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Natural Gas In the Production Growth Vortex

Natural Gas In the Production Growth Vortex. Energy Finance Discussion Group Denver November 11, 2008 David Pursell. *Important Disclosures on page 33 of this document.*. Natural Gas 12 Month Strip. 2. Futures – Are They Accurate?. Thoughts On Price . Price range 2001 :

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Natural Gas In the Production Growth Vortex

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  1. Natural GasIn the Production Growth Vortex Energy Finance Discussion Group Denver November 11, 2008 David Pursell *Important Disclosures on page 33 of this document.*

  2. Natural Gas 12 Month Strip 2

  3. Futures – Are They Accurate?

  4. Thoughts On Price • Price range • 2001 : • Marginal Cost Supply ~$3.50/mcf • Marginal Consumption ~$8 to $10/mcf • 2008 • Marginal Cost Supply ~$8/mcf • Marginal Consumption ~$10 to 12/mcf (assuming economy OK) • LNG • 2001 – N/A • 2008 - $12/mcf (moving target with oil) 4

  5. Thoughts On Price – Long Term • US Can grow demand…we have supply growth. • Economic expansion required • Power demand is THE driver of natural gas demand growth • Need gas-fired backup (large capacity margin) to back stop alternatives (wind, solar, and hydro). • Transportation fuels…I cant make the math work • Carbon Legislation – should greatly benefit power generation demand • Gas >> Oil >> Coal • Concerns: • Overall tax/cost of retail electricity may hinder economic growth • Demand side management (incentive to consume less) will be integral part of plan. 5

  6. GOM Production “I can hardly remember how I built my bankroll, but I can't stop thinking about the way I lost it." Mike….Rounders 6

  7. Onshore Supply Growth! • “Ohhhh, man I wish I could go back in time. I'd take state.” • Uncle Rico – Napoleon Dynamite 7

  8. Gas Storage – Back to Normal 8

  9. Shale Plays Improving Mix 9

  10. Implications for Rig Count 10

  11. Capital Market Issues • E&P companies can’t / won’t outspend cash flow • Raise Equity….nope • Debt…good luck • Sell assets…not so much • Cut spending/rig count…most likely • Pipeline companies • How to fund new pipes? • Basis issues harder to solve via more pipes • Need to solve via lower production in near term

  12. Rigcount By Operator Type

  13. Shale Comparison Source: CHK 13

  14. Basin Breakeven Analysis 14

  15. Basis Differentials

  16. Demand – Can Improve Long Term 16

  17. Demand and Basis Risk • Northeast US • Natural Gas Demand ~8.5bcf/day over past eight years. • Growth Prospects? • Rockies Express = more gas • Shale Development in West Virginia and Kentucky = more gas • Does the region need the Marcellus? • Risk to basis? 17

  18. Natural Gas – Power Generation US GDP and Total Power Generation Load US Natural Gas Demand driven by electricity sector expansion and growth 18

  19. Got Shale? • Rationale – Transition in Public Company E&P Mindset • 10 years ago - hard to find, but easy to produce • Exploration focus • Seismic / Geology driven • Now - easy to find, but hard to produce • Shale plays – going to the source rock/formations • Presence of gas not a big risk • Engineering risk increase 19

  20. Resource Triangle Source: Holditch

  21. Marcellus Shale Resource

  22. Marcellus Shale “According to the map we've only gone 4 inches.” Harry…Dumb and Dumber 22

  23. Haynesville Shale • The Good • Takes “froth” out of the Marcellus Shale • The Bad • Pulls some of the necessary capital resources away from the region • The Ugly • Creates a large amount of supply-side/production growth focus 23

