Mmarrkk

Chesapeake: When Gas Prices Will Recover

Forgot to add this: At $2 nat gas, virtually all of the gas produced in the Rockies would be selling for pennies as the basis differentials are huge due to lack of capacity in pipelines. So what would happen if 1/2 the gas in the Rockies were just shut in?? Think that might have an impact on prices??

Chesapeake: When Gas Prices Will Recover

Maynard and weiwentg: explain how CHK gets to the point of liquidation or dilution again? As I see it, if prices continue on down (which I've stated is very hard to justify over an extended period of time due to the fundamentals), CHK has the option to continue to cut back on their drilling/acquisition budget. It truly is that simple; just live within your means and cashflow. Now, if they continue to cut their drilling costs, they will lose some of their undeveloped leases but that can really be managed by savvy landmen using 640-acre units and a single well in each. A huge portion of their acreage is held-by-production (HBP) which means they don't have to drill the wells anytime soon. the other result of cutting capital is that their production increases will be slowed down. So instead of growing production 20-25% per year, they may have to live with 5% per year. Again, not a liquidation scenario.

They have the choice to either spend the money or not. If they want to spend the money in low price environments, they will have to issue stock which will be dilutive. But they DON'T HAVE TO DO THAT. They just stop drilling! Their average cost to maintain current production is below $1/mcf without drilling.

As for the $2 nat gas scenario, at that price level everyone in NA will stop drilling nat gas wells. You will see a rapid decline in supply, the likes of which we haven't seen in many years. Supply will drop well below a depression-like market and prices will rise. Alternatively, LNG will be attracted into the market at higher prices than $2 as the cost to operate the LNG liquifaction, transport and re-gas system is higher than that. For these reasons, prices at $2 won't last long. I believe prices below $4 won't last long. So all Aubrey has to do is be patient and continue to cut back on his drilling budget, accept very low growth (GROWTH none the less) and wait.

As for me, I'd love a $2 nat gas environ. I'd be out scooping up assets left and right at firesale prices!