As operators continue to turn in exploratory test results for the Lower Three Forks in the Williston Basin, the outlook for this new exploration frontier in the Bakken looks increasingly inspiring. This earnings season has already yielded two major announcements, one by EOG Resources (EOG) and one by Continental Resources (CLR), both very positive (EOG's remarks - discussed further in this note - were sufficient to provide a noticeable uplift to the Bakken-focused stocks on the day of the company's earnings call). Even bigger catalysts are on the near-term horizon.

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(Source: Continental Resources October 9, 2012 Investor Presentation)

While the total number of publicly disclosed exploratory wells in the Deeper Three Forks is still less than a dozen - a miniscule number given the scale of the Bakken play - the results have nonetheless been very convincing and, for this early stage in the play's evaluation, are

MarkWest Energy Partners (MWE) announced yesterday after the close that it has acquired certain midstream assets in the Anadarko Basin from Chesapeake Energy (CHK) for $245 million in cash. The acquired assets are located in the Texas Panhandle and Western Oklahoma.

Transaction Analysis

As discussed further, financial metrics of the transaction appear in line with other similar transactions in the midstream sector. Few aspects are worth noting though:

• The assets are mostly construction-in-progress, with additional $90 million of capex required; the in-service date for the most significant asset, the Buffalo Creek cryo plant, is early 2014.
• The assets come along with a significant dedicated service footprint (130,000 acres) and long-term fee-based contracts that Chesapeake is providing alongside.

From Chesapeake's perspective, the transaction not only provides immediate cash proceeds, but also reduces capital expenditure requirements for an asset that is not generating much cash flow in the immediate term.

Several recent M&A data points that involve significant blocks of undeveloped acreage in the Marcellus, Mississippian, Permian and other prolific resource plays bring in the spotlight the dispute regarding the valuation of so called "resource potential" - a somewhat vague metric that is often used in investor presentations as a selling point. Acreage transactions provide an important market test to the concept. In this note, I use M&A examples to illustrate economics and valuation dynamics related to undeveloped acreage.

Chesapeake's Marcellus Sales

Two significant undeveloped acreage divestitures by Chesapeake Energy (CHK) in the Marcellus area were announced last week. In the first transaction, Chesapeake (and its non-operating partner Statoil [STO]) agreed to sell 162,000 net acres in Northeast Pennsylvania, including 51,000 net acres in the prolific Susquehanna County, to Southwestern Energy (SWN) for $93 million in cash. In the second transaction, Chesapeake and Statoil agreed to sell 99,000

Chesapeake Energy (CHK) has signed a definitive agreement to sell yet another significant acreage package in the Marcellus and Utica, this time in southwestern Pennsylvania.

The acquirer, EQT Corporation (EQT), will be purchasing approximately 99,000 net acres prospective for the Marcellus and Utica shales and 10 horizontal Marcellus wells, located in Washington County, PA, from Chesapeake and Statoil (STO) for approximately $113 million. In its press release this morning, EQT disclosed key metrics of the transaction that shed some light on the valuation of acreage in some of the more sought-after areas of the play. According to EQT, of the total purchase price, $53 million is allocated to the existing ten Marcellus wells, while the remaining $60 million is for the undeveloped acreage.

Three of the ten acquired Marcellus wells are currently producing, and the remaining seven will be turned in line by year-end 2013. These existing wells have

The Bakken and Eagle Ford may currently be the largest unconventional oil producers in the U.S., but the two fields certainly do not hold a monopoly on horizontal oil. In fact, North America's shale oil plays may prove to be just as abundant and diverse as the continent's natural gas plays. SM Energy's (SM) earnings and operating update released yesterday after the close provides a vivid illustration to that effect.

