Saturday, August 4, 2012

Are the Chesapeake Energy Pipeline Commitments Really a Liability, or an Asset? ($CHK)

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.


Steve said...

Chesapeake is also the anchor shipper for the Marcellus ethane pipeline:

On Nov. 2, Enterprise and Chesapeake Energy Corp. announced they have entered into a long-term contract whereby Chesapeake would anchor Enterprise’s proposed 1,230-mile (1,980-km.) ethane pipeline from the Marcellus and Utica shale regions in Pennsylvania, West Virginia and Ohio to the U.S. Gulf Coast. Through Mont Belvieu, ethane production from those shales would ultimately have direct or indirect access to every ethylene plant in the U.S. The pipeline could begin commercial operations in the first quarter of 2014.


Shippers who commit to use the pipeline would pay between 14.5 cents and 15.5 cents per gallon.

Steve said...

They are also anchor shipper for the Mississippian oil play:

Meanwhile, SemGroup Corp., Gavilon Group LLC unit Gavilon Midstream Energy LLC, and a unit of Chesapeake Energy Corp. plan to form a joint venture to build a 210-mile pipeline in western and north-central Oklahoma. The line will transport oil to a 1 million bbl storage facility in Cushing.
The pipeline will consist of two laterals, one starting near Alva in Woods County, Okla., and the other near Arnett in Ellis County, Okla. The laterals will intersect near Cleo Springs in Major County, Okla., where the pipeline will increase in diameter and continue east to storage at Cushing.
The pipeline will have an initial capacity of 140,000 b/d, expandable to 180,000 b/d through additional horsepower. SemGroup will design, build, and operate the pipeline; Chesapeake is the project's anchor shipper; and Gavilon will perform risk management and clear the shipped crude in the Cushing market.
The companies plan to begin building the pipeline in July for an in-service date of third-quarter 2013.

Steve said...

I'd also like to know how much Cushing to Gulf Coast oil capacity Chesapeake is contracted for.

Aubrey McClendon 11/04/2001: "We narrowed the differential in 2012 because we believe that, in 2012, there will be a solution to the cushing to Gulf Coast differential or call it Brent, call it LLS, whatever you want to call it. It's already come in from $28 a barrel at its high to $17 or $18 today. We believe there will be a physical solution to that emerge this year, and WE'LL BE PART OF IT, honestly."