In some ways 2008 feels like yesterday, in other ways it feels like a lifetime ago. The reality is, of course, that it has been five years. When you consider how much life has changed for natural gas producers in the United States, you would think 2008 was closer to being a lifetime ago.
I have vivid memories from the early summer of 2008 when Chesapeake Energy (CHK) disclosed its huge position in the previously unknown Haynesville Shale. Back then with natural gas prices approaching $10/mcf it looked liked Chesapeake had hit the motherload with the huge acreage position (550 thousand acres) the company had acquired.
Validating just how valuable that acreage position was in 2008, Chesapeake entered a Haynesville joint venture with Plains Exploration:
PXP has agreed to acquire a 20% interest in Chesapeake's Haynesville Shale leasehold as of June 30, 2008 for $1.65 billion in cash. In addition, PXP has agreed to fund 50% of Chesapeake's 80% share of drilling and completion costs for future Haynesville Shale JV wells over a several year period until an additional $1.65 billion has been paid. Chesapeake estimates that its Haynesville leasehold as of June 30, 2008 was approximately 550,000 net acres. As a result of the transaction, PXP will hold approximately 110,000 net acres of this leasehold and Chesapeake will hold approximately 440,000 net acres. Chesapeake plans to continue acquiring leasehold in the Haynesville Shale play and PXP will have the right to a 20% participation in any such additional leasehold.
The total price paid by Plains was $3.3 billion and the total acreage received was 110,000 acres. At the time there was little production associated with the acres being acquired, so Plains paid $3.3 billion/110,000 = $30,000 per acre.
Click to enlarge images.
The timing of this joint venture proved to be exceptional for Chesapeake and a disaster for Plains. One year ago, Plains entered into another large transaction this time with the company dumping the Haynesville acreage it acquired from Chesapeake for a third of what it paid. That was a clear indication of what had happened to Haynesville asset prices.
EXCO Resources, Inc. today announced that it has entered into definitive agreements to acquire producing and undeveloped oil and gas assets in the Eagle Ford and Haynesville shale formations (Eagle Ford and Haynesville, respectively) for an aggregate purchase price of approximately $1 billion, subject to closing adjustments and customary terms and conditions, from subsidiaries of Chesapeake Energy Corporation.
-- Approximately $320 million purchase price
-- Average net production of approximately 114 million cubic feet of natural gas equivalent per day in May
-- Non-operating interests in 170 EXCO operated wells in EXCO core area
-- Approximately 5,600 net acres
-- Operating interests in 11 operated wells directly offset to EXCO core area
-- Approximately 4,000 net acres
-- Adds approximately 55 identified drilling locations
The price per acre paid by EXCO was $320 million for 9,600 acres. That is $33,333 per acre which is very similar to what Plains Exploration paid five years ago. The big difference however is that this acreage is already very well developed and has 114 million cubic feet of production per day (as of May). If that production is netting a profit of even $2/mcf today, it is generating cash flow of over $60 million per year.
Five years ago, Plains was willing to buy Haynesville acreage with no production for the same price that is now being paid for acreage that brings with it significant free cash flow. That is an incredible change in valuation.
What still impresses me about Chesapeake Energy, though, is how the company acquired all of this acreage for what turned out to be almost no cost. With the various joint venture deals that Chesapeake completed (like with Plains Exploration) the company quickly recovered all of the cash it spent acquiring the acreage in the first place. Chesapeake was able to hold 66% to 75% of the plays for a net cost of zero by selling 25% to 33% of the acreage to partners.
For investors in Chesapeake and other natural gas producers, the message from this recent Haynesville asset sale is pretty clear. Those acreage valuation data points from 2008 were aberrations and all time highs that aren't coming back unless there is a shocking rise in natural gas prices.
The shale gas revolution has been far better for us consumers than it has been for the producers.