Chesapeake Energy: Natural Gas Supply Responds to Price

Chief executive Aubrey McClendon of Chesapeake Energy (CHK) portrayed a potentially massive natural gas field in the Haynesville Shale formation of North Louisiana and East Texas in a conference call on July 2. Declaring that the data strongly suggest ultimate recoverable reserves of 250 trillion cubic feet (tcf), he envisioned 40,000 wells covering an area equivalent to a square 75 miles on a side. That amount of future production might be a quarter of all the gas produced in the U.S. over the next fifty years.

Taking account of speculative current market values for undeveloped land, Mr. McClendon builds a plausible value of $150 a share for Chesapeake stock. We keep our estimate of Net Present Value at $80 a share. In either case, CHK has a low McDep Ratio and we like the concentration on natural gas, the undervalued premium fuel. Other companies especially active in the 80% of Haynesville potential not controlled by CHK include buy-recommended Encana (ECA) in partnership with buy-recommended Royal Dutch Shell (RDS.A). If the tentative volumes continue to unfold, it could help make natural gas our most important “alternative” energy.

Evidence that Supply Responds to Price

While we think natural gas price remains below its ultimate worth, it is nice to know that consumers get more supply for the higher price that has been evident so far. After languishing in the 1990s, U.S. natural gas reserves have increased every year in the 2000s to 211 trillion cubic feet at the end of 2006. Now with the development of unconventional natural gas, including that from shale formations, we are seeing that our most promising alternate fuel is good old natural gas. Most of the new reserves in the first half of the 2000s have come from the Rockies, in a geographical extension of the type of tight gas and coal seam production pioneered in the San Juan Basin, still the largest U.S. natural gas field with daily production of 4 billion cubic feet (bcfd) and proven reserves of some 20 tcf. More production from the Rockies awaits new pipelines.
 The latest large new source has been the widely acknowledged shale gas, often located closer to market and nearer existing pipelines. The Barnett Shale in, around and under Fort Worth is vying to be the largest U.S. field with production near 4 bcfd. While proven reserves in the field have not yet reached 20 tcf, Mr. McClendon thinks the North Texas Barnett may ultimately produce 50 tcf over the decades.

 

An Alternative Energy Program That Could Make Sense

Meanwhile the low price of natural gas is telling us the market could be expanded. The Chesapeake chief would like to be able to export U.S. natural gas to take advantage of a $20 a million btu price in Europe next winter, compared to $14 in the U.S. Stretching his imagination further, he points out that $20 natural gas is a competitive $2.50 a gallon on a gasoline-equivalent basis. The cost to retrofit 25,000 gasoline stations to supply natural gas as a vehicle fuel might readily be justified by the economic, environmental and strategic benefit.
 Owners of large cars or small trucks worried about the rising cost of gasoline might sacrifice some modest space to accommodate a compressed natural gas tank. Small problem, there are few if any service shops certified by the Environmental Protection Agency to convert latest models to “flex” fuel for the natural gas/gasoline combination. Though we can be quick to fault our political leaders on energy policy, we think our government has tried on natural gas vehicles, but there has been little public support. Perhaps it is time to gear up again - with the economic incentives higher.

Originally published on July 8, 2008.

Comments

[Ozarker:]

Kurt your inciteful remarks are right on target. Natural gas is plentiful, clean-burning, and inexpensive compared to other fuels and an interrupted supply for many decades is to be had right here in the good old U.S. of A. If I knew where I could get a conversion done to my SUV, I would do it tomorrow. Fuelmaker Corp. in Canada makes a Natural Gas compressor that fits on your garage wall and fills up your vehicle overnight. Your good for approximately 200 miles the next day. The device is roughly the same size as an old pay phone and makes the same amount of noise as a clothes dryer and is no more dangerous than your water heater. Unless you had to go on a long trip, you would never have to go to a gas station again!

2008 Jul 28 08:29 AM

[John Galt:]

So much energy, so little leadership....

2008 Jul 28 08:32 AM

[haydete:]

Most utility companies have demonstration fleets - you can always ask where they did the conversions. Also, Fuelmaker compressors claim the 200 miles if you drive a Honda at 30mpg (gas equivalent) so you won't be going 200 miles in your SUV.

However, having been a lubricant formulator in a past life, CNG is a wonderful fuel in regards to engine life, engine cleanliness, higher octane, etc. Ford used to sell Crown Vics with CNG conversions. The technology is there, the only part missing is the distribution system for consumers. From an oil company employee perspective, this ought to be the leading choice by far, and should have been promoted before the use of corn-based ethanol.

2008 Jul 28 09:01 AM

[atotonilco:]

CLNE is Boone Pickens answer to this. Check it out.

2008 Jul 28 10:33 AM

[20smoney:]

I'm buying CHK... are you?