While the Eagle Ford and Bakken continue to be SM's most significant operating areas, this very reasonably valued 115,000 Boe/d, $5.5 billion enterprise value company has been able, in the course of just few quarters, to unveil three additional sizeable acreage positions in several emerging oil plays: Mississippian Lime in the Permian Basin (not to be confused with the Oklahoma Miss Lime play where SandRidge and Chesapeake are the key players); stacked oil plays in Powder River Basin; and

This morning, Southwestern Energy (SWN) announced a definitive agreement to acquire approximately 162,000 net acres of leasehold located in Northeast Pennsylvania prospective for the Marcellus Shale from Chesapeake Energy (CHK) and Statoil (STO) for approximately $93 million. The key acreage is located in Susquehanna, Wyoming, Tioga and Sullivan counties. The acreage is mostly undeveloped - current net production from these properties is approximately 2 MMcf/d from 17 gross wells (1.2 net wells).

The transaction's price may come as a surprise and major disappointment to Chesapeake shareholders as it implies valuation of just $574 per acre (value of existing production is de minimis). While the acreage is located mostly on the fringes of the Northeast Pennsylvania's dry gas sweet spot, the price still appears surprisingly low, particularly given that the acreage includes 51,000 net acres in Susquehanna County. To put this in perspective, Cabot Oil & Gas (COG) whose most

Cabot Oil & Gas' (COG) March 2013 Investor Presentation

Key Takeaways From Cabot Last Week's Earnings Call:

• The newly announced results for two wells east of the Zick Pad provide another confirmation that the "super-productive" sweet spot extends all the way to the eastern flank of Cabot's acreage in Susquehanna and possibly beyond.
• The Marmaton oil assets (~70,000 acres) may be designated for monetization. In the meantime, the third rig is being added in the Marmaton as the drilling program continues to deliver strong results.
• Pearsall testing program has not delivered a breakthrough so far (well optimization effort still ongoing). Production data are positive but not overwhelming. Drilling plans are being scaled back from three rigs to one.

Marcellus Results Continue Strong

Recent step-out test results continue to validate Cabot's view that the super-productive sweet spot in Susquehanna extends all the way to the eastern flank of the company's

Fully Outsourced Field Management

During its earnings call last Friday, Schlumberger (SLB) commented on the company's recently announced Eagle Ford joint venture with Forest Oil (FST). While Schlumberger stated that "this is a one-off deal in terms of taking working interest" in an E&P project and the company "has no plans of pursuing this type of contract model further," it is nonetheless abundantly clear from the commentary that Schlumberger is aggressively targeting the U.S. shales market for its integrated field management offering.

The development deserves some attention as the concept behind it is quite transformational in nature and, if accepted in the market, may - in the long run - have consequences for the way the U.S. E&P sector is currently organized. In essence, the integrated project management model would allow E&P companies with high quality acreage but somewhat limited technical expertise and resources to outsource a significant part

It would be almost disingenuous to write about the Oil & Gas Sector fundamentals and not to acknowledge the presence of the 800-pound gorilla in the room - the fact that the sector may be in the middle of a steep, painful correction.

Last week was brutal for energy equities, particularly those with smaller market capitalizations and high leverage, with some stocks posting double-digit cumulative losses in just five trading sessions. The amplitude of intraday moves has noticeably increased. While it may be tempting to try to rationalize each specific stock's performance by fresh operating news or a change in commodity price outlook, trading patterns that were manifest last week indicate that the decline in oil and gas stocks was attributable first and foremost to fund flow factors and not to an abrupt change in the industry's fundamentals. Several trends and trading "anomalies" hint towards a correction that may be

In the midst of the steep and painful correction that the Energy sector has been through in the course of the past several days, one spot continues to shine bright and "green:" Nymex natural gas. In fact, the EIA storage data release yesterday morning and the instantaneous natural gas rally seem to have helped to turn around what was initially shaping up as yet another ugly day for Energy stocks (natural gas could not salvage Apple, though).

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(Stock price chart: Yahoo Finance)

The cumulative move in natural gas prices has been significant since my previous detailed note two weeks ago. The May contract has gained 38¢ since March 28. A fresh look at the commodity's current fundamentals and trading dynamics seems warranted.

What does the futures curve tell us?

