A Credit Bubble Stocks correspondent writes in,
EGO – the best in class liquids shale producer – just reported their Q2. Of their growing oil production from shale they proudly proclaim: 'In addition, we are uniquely positioned to market a significant portion of this crude oil at robust Brent-type pricing through our own rail offloading facility at St. James, Louisiana, and to reach the Houston Gulf Coast market via the recently completed Enterprise Eagle Ford pipeline.'
Their St. James facility is an rail terminal and storage facility, EOG can ship their Bakken crude there (at some cost) and get close to a Brent price. The Enterprise Eagle Ford pipeline accomplished the same goal much more economically, allowing them to pipe oil directly from the Eagle Ford Shale into the Houston Ship Channel (via Enterprise’ El Rancho pipeline from Sealy). This is great news for EOG, because gulf coast crude competes with seaborn Brent, and trades at the same price. EOG was the anchor tenant in Phase I of this pipeline.
Chesapeake’s Eagle Ford position is basically just to the West of EOG where Phase II of the pipeline is headed (estimated online date is Q1 2013). Phase 1 has a 350,000 bbl per day capacity and, like EOG, CHK will be making use of some of it. The smaller Phase II extension has capacity of only 200k barrels per day. Those producers using this capacity when it comes online will be selling their crude into a direct pipeline to Brent pricing. Those who don’t will be trucking their crude 325 miles on roads that weren’t built to handle the traffic.
Tanker trucks can carry about 170 barrels of crude, and must be driven back empty, for a roundtrip of 650 miles at a cost of $12 per bbl, as compared to an assumed cost of $2-3 per bbl to ship it via pipeline. This is a huge $10 per bbl differential, which will dramatically change the economics of the field for the haves and have-nots. The acreage of the 'haves; will be implicitly worth more, which is important to note, because Chesapeake is the anchor tenant of Phase II and has contracted for half the capacity for the first ten years.
This is one of the pipeline commitments that shows up in their 10K as billions in undiscounted future obligations, which some analysts have called off balance sheet liabilities. If CHK has locked up half the pipeline at a preferential rate, and others will have to competitively bid for the rest of the capacity at higher rates, or truck their oil at much higher prices, is this as asset or a liability? $3 per bbl for ten years would make this agreement a 'liability' of $1.1 billion dollars in CHK’s 10K. However, if other shippers are paying $1.50 extra for the same pipeline (or more) isn’t this actually a large off-balance sheet asset?
[Also]: BHP just announced a $2.84 billion write-down of the Fayetteville shale asset they bought from CHK for $4.75 billion a little over a year ago. While Chesapeake didn’t have their gas production 'hedged' going into this year, they did sell this dry gas asset for at least $2.8 billion more than it is worth today. This was Chesapeake’s worst dry gas asset, and the proceeds were used to fund their purchase of the Utica Shale, on which they reaped a 500% gain selling a portion to Total.