2008 Jul 28 10:35 AM

[Ant1967:]

User 163362 CHK will go up. Give it time. I bought on weakness which should level out sometime. I'm in for the long haul...

2008 Jul 28 12:41 PM

[Yiani:]

An energy policy with significant emphasis on gasoline-based alternatives requires huge initial capital investments, government leadership and financial subsidies. Unfortunately, our economy is in the tank now and so is our national treasury, over nine trillion in debt and growing rapidly.

The problem with vehicles that run on other than gasoline - electric, natural gas/propane, hydrogen (fuel cells) - can not be fueled at present by an existing infrastructure, such as your local gas station. So, in addition to paying a premium for such vehicles, one has also to consider fueling options.

2008 Jul 28 01:36 PM

[Ketul Kirti...:]

Here's an analysis on why Williams may be undervalued:
usequity.blogspot.com/...

2008 Jul 28 01:42 PM

[samadams:]

I just returned from Thailand where I took a road trip in a natural gas powered Toyota Corolla with a tank in the trunk
It could run on gasoline or nat gas

2008 Jul 28 05:26 PM

[Alamo:]

Wonderful article.

As a member of T. Boone Pickens' armada, this is the clear, concise statement that sets out what our future energy source should be. While enabling us to cap the wealth drain (to the sad tune of $700 billion dollars annually) and provide the American economy a significant and vital boost.

How can any right thinking American citizen not understand the simple fact that we must end our addiction to crude oil that we don't have, and should not want. When wars like the Iraq catastrophe are factored into the cost of that addiction along with numerous other global entanglements (read Iran, Venzuela, etc) the drain on this nation is vastly more than the $700 billion figure being bantered about.

Natural gas has all the positive attributes we need and frankly, must develop, if we intend to continue as the nation we want to be. Losing that 700 billion plus dollars a year will destroy the American economy. We all realize this, why don't we make up our collective minds to change our future. It can be done and it won't require a "Manhattan Project" to bring it about. The solution is about 2 miles beneath our feet and readily acheivable, NOW.

2008 Jul 28 08:59 PM

[Timothy Stolz:]

Education of the consumer is not happening! We need to get the word out about natural gas. I wonder how many of the people reading this have ever really seen a vehicle that runs on clean natural gas? More needs to be done to set examples by those of us that believe in this technology. More exposure to the ideas and possibilities of the common sense approach of using a natural resource we have right here at home, needs to be explained to our news media too.
Just put "one word in front of another" about natural gas and keep talking, blogging and writing. Consumers want to listen to the truth so give it to them straight. Our dependence on foreigh oil has got to come to an end!

2008 Jul 28 09:39 PM

[devassocx:]

all you guys please convert your vehicles to ng.

If enough people do, then I won't have to as gasoline will be plentiful
and cheap.

2008 Jul 28 09:53 PM

[lonie:]

To convert to natural gas In the USA , by the time you get thru all the bureaucratic malarky ,give the politicians time to position themselves for the most advantageous positions for 'profit ' all but the shouting will be over with.
Here in Thailand there are hundreds of shops , some near ' shade tree ' operations, that will convert a Gasoline or Diesel vehicle to Natural gas for about 800 US dollars . I understand that in USA they want about 3 to 8000 dollars .

Here in Thailand there are over 300 fueling stations,some CNG only, and more being installed every day.

In USA by time you get thru screwing around with Cummins /Westport conversions you will pay many thousands for a conversion. Many companies here are converting their big trucks themselves , the original Diesel engine that came with the truck ,or you can buy one new .

The USA is being left behind in the world due to the Bureaucratic mess and some 'greenies, yelling . What the hell is the problem? Natural gas , Propane has been used for years and burns cleaner than Gasoline or Diesel without any pollution controls.

2008 Jul 29 03:04 AM

[xander:]

honda is leasing in california a car that runs on cng

2008 Jul 29 05:35 AM

[dillish:]

To echo the fellow in Thailand, I live in Bolivia, a nearly hopelessly impoverished 3rd world country, where, neverthelss, CNG is readily available and conversion kits are installed for less than $200. OK, so wages are low make that maybe $500 in the US. No reason other than bureaucracy and greed it can't be done in the US.

2008 Jul 29 08:35 PM

[TOMS S:]

THIS IS BEYOND STUPID, NG SHOULD BE THE MAIN POWER SOURCE OF OUR CARS. IT SHOULD BE ILLEGAL TO SEND OUR US DOLLARS TO THE MIDDLE EAST FOR OIL. IF WE WANT TO STOP TERRORISM JUST STOP BUYING THEIR OIL. PLEASE....WOULD SOMEONE IN THE US GOVERNMENT START A POLICY THAT WILL END FORIEGN OIL USE. PRES BUSH YOU CAN STILL BE A HERO IF YOU INSTIGATE A NG POLICY TO CONVERT 50% OF THE USA CARS TO NG BY THE END 2010.

