?

[matts]

 

 

[fareastwarriors]

Chesapeake Reports Rising Oil Output

 

 

http://online.wsj.com/article/SB10001424127887324635904578642961993301192.html?mod=WSJ_business_whatsNews

 

 

Chesapeake Energy Corp.'s shares jumped 7% Thursday to the highest level in more than a year, as the energy producer reported rising oil output and its new chief executive pledged to close a persistent gap between its spending and cash flow by next year.

 

Chesapeake's profit of $580 million fell 40% from a year earlier. But stripping out one-time effects like asset sales and after-tax charges, earnings per share rose to 51 cents from six cents in 2012. Oil production increased 44% from a year ago and 12% from the previous quarter.

 

Shares of the Oklahoma City-based company ended at $24.95 after the stock's largest single-day gain in a year.

 

Doug Lawler, in his debut as Chesapeake's second-ever CEO, said the company would focus on reining in spending and exploiting its most profitable assets.

 

Mr. Lawler, who took over from Chesapeake co-founder Aubrey McClendon in June, praised Chesapeake for its "abundance of opportunities and strong foundation," but said he would steer the company away from drilling geared at preserving leases. He suggested the company would allow some of its drilling leases to expire if they didn't yield the highest returns.

 

He also announced a comprehensive review of where Chesapeake spends its money with an eye to reducing the company's financial complexity, without offering specifics.

 

Mr. McClendon, who founded Chesapeake in 1989, built the company into a powerhouse at the vanguard of tapping natural gas from shale-rock formations. The company routinely spent more money on drilling and acquisitions than it brought in from operations, piling on debt.

 

Chesapeake spent $6 billion more in 2012 on drilling and completing wells than the cash generated from its operations, and to cover its costs it raised more than $11 billion last year by selling assets.

 

But rising oil production, combined with modestly higher gas prices, have helped double cash flow from the first half of 2013 compared with last year, to $2.2 billion. That is about $900 million less than Chesapeake's well costs over the same period.

 

The company still carries a heavy debt load of $13 billion, up 7.4% from the beginning of the year. Chesapeake executives said they would seek to pay down the debt with proceeds from additional asset sales, having struck deals to sell about $4 billion worth of assets so far this year.

 

 

[argonaut]

Any comments by those who know the CHK management team on today's announcement of 4 execs leaving?

 

http://newsok.com/four-executives-leaving-chesapeake-energy-corp./article/3871387

[T-bone1]

Hopefully they can find someone to run HR for less than the $5MM per year they were paying Martha Burger . . . Looks like the gravy train is over.

[fareastwarriors]

Aubrey McClendon, one of America's best known wildcatters, is betting again on striking it big in Ohio as he builds a new oil and gas exploration company.

 

 

 

http://online.wsj.com/article/SB10001424127887323423804579025183880280074.html?mod=WSJ_hp_LEFTWhatsNewsCollection#articleTabs%3Darticle

 

Wildcatter McClendon Bets Big on Ohio Shale

 

Former Chesapeake Chief Lines Up $1.2 Billion in Funding for Utica Shale Deals.

 

 

He has lined up about $1.2 billion in equity and debt financing for deals in Ohio, much of it coming from two energy-focused private-equity firms, according to people close to the matter.

 

 

.Mr. McClendon is close to completing an agreement to get more than $500 million from the Energy & Minerals Group, a Houston firm run by John Raymond, son of former Exxon Mobil Corp. Chief Executive Lee Raymond, according to people close to the deal.

 

He expects to get another $200 million from private-equity group First Reserve, of Greenwich, Conn. Others will invest smaller sums, while Mr. McClendon will contribute some of his own money, the people said. The company has raised $400 million in debt, one person familiar with the matter said.

 

 

[nkp007]

CEO Doug Lawler speaks at the Barclays CEO Energy Conference: http://www.chk.com/Investors/Events/Pages/default.aspx for webcast

 

I am impressed with his tone and his comments. Everything he said ties into much, much better capital allocation on a company-wide level.

 

Adding much better capital allocation to what is already a really nice set of assets should produce some good results over the next few years.

 

It looks like they are on the right track. Definitely worth the listen.

[fareastwarriors]

http://www.cnbc.com/id/101030620

 

Layoffs at Chesapeake Energy rattle employees

 

[matts]

I think the layoffs of ridiculously overpaid executives and some trimming of employees will be very good for costs. Could someone please give me their thoughts on whether they think the stock is still cheap and brief rationale?

 

I hold SD but thinking of switching.

[colinwalt]

Matt Ridley is one of my favorite writers...

 

http://www.rationaloptimist.com/blog/the-dash-for-shale-oil-will-shake-the-world.aspx

 

July 06, 2013

 

"A new report (The Shale Oil Boom: a US Phenomenon) by Leonardo Maugeri, of Harvard University, sets out just how astonishing this second shale revolution already is. After falling for 30 years, US oil production rocketed upwards in the past three years. In 1995 the Bakken field was reckoned by the US Geological Survey to hold a trivial 151 million barrels of recoverable oil. In 2008 this was revised upwards to nearly 4 billion barrels; two months ago that number was doubled. It is a safe bet that it will be revised upwards again.

 

The big reason for the upwards revisions is technology rather than discovery. Thanks to faster and cheaper drilling (which means less-rich rocks can be profitable) and things such as “zipper fracturing”, where two parallel wells are drilled and alternately fractured to help to release oil for each other, the oil recovery rate is rising from 2 per cent towards 10 per cent in places. Gas is now nearer 30 per cent. Well productivity has doubled in five years."

[fareastwarriors]

http://www.nytimes.com/reuters/2013/10/08/business/08reuters-chesapeake-jobs.html?src=busln

 

 

Chesapeake Has Cut About 10 Percent of Its Workforce

[nkp007]

They should cut the dividend entirely. Not sure why that's still there. Reallocate to debt paydown.

[alertmeipp]

I don't think they want to tank the share price with that.

[nkp007]

I doubt many people have been investing in Chesapeake for the dividend. It's been a circus for years with huge price volatility.

[alertmeipp]

I doubt many people have been investing in Chesapeake for the dividend. It's been a circus for years with huge price volatility.

 

Fair point, but I believe some funds can't hold stock that has no dividend.

[muscleman]

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9591084-5905-104941&type=sect&TabIndex=2&companyid=1021&ppu=%252fdefault.aspx%253fsym%253dCHK

 

 

Q3 is out. Oil production up 23%. Share price dropped nearly 7%. Mr. Market doesn't seem to have good mood today ;)

[nkp007]

We are happy with earnings. Maybe we are the only ones.

[txlaw]

We are happy with earnings. Maybe we are the only ones.

 

Me too. 

 

Same thing happening with SD that's happening to CHK, though I haven't had a chance to look at SD's release yet.

[argonaut]

I saw this: http://m.seekingalpha.com/currents/post/1391442

 

I've placed orders to buy some more.