Houston -- 22Feb2008 Natural gas-heavy independent Chesapeake Energy believes the next two
years could be the "golden years of value creation" for it and other
"well-positioned" exploration and production companies, as the range of gas
prices rises 25%-33% to $8-$10/Mcf, the company's CEO said Friday.
The higher range stems from a confluence of market factors that
increasingly favor greater gas use, including "stubbornly high oil prices,
[increasing] coal prices, emerging environmental trends and winter weather
that is near the 30-year average and above the 10-year average," Chesapeake's
Aubrey McClendon told analysts during an earnings conference call.
"I think we're seeing a trend develop in which we'll see $8-$10 gas
instead of $6-$8 gas, especially if the weather is hot this year and
particularly in key southern markets," McClendon said. The current La Nina
weather trend "is bordering on the strongest La Nina ever recorded."
Moreover, world trends also show a need for more gas usage, McClendon
said, noting there has been a delay in building or startup of LNG export
plants and a doubling or tripling of the cost of building them. And, world
demand for gas has been rising 3%-4%/year. In addition, the world's supply of
coal, still widely used outside the US, will not always be inexpensive nor
plentiful, said the CEO.
"The notion that the world has a limitless supply of coal and that coal
will always be cheap is very challenged," he said. "What's happened in oil,
metals and agricultural commodities is, we're now seeing happen in coal and
natural gas as well. The world is short a lot of commodities these days."
Companies "well-positioned" in the natural gas market such as Chesapeake,
with large production bases and the acreage necessary to supply ample future
growth, could create several billions of dollars in added value, said
McClendon. This is not only from production but from new reserve growth and
also hedging," he said, noting Chesapeake made $2.5 billion in 2006 and 2007
from hedging activities.
Since gas demand has the potential to increase faster than the rig count
is increasing, this "should provide Chesapeake the opportunity [for]
multi-year gas hedging at or above $10/Mcf," he added.
Meanwhile, Chesapeake Chief Financial Officer Marc Rowland said the
company hopes to close on the monetization of its midstream business by the
end of April. Several major companies are in due diligence "as we speak," on
the chance to invest up to $1 billion in capital in the assets, he said,
adding the structure of the monetization will be a private limited partnership
structure.
"We think we'll see valuations between $3.5 and $4 billion or even a
little greater," Rowland said.
The assets' annualized earnings are about $165 million, and Rowland said
this should grow 'even faster' in 2008 and 2009 as the company becomes more
deeply involved in the north Texas Barnett Shale, the northeast Arkansas
Fayetteville Shale and other big gas projects.
years could be the "golden years of value creation" for it and other
"well-positioned" exploration and production companies, as the range of gas
prices rises 25%-33% to $8-$10/Mcf, the company's CEO said Friday.
The higher range stems from a confluence of market factors that
increasingly favor greater gas use, including "stubbornly high oil prices,
[increasing] coal prices, emerging environmental trends and winter weather
that is near the 30-year average and above the 10-year average," Chesapeake's
Aubrey McClendon told analysts during an earnings conference call.
"I think we're seeing a trend develop in which we'll see $8-$10 gas
instead of $6-$8 gas, especially if the weather is hot this year and
particularly in key southern markets," McClendon said. The current La Nina
weather trend "is bordering on the strongest La Nina ever recorded."
Moreover, world trends also show a need for more gas usage, McClendon
said, noting there has been a delay in building or startup of LNG export
plants and a doubling or tripling of the cost of building them. And, world
demand for gas has been rising 3%-4%/year. In addition, the world's supply of
coal, still widely used outside the US, will not always be inexpensive nor
plentiful, said the CEO.
"The notion that the world has a limitless supply of coal and that coal
will always be cheap is very challenged," he said. "What's happened in oil,
metals and agricultural commodities is, we're now seeing happen in coal and
natural gas as well. The world is short a lot of commodities these days."
Companies "well-positioned" in the natural gas market such as Chesapeake,
with large production bases and the acreage necessary to supply ample future
growth, could create several billions of dollars in added value, said
McClendon. This is not only from production but from new reserve growth and
also hedging," he said, noting Chesapeake made $2.5 billion in 2006 and 2007
from hedging activities.
Since gas demand has the potential to increase faster than the rig count
is increasing, this "should provide Chesapeake the opportunity [for]
multi-year gas hedging at or above $10/Mcf," he added.
Meanwhile, Chesapeake Chief Financial Officer Marc Rowland said the
company hopes to close on the monetization of its midstream business by the
end of April. Several major companies are in due diligence "as we speak," on
the chance to invest up to $1 billion in capital in the assets, he said,
adding the structure of the monetization will be a private limited partnership
structure.
"We think we'll see valuations between $3.5 and $4 billion or even a
little greater," Rowland said.
The assets' annualized earnings are about $165 million, and Rowland said
this should grow 'even faster' in 2008 and 2009 as the company becomes more
deeply involved in the north Texas Barnett Shale, the northeast Arkansas
Fayetteville Shale and other big gas projects.