I KNOW YOU HAVE THE INTELLEGENCE TO DO THE RIGHT THING, JUST SHOW IT TO THE REST OF THE COUNTRY.

TOM FROM MICHIGAN

PS IF YOU WANT TO GET OSAMA, JUST OFFER EVERY PERSON IN THE CITY OF DETROIT $100,000 REWARD AND GIVE THEM A GUN, AMUNITION AND A ONE WAY TICKET TO AFGHANISTAN, TRUST ME THE AFGHANS WILL GIVE UP OSAMA WITHIN A MONTH. HAVING ONE MILLION DETROITERS RUNNING THROUGH YOUR COUNTRY WILL CAUSE SO MUCH TERMOIL THEY WILL DO ANYTHING TO RESOLVE THEIR NEW DELEMA. I LOVE DETROIT BUT I ALSO KNOW WHAT THE PEOPLE WHO LIVE THERE ARE CAPABLE OF.




On Jul 28 08:32 AM John Galt wrote:

> So much energy, so little leadership....

2008 Jul 29 11:46 PM

[Clean_Burning:]

Natural Gas is the practical “bridge” until hydrogen and other renewable transportation energy sources are developed.

As the cleanest-burning fuel around, it's reported that 2010-model natural-gas engines for medium heavy-duty trucks are six times cleaner in smog-causing nitrogen oxides than new “clean diesel” engines on the market. They also cut greenhouse gases 23 percent and reduce soot.

Granted, a trash hauler powered by natural gas costs $50,000 to $60,000 more than a conventional truck. So a $32,000 federal tax credit and grant programs are available to help pay for vehicles.

2008 Jul 30 01:48 AM

[tommytwotimes:]

Henry Ford didn't care that there were no gas stations for his car. If we build NG cars, someone will build a gas station. High oil and a bad economy make it more feasible. BTW its already here, check out CMI and WPIVF, they are convert all the trucks in the port of long beach to NG. Once they have it perfected they just need smaller models of engines.

2008 Jul 30 07:20 PM

[sligoo:]

Chesapeak (CHK) is certainly a compelling story. If everything goes according to projected production, their position in natural gas will rival Petrobras's Santos Basin oil potential.

2008 Aug 01 03:27 PM

[DWrath:]

I have to agree with Clean_Burning, natural gas is a bridge. Currently, there is no one perfect solution to our energy needs. Natural gas is the cleanest of the fossil fuels, but it still is far from clean. Cleaner technologies (hydrogen fuel cells, lithium ion, super capacitors, compressed air) are quite a ways off, and natural gas can be a "stop gap" for our automobiles until a better source(s) is developed. We can't wait until the perfect solution is found, but keep adopting, working, and improving on our current technology. Yes, hopefully natural gas will reduce our dependence on foreign oil, IF we keep pumping out of the ground in the US, but the largest reserves of natural gas are found, you guessed it, in the middle east. New technologies and new innovations have never been bad for our economy. Those who say we cannot switch to alternative forms of energy because the economy is bad have it backwards; we should be pursuing new energy technology to improve our economy. BTW, I support the Pickens plan, mainly because it is a practical and achievable plan that can be implemented relatively quickly.

2008 Aug 03 09:03 AM

[mkreisel:]

If there is so much natural gas around, why should it ever trade above $10/mcf?

2008 Aug 06 07:14 PM

[TRY:]

I drive a dedicated CNG Dodge van. Here in east central Ohio there are CNG stations in Coshocton and Newark, Ohio. Another one is located in Columbus, Ohio. I want to mention that Fuel Maker, Inc. of Canada makes gas compressors so that persons who, for example, have a natural gas well on their farm, can have energy independence. The price for a gallon of CNG is $2.19 Fuel Maker also make an appliance called "PHILL" that can be installed to your local home gas line which slow fills your CNG fuel tank car overnight. It will take time to recover your ROI, but in the long term, considering what can/will happen in the Middle East, I say that converting to CNG is the future.

2008 Sep 02 06:32 AM

[Paul.Mc:]

The conventional engine is reasonable design for gasoline and even diesel but it is a very poor design for hydrogen and not particularly suited to natural gas. The Pivotal engine is absolutely better suited to control hydrogen combustion and also is potentially a much better natural gas engine than the conventional converted automotive engine.

The more efficient, lighter and compact Pivotal CNG engine would increase the viability of natural gas and consequently increase the pace of change.

The Pivotal engine is a significant technology to bring CNG to the state of being the common fuel for transportation in the USA.

pivotalengine.com

2008 Sep 21 09:43 PM