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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (http://stockology.blogspot.com/)
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  • The Fracking Tales Of Natural Gas Producers 11 comments
    Oct 15, 2012 2:33 AM | about stocks: UNG, CHK, GDP, SWN, COG, EOG, KOL

    There is a controversy on shale gas. Natural gas (NYSEARCA:UNG) producers love to boast the high productivity of their shale wells. Some claim that they could still make a profit even at current ridiculously low gas prices. But the data speaks otherwise.

    Fracking Tales Meet The Reality

    Recently USGS published report OF12-1118 which surveyed the EUR (Estimated Ultimate Recovery) of gas wells in 132 different natural gas resource areas. The USGS numbers released are very damning to the rosy claims made by NG producers over the years. Let us look at the numbers for the top US shale plays below:

    (click to enlarge)

    The Shale Shock Media called the report a Huge Fracking Surprise and had this to say:

    Southwestern Energy (NYSE:SWN) and Chesapeake Energy (NYSE:CHK) claim average EUR's in the Fayetteville of 2.4-2.6 Bcf. The Powers Energy Investor, an industry publication stated:

    "To put into perspective how ridiculous Chesapeake's claims of 2.6 Bcf is, consider the following: of the company's 742 operated wells completed on the Fayetteville, only 66 have produced more than one Bcf and none have produced more than 1.7 Bcf. Chesapeake's average Fayetteville well has produced only 541 Mcf."

    The USGS confirms these numbers again with the average EUR for Fayetteville wells coming in at 1.1 Bcf, significantly lower than 2.4-2.6.

    Critics like Arthur Berman, Chris Neddler, or any one who cared to study the real shale gas production data already know that the NG industry exaggerated the productivity of they shale wells. The data does not lie. Here is a quick statistics of all major US shale plays:

    (click to enlarge)

    Taking the cumulative volume of shale gas produced and dividing it by number of wells in each play, the results are far below the EURs that the NG industry claimed for these shale plays:

    • Barnett: 0.663 BCF. CHK projected EUR of 2.65 BCF per well.
    • Fayetteville: 0.673 BCF. CHK calculated an EUR of 2.4 BCF.
    • Marcellus PA: 0.662 BCF. But Southwestern Energy (SWN) pitched EURs of 6.00 BCF or higher.
    • Haynesville: 2.63 BCF/well. But Goodrich Petroleum (NYSE:GDP) pitched EURs as high as 8.6 BCF per well.

    Overall, for all US shale plays, there are 35,996 production wells with an accumulated shale gas production of 22,971 BCF. The average is only 0.638 BCF. At current gas price of $3.40/mmBtu, 0.638 BCF of gas is worth $2.17M. That is only a fraction of the costs of drilling a well and brining it into production.

    Shale Gas Is Neither Cheap Nor Abundant

    Decades after the NG industry venture into shale gas development, the industry has spent more than half a trillion dollars and developed 36,996 shale wells, averaging more than $13.5M per well total cost. The industry only had 23 TCF of shale gas production to speak for the money spend. That amount of gas is less than one year of US consumption, and is worth only $78B at today's gas price.

    I believe it is conclusive that shale gas is non-economical at current gas price environment. The industry might be able to pitch a few exceptionally good wells drilled at sweet spots, but the overall performance of the entire shale gas industry is dismay.

    Implications to Investors

    As I always said, if you invest in NG producers, you need to do your own due diligence study. You cannot take the well performance claims of the producers at face value.

    If shale gas cannot be produced cheaply, price must go a lot higher to allow some producers to make a decent profit. That means the current low price of NG is only temporary. NG cannot compete with coal in the long term.

    I believe investors should switch away from the NG sector, and switch to the coal sector. Do you notice that investor put 75 times more investment capitals in the NG sector versus the coal sector? I think this is one of the biggest investment portfolio imbalances in the history of energy investment. Money was put in the wrong sector. This means huge investment opportunity for people willing to stick to coal, when naysayers claim that NG is replacing coal.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (11)
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  • eagle1003
    , contributor
    Comments (1523) | Send Message
     
    The author has made a good case. This is not a good time to be in NG producer stocks. I also suspect that NG will decline for a number of weeks (shaking out the longs), before resuming it's upward march. As Mark pointed out, the producers need higher prices to make profit on the shale plays. They will eventually get them but it won't be overnight. I will be a buyer below 2.90. Of course, winter weather can change everything. The coal stocks are looking stronger but I still am wary of JRCC when there are many healthier coal stocks to choose from. I don't think we are going to see any more significant pullbacks in the coal sector and any pullbacks can be bought with confidence.
    16 Oct 2012, 04:29 PM Reply Like
  • garymarder
    , contributor
    Comments (2) | Send Message
     
    Mark,
    Do you think JRCC will surpass the $60 mark as in 2008 ,or is this time different?
    Also how will the election of Romney or Obama effect JRCC and the Coal industry.
    16 Oct 2012, 10:24 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Garymander:

     

    This time is very different than 2008 and is much better than 2008.

     

    Looking back, there was not a whole lof of bullish factors in supply and demand in 2008. The supply was a bit tight, but NOT that tight. Natural gas price went crazy and then collapsed. Again there was not a big supply/demand inbalance.