The move has been predominantly in the front end of the curve, while the back end (2015 and

Northwest Pennsylvania: Great Exploration Frontier In The Marcellus, Utica And Upper Devonian Shales

After more than five years of break-neck natural gas development in the Marcellus Shale, it may appear counterintuitive that only a relatively small percentage of prospective acreage in Pennsylvania has transitioned into full development mode. Moreover, vast swaths of prospective lands still remain essentially unexplored. While clearly not all counties are equally endowed by mother nature with highly productive underlying geologic formations (in some areas drilling has been on hold due to poor economics), in many cases, particularly in wet gas areas, the real culprit has been the lack of production and takeaway infrastructure which has discouraged exploratory drilling.

Northwest Pennsylvania (the counties shown in yellow on the 2012 drilling activity map below) is the case in point. This enormous area offers promising stacked-pay, liquids-rich potential in the Marcellus, Utica, and Upper Devonian shales but still remains

Halcon Resources' (HK) stock price action yesterday may have left some investors scratching their heads. HK shares ended the April 15, 2013 trading session - clearly a very difficult one for the market - down almost 16%, one of the steepest declines in the entire energy sector. After all, did not the company just unveil strong drilling results in a new exciting Eagle Ford oil play in East Texas where Halcon holds 50,000 recently leased acres and is optimistic about gaining an even larger position? Do not the 100%+ returns now expected in the South Louisiana Wilcox play sound outstanding and does not the fact that the play was moved to the first position in the corporate presentation highlight greater materiality (a new core area?) of the Wilcox to the company? Did not the preliminary "color" on the important Utica test well, that is currently flowing back, sound positive (or

In advance of the presentation that SM Energy (SM) is scheduled to make at an industry conference in New York tomorrow, the company issued a press release announcing a successful Eaglebine exploratory test well in San Jacinto County, Texas. The Horizon Properties 2H (SM owns 100% working interest in the well), a horizontal completion in the Woodbine interval, produced approximately 740 Boe/d in a 24-hour test, flowing at 1,520 psig casing pressure on a 27/64" choke, while cleaning up after fracture stimulation. Production consisted of 305 Bbl/d of 42 degree API gravity oil and 2.6 MMcf/d of 1,250-Btu gas. The well will be shut-in to await construction of a gathering system. Taking into consideration that only 2,500 feet of the wellbore were effectively stimulated, the initial flow rate should be viewed as strong (operators often complete wells in this play with 5,000-8,000 foot laterals).

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(Source: SM

The Mississippian Lime "Extension" area seems to be losing support of an important potential sponsor: Encana Corporation (ECA). In its latest corporate presentation, a new slide summarizing the company's results to date and near-term strategy in the Miss Lime delivers the final verdict:

Kansas activity did not meet expectations.

The slide also shows Encana's "new area of interest" which is substantially narrowed down to include the Oklahoma portion of the play and the immediately adjacent area to the north on the Kansas side. For the moment, it appears that Encana has terminated its exploration activity on the 310,000 net acres it has under lease in the play's northern extension and will focus its assessment effort on the remaining 82,000 acres in Osage County of Oklahoma and the surrounding area.

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(Source: Encana Corporation's April 2013 Investor Presentation)

For Miss Lime watchers the news should not come as a

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(Source: Summit Midstream Partners' March 2013 Investor Presentation)

I have covered some of the unfolding developments in the Piceance Basin Mancos-Niobrara play in my earlier two notes (Niobrara Shale: Will Major Recent Discovery Translate To A Major Source Of Gas Supply? and Niobrara Shale: WPX Energy's Discovery Well Flowing Strong - Renaissance In Piceance?). The biggest recent news that has caught investors' attention was proactive disclosure by WPX Energy (WPX) of their highly successful Niobrara horizontal test. The well, which was completed in January, IP'ed at 16 MMcf/d and has produced over 1 Bcf after the first 100 days - an outstanding result. (WPX is an E&P spin-off from Williams Companies, with an existing strong production base in the Piceance Basin of Western Colorado which includes 180,000 acres prospective for Mancos-Niobrara.)

