AEB

Quicksilver Resources' Barnett Shale Gamble

Eric,

I forgot to address the part of your question about EOG. EOG is one of the
best of the (bad) lot on unconventional plays. I don't know that much about their participation in the overall Barnett Shale play, but I did an analysis of Tarrant County last April (Tarrant County has some of the "best" core production--that's where Chesapeake paid $20k/acre for the DFW Airport leases).

In that analysis (using $6.25/MMBtu gas price--a dream today), these were the results for percent of wells by operator that met economic threshold:

Encana 41%
EOG 39%
XTO 39%
CHK 25%
Devon 19%

Those "success" rates (I cannot imagine justifying wildcat wells based on a 20% or lower success rate, and this is field development!) are against a background of an average of 25% payout by all operators, not just the 5 that I listed.

I think that EOG shifted its focus to the more oil-prone, less thermally mature part of the Barnett after I did that study. That seemed like a good idea when oil prices were above $125/barrel, but probably doesn't look so good now. The problem with the oil play is lower relative permeability to oil vs. gas (it's a bigger molecule to fit through tiny pores), and lower porosity because of some kerogen conversion volumetric factors that you certainly would not be interested in!

I do not invest in oil and gas companies but, if I did, I would choose ExxonMobil and stay away from the amateurs!

AEB

Quicksilver Resources' Barnett Shale Gamble

Eric,

I forgot to address the part of your question about EOG. EOG is one of the
best of the (bad) lot on unconventional plays. I don't know that much about their participation in the overall Barnett Shale play, but I did an analysis of Tarrant County last April (Tarrant County has some of the "best" core production--that's where Chesapeake paid $20k/acre for the DFW Airport leases).

In that analysis (using $6.25/MMBtu gas price--a dream today), these were the results for percent of wells by operator that met economic threshold:

Encana

Quicksilver Resources' Barnett Shale Gamble

Devon currently operates about 3,300 wells in the Barnett Shale, and most of these are marginally commercial or non-commercial. Devon acquired Mitchell Energy's position in the Barnett, and Mitchell began the play. Devon's error, therefore, was not buying into the play after prices and costs had soared like Quicksilver. Devon's mistakes are over-exposure to the play, and some fundamental inability to address the commercial realities of shale gas. In the current issue of the AAPG Explorer, there is an interesting article (www.aapg.org/explorer/...) about a University of Oklahoma study of the geology and geophysics of the Barnett Shale sponsored by Devon. Maybe they realize at this late date that fundamentals must be addressed. If so, good for them, but perhaps not so good for shareholders that have already lost value.

Devon, of course, is a competely different type of company from Quicksilver. Devon is a global independent with broadly diversified assets, so perhaps they can absorb losses in the Barnett Shale. On the other hand, their cost structure is much higher than a company like Quicksilver, meaning that it takes larger resources and more profit to pay for the overhead of all of those people who don't contribute to the core business of finding oil and gas.

If you haven't already browsed to my blog, I have a thorough explanation of what I think is going on in shale plays: petroleumtruthreport.b.../ . It is a bewidlering phenomenon because these plays make little commercial sense, yet investors are happy to shovel billions into them.

AEB

Quicksilver Resources' Barnett Shale Gamble

Quicksilver has been active in the Barnett Shale play since 2003, and began drilling in January 2004. There was no 2008 "foray" , just a badly-timed expansion in the "core area" of the play.Quicksilver had focused on the surrounding counties (mostly Hood and Hill counties), but had acreage and drilled wells in the core area in Johnson and Tarrant counties also since 2004. If there was a foray, it was into Denton County where they had not been active before.

Regarding all the negative reactions to Vanderveen's implied criticism of Quicksilver, I think that he is right on. Hedges notwithstanding, how stupid is it to buy into the most overpriced acreage in the play at the highest price-point in the market, and then watch gas prices lose 2/3 of their value? If that is good management, I would love to see an example of poor management!

It amazes me how many people--inlcuding the many bloggers who jumped all over Vanderveen's observations--with investment backgrounds think that they know anything about the oil and gas business. I wonder why you guys don't talk to people inside the industry--like geologists?

I am a geologist, and I have struggled to understand the fascination of the investment community with shale plays. I think that they are all stock scams, in which the executives of public companies get rich because people who don't know anything about oil and gas buy stock and inflate its value (in better times). I've been in oil and gas for 31 years and wouldn't advise anyone to put a nickel in the Barnett Shale geologically or economically. Take a look at Quicksilver's debt sometime, then ask how many of their wells will ever break-even, much less make money. You will be amazed!