     

    But this year, due to the long period of low natural gas prices, there is massive capital destruction in the shale gas industry. I predict that many producers will lose access to easy mney and will be unable to keep drilling new wells. The over-supply will turn into a shortage. The shortage will not be resolved quickly.

     

    So I do think JRCC can go to $60+. This time it probably stay high for much longer than last time.
    17 Oct 2012, 02:06 AM Reply Like
  • minorman
    , contributor
    Comments (230) | Send Message
     
    Well I'm riding pretty high with my henry hub futures right now. And I firmly expect to ride them much, much higher. The shale (dumb money) crowd is in for a nasty surprise, I think.
    (oh and my BTU position is also now in the green... Good times)
    17 Oct 2012, 06:25 PM Reply Like
  • rodl
    , contributor
    Comments (6) | Send Message
     
    Mark;
    CNX answered a question on the quarterly earnings call today stating that teir average EUR for PA Marcellus was 8.5 BCF, and their average well cost was $6.5MM, and stating a well cost of $0.75/MCF. They said that Ohio Utica wells are deper and more expensive, but more productive and cost about $1.25/mcf to drill. You may want to listen to this call. One more question - How do you acount for wells which have been drilled, but are shut in waiting for pipeline capacity?
    25 Oct 2012, 03:02 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Rodl:

     

    My comment on the CNX claim is that it seems to me that NG producers are getting more bold in making fairy tale claims of ridiculously high EUR projections.

     

    In the case of CNX I invite you to have a look at their recent presentation on 09/06/2012:
    http://bit.ly/Puupon

     

    Look at page 11. On the Gaut-4 pad, they drilled 4 wells on the same pad, averaging 16.3 mmCF/day IP (initial production) rate. If the decline pattern is like the rest of Marcellus wells, the EUR indeed could be as high as 7 to 8 BCF per well.

     

    But these wells are very different from other shale wells:

     

    1. They are drilled multiple wells on the same pad.
    2. They have exceptionally LONG laterals

     

    My estimate from the graph on page 11 is that the laterals extends 9000 feets, almost double the typical lateral length. The longer the lateral extends, the higher IP you can get, as it gathers gas from a bigger area. But the decline is also more steep.

     

    I would cut the actual EUR to half, to between 3 BCF to 4 BCF. Read my analysis of a similar claim by QEP:

     

    http://seekingalpha.co...

     

    Any NG producer can do the same and drill longer and longer laterals to get a higher well IP. But it does not mean they get more gas out of the ground. Let's calculate the numbers.

     

    At 9000 feet lateral, and the laterals drawing shale gas from an area 660 feet wide, 330 feet to each side of the lateral, we are talking about a covered area of 9000x660 square feet per well. That is about 6 million square feet. Or 138 acres per well. That is much larger than the standard 80 acres per well allocation. So they are not getting more gas out of each acre of the shale gas reserve.
    25 Oct 2012, 10:19 PM Reply Like
  • Sgeol
    , contributor
    Comments (74) | Send Message
     
    Why is the decline steeper on a longer lateral?
    27 Oct 2012, 01:08 PM Reply Like
  • Sgeol
    , contributor
    Comments (74) | Send Message
     
    Mark, I don't why a longer lateral would have a steeper decline. Higher IPs certainly, but why steeper declines?
    1 Nov 2012, 08:48 PM Reply Like
  • rodl
    , contributor
    Comments (6) | Send Message
     
    Answerining a question on tday's quarterly earnings call for CNX, Brett Harvey CEO stated that the average eur for their marcellus wellswas 8.5BCF and the cost of an average well was $6.5MM, giving a capita cost of $0.75/mcf. The Utica wells cost more and produce more, but average $1.25/mcf to drill those wells.Plase listen to the call and see if you get the same thought.
    25 Oct 2012, 04:40 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Rodl:

     

    More over, producers are cherry picking the best data to show investors. Go back to 09/06/2012 Barclay's presentation by CNX:

     

    http://bit.ly/Puupon

     

    Look at pahe 11 again. Immediately next to the Gaut-4 well pad they pitched, there is the Aiken. You can get the Aiken production data from the PA DEP web site:

     

    http://bit.ly/RmCcRO

     

    Here are the numbers:

     

    AIKENS-5A 298023 (62 days)
    AIKENS-5B 217722 (55 days)
    AIKENS-5C 234468 (55 days)
    AIKENS-5D 248430 (48 days)
    AIKENS-5H 249062 (46 days)
    AIKENS-5G 127410 (41 days)

     

    These are all within the first two months of production. Average daily production rate is 4454 MCF/day. That's far lower than the average of 16300 MCF/day IP rate of Gaut.

     

    At IP = 4454 MCF/day. Assuming normal shale well decline, the EUR would be 2.0 BCF to 2.2 BCF per well.

     

    Further away, The Hutchingson is even lower in productivity.
    25 Oct 2012, 10:24 PM Reply Like
  • Tvfarmer
    , contributor
    Comment (1) | Send Message
     
    Mark I can't seem to get your links referencing the Aikens wells to work, Are these the Aikens wells in Bradford County, just outside of Sayre PA?
    11 Feb 2013, 05:16 PM Reply Like
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