Last month, WPX commented that the well indicated 20-30 Tcf resource potential

Forest Oil (FST) yesterday announced a joint venture with Schlumberger (SLB) for the development of Forest's Eagle Ford acreage in Gonzales County, Texas. Under the agreement, Schlumberger will pay a $90 million drilling carry to earn a 50% working interest in Forest's Eagle Ford acreage position. Forest will be the operator. The agreement excludes existing producing wells.

From a valuation standpoint, the announcement may appear a major disappointment: the transaction effectively values Forest's entire undeveloped acreage position in the Eagle Ford (~86,000 net acres at the end of 2012) at $180 million, a far cry from the $0.5-$1.0+ billion range that some sell side analysts were anticipating back in 2011 when the Eagle Ford M&A activity was at its peak. The low valuation should not be a big surprise, however. Due to expiration deadlines, the acreage is perishable goods - only 55,000 acres are expected to be held at

The rich stream of Niobrara-related news has been primarily related to several horizontal plays in the Rockies which target oil. Recently, alongside the well-established areas such as JD Niobrara, a major new horizontal Niobrara play has been quietly emerging in the Piceance Basin of Western Colorado. Unlike its sister plays which are oil-driven, this play targets natural gas.

WPX Energy's Discovery Well Is Flowing Strong

In a special press release issued earlier this week, WPX Energy (WPX) provided an update on what the company believes to be its "major discovery" in the Niobrara (Lower Mancos) Shale in the Piceance Basin. WPX announced that its first horizontal test well located in Garfield County produced over 1 Bcf of natural gas in just over 100 days of operation. The result is truly impressive and is similar to production rates observed in sweet spot locations of the Haynesville. Most importantly, the well

It is difficult to overemphasize the importance for Penn Virginia (PVA) of the highly successful $775 million debt financing transaction that the company priced after the close yesterday. The offering removes the not so insignificant funding uncertainty related to the Magnum Hunter (MHR) asset acquisition announced last week and, based on my estimate, provides an extra $45-$50 million of much needed liquidity relative to the initially announced financing structure. The offering was upsized from the initial $400 million to include a refinancing of existing bonds and bears at an attractive 8.5% coupon (priced at par) - an outstanding result. The proceeds will be used to tender for the company's $300 million face amount of 10.375% Senior Notes due 2016 and fund the Magnum Hunter acquisition.

The equity market should take note: the bond offering was very well received by the debt markets, despite the Caa1 rating from Moody's

A month after SandRidge Energy (SD) reached a settlement with the activist shareholder TPG-Axon Capital and added the fund's four nominees to its Board, the company issued a press release with a brief update on management changes and strategic review that are currently underway. The press release contains indications that the new Board is focusing on some of the most critical issues related to SandRidge's operations and finances and significant strategic initiatives will be announced in the near future once the review is complete. The following is perhaps the most substantial sentences from the company's press release (please read the release in its entirety at the end of this note).

The Strategy and Planning Committee, consisting of Messrs. Westbrook, Moneypenny, Serota and Brewer, has met several times to review potential adjustments to the Company's planned capital and operating expenditures, including reductions in rig count and general and administrative expenses.

The

Recent Baker Hughes Rig Data Shows Surprise Contraction In Active Gas Rig Count

Last Friday, April 5, Baker Hughes reported yet another sizeable reduction in the U.S. gas-directed rig count: according to the survey, the number of rigs drilling for natural gas in the Lower 48 States now stands at 375, down 14 from 389 rigs the week before and down 56 rigs from the recent high of 431 rigs on March 15 (these figures compare to 900+ rigs just eighteen months ago).

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At the first glance, this recent decline appears very material and is surprising as it represents a departure from the low but stable level of natural gas drilling seen over the past six months. To put the magnitude of this decline in perspective:

• There are only 13 rigs currently operating in the entire Fayetteville Shale, which, in my estimate, should be sufficient to