  24. Haynesville Shale Activity Overview GDP – Vertical wells Hall 5 No. 1 (50% WI non-op) Caddo Parish; Central Pine Island Field Completion Phase Taylor Sealey No. 1 (100% WI) Panola/Rusk Counties; Minden Field IP ~ 2.6 MMcfe/d (22/64 choke) Lutheran Church No. 4 (100% WI) Panola/Rusk Counties; Beckville Field IP ~ 1.6 MMcfe/d HK – 1H 08 Announcements Elm Grove Plantation #63 (100% WI) Bossier Parish; T-R: 16N-11W, sec 9 IP ~ 16.8 MMcf/d (26/64 choke) 11,005 ft. TVD, 3,880 ft. lateral Hutchinson 9-6 (91% WI) Caddo Parish; T-R: 15N-12W, sec 9 IP ~ 16.7 MMcf/d (22/64 choke) 11,222 ft. TVD • Current Players • Berry (4,500 Net) • Cabot (135,000 Gross) • Chesapeake (440,000 Net) & Plains E&P (110,000 Net) • Comstock (53,000 Net) • Devon (483,000 Net) • Ellora (70,600 Net) • El Paso (42,500 Net) • EnCana/Shell (370,000 Net) • Encore (21,200 Net) • EXCO (107,000 Net) • Forest (91,000 Net) • GMX Resources (38,500 Net) • Goodrich (60,500 Net) • J-W Operating (Acreage n/a) • Penn Virginia (60,000 Net) • Petrohawk (300,000 Net) • Questar (28,000 Net) • XTO (100,000 Net) • CHK (20% Plains E&P) • Caddo Parish; T-R: 15N-15W • 1) Feist 28-#01 (section 28) • IP ~ 2.6 MMcf/d (9/64 choke) • 11,596 ft. TVD • 2) Milton Crow 27-1H (section 27) • IP ~ 14 MMcf/d (24/64 choke) • 11,744 ft. TVD ECA (50% Shell) Sabine Parish: IP ~ 8 MMcf/d Red River Parish*: IP ~ 15 MMcf/d *T-R: 13N-9W COG – 11 Vertical wells Rusk County; Minden Field IP ~ 650-2,300 Mcf/d 11,596 ft. TVD Trawick: 3.3 MMcf/d test County Line test - 4Q 08 PVA – 5/30/08 Announcement Fogle #5-H (100% WI) Harrison County; South section IP ~ 8 MMcf/d 11,378 ft. TVD, 3,861 ft. lateral 24 24 Source: Company Filings, Investor Presentations.

  25. Haynesville Shale Resource Summary 25

  26. Shale Development Issues • Macro Environment/Credit Markets Matter • Pipeline Infrastructure – Who builds the pipelines? • Onshore Production Growth: • Implications to overall gas price • Implications to basis differential • Growth Companies (i.e., deficit spenders) looking for partners/sell assets • Location Matters – Shale plays have lots of good and bad acreage 26

  27. Emerging Shales • Canada • Utica (Eastern Canada) • Montney-Doig – NE BC • Horn River Basin – NE BC • United States • Haynesville • Marcellus • Lots of other shales in Appalachia • Utica (NY) • Pearsall – S. TX • Some shales in Rockies…but basis differential an issue 27

  28. Not All Shales Work • Palo Duro Canyon • Texas Panhandle • New Albany Shale – Indiana • Antrim look-alike…except no natural fractures • West Texas Barnett • Too early to stick a fork in….but results les than impressive • Mississippi / Alabama Shales – still early but… • Lots of wells with no positive well news 28

  29. 2009 Free Cash Flow at Different Commodity Prices 29

  30. Gating Items - People - Revenge Of the Nerds! • Horizontal Drilling • Proper Azimuth • Optimum Length • Completion – Hydraulic Fracture…can’t boilerplate • Multiple Stages, Simultaneous Fracturing • Slickwater vs. Gelled Fracs • Regionally Specific • Surfactant, 100 mesh, proppant transport etc. • Well Spacing - will drive ultimate recovery • Depends on Completions and Reservoir • Fracture Mapping with Micro-seismic helps • Reservoir Modeling difficult • Natural fracture spacing/orientation • Isotherm, gas-in-place, free gas porosity “No one will really be free until nerd persecution ends.” Gilbert – Revenge of the Nerds 30

  31. Change! Gas Market Implications • Carbon Tax (er….Legislation) is Coming • Natural Gas should benefit • Lower carbon than oil and coal • Drilling • Wait and see • Magnitude of Tax? • Skeptic says taxing fossil fuels last great gov’t revenue source • Demand side management • Expect legislation to encourage lower consumption "Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." So I got that goin' for me, which is nice Caddyshack - Carl Spackler

  32. Conclusion Formula for success: “Rise early, work hard, strike oil.” J. Paul Getty Formula for success - 2008: “Rise early, work hard, buy acreage.” Formula for success - 2009: “Rise early, work hard, survive.” 32

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  34. Tudor, Pickering, Holt & Co., LLC is an integrated energy investment and merchant banking boutique, providing high quality advice and services to institutional and corporate clients. Through the company’s broker-dealer, Tudor, Pickering, Holt & Co. Securities, Inc., the company offers securities and investment banking services to the energy community. The firm, headquartered in Houston, Texas, was formed through the 2007 combination of Tudor Capital and Pickering Energy Partners, Inc. and today has approximately 70 employees. Pickering Energy Partners was founded in 2004 and has quickly grown to be one of the most highly regarded equity research, sales and trading firms covering the upstream, midstream and oilfield service sectors. This expertise was complemented by the addition of Tudor´s investment banking team, which provides focused advisory and financing services to its clients. Contact Us Houston (Research, Sales and Trading): 713-333-2960 Houston (Investment Banking): 713-333-7100 Denver (Sales): 303-300-1902 Denver (Investment Banking): 303-300-1905 www.TudorPickering.com 34

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