I recently listened to the flamboyant co-founder and CEO of Chesapeake Energy, Aubrey McClendon, say to a group of investors that when it comes to shale plays, that the only thing that is proprietary is the land. He went on to explain how valuable the 625,000 net acres of Eagle Ford leaseholds that Chesapeake owns is. He compared it to owning the physical oil in place in the ground. That got me to thinking, that it surely follows that all of us who own land not yet leased in the Eagle Ford are in the identical position as McClendon and his leasehold. In it's simplest terms, we own acreage that sits on top of a huge reservoir of billions of barrels of proved crude oil. The word "proved" has great significance as it relates to oil in place under the land. By being proved acreage, big oil companies are allowed to tell their investors what their estimated ultimate recovery will be. Big oil almost always understates the actual EUR so as to avoid any potential future stockholder lawsuits. All the operators have booked the crude oil underlying their Eagle Ford leaseholds as being recoverable crude oil assets in place.
McClendon spent a lot of money putting together his 625,000 acres of leasehold and some financial gurus were questioning that large expense. In answering that question, McClendon went into great detail explaining to investors how they should look at the Eagle Ford oil under the ground in Chesapeake leaseholds. He compared it to owning a financial option on oil, a "call", that sells for $20/bbl at strip prices covering the years 2015-2018. He then goes on to ask his investors if it is smarter to buy a call option on a barrel of oil at $20 bbl where the strike price = $90/ bbl for an all-in cost of $110/bbl or is it smarter to do as he has done and pay .40 cents/bbl and $15.00/bbl "strike" price for an all-in cost of $15.40 bbl? Now let me explain what McClendon is asking here. McClendon poses the question, that by him knowing that there is at a minimum of 5,000 barrels of crude oil under each acre of leasehold land he has bought, for an average price of $0.40 per barrel, if that is not more lucrative than than buying a call option? McClendon states that the average cost to produce a barrel of oil in the Eagle Ford is $15.00 per barrel, and when added to the $0.40 per barrel cost for the land, comes to a grand total cost to him of $15.40 per barrel of crude oil. If you tried to do that in the futures market by buying a call option for future delivery of crude oil it would cost you on the order of $110.00 per barrel. This is simple arithmetic, therefore would you choose McClendon's cost factor of $15.40 per barrel of oil or buy a piece of paper for future delivery at $110.00 per barrel? As you can readily see, that's a whopping $95 per barrel better deal by buying the Eagle Ford leases. McClendon goes on to ask and answer his own question, "Where else can you earn a return like that? Nowhere!" Aubrey McClendon makes my point so eloquently and simplifies the way to look at leases in the Eagle Ford in such a way that I am struck dumb at trying to do better.
The Eagle Ford is no longer the least bit speculative, there are absolutely no dry holes, there is no finding cost, it is proved reserves. Each Eagle Ford oil window acre overlays a minimum of at least 5,000 barrels of crude oil per acre, in the "Goldilocks" zone perhaps even greater than 15,000 barrels of oil with operator stated EURs going up almost monthly. On my small 70 acres, that means there is at least 350,000 bbl of oil and probably more on the order of like 1.05 million barrels of oil. Another way to look at it is what that oil would be worth out of the ground today. At today's price of $82 per barrel, where NYMEX crude oil is trading on November 19, 2010, there is between $28.7 million and $86 million worth of recoverable oil from my 70 acres. The only way to determine what is fair and equitable for landowners and operators alike is through honest negotiations. To date, not a single operator has come to me with a fair offer and I steadfastly refuse to sign a lease that is patently unfair. The take-it-or-leave-it operator attidude is akin to a bully.
As McClendon fairly states, there is a average cost right now to operators of $15 per barrel to develop and produce a Eagle Ford well. That means that after subtracting the cost to drill, frac, transport and market the crude oil contained in the reservoir below my land, there is a profit of $76 per net flowing barrel of crude oil. The question is how much of that profit should go to the operator and how much should go to me the landowner. There is absolutely nothing, nada, zip, that is proprietary about drilling, fracing and producing a well from the unconventional rock in the Eagle Ford. As a matter of fact, the only thing proprietary about anything in the Eagle Ford is who owns the land. Well, I own 70 acres of Eagle Ford land and I demand fair treatment and the recognition that I own a valuable asset. I am not being unreasonable today, nor have I ever made any unreasonable demands from operators. Today, a $30,000 per acre lease bonus with a 30% royalty would be modest when compared to the great treasure that lay under the land. That's not an offer. When you know for a fact that the land holds at least $28.7 million worth of crude and perhaps $85 million worth of crude, it would make for a good starting point.
So, if an operator doesn't own the land, he looks to how he can either obtain the land, or failing that, how he can exercise control over the land through the regulators at the Texas Railroad Commission so as to prevent others from developing the land. With their clever army of lawyers, operators often get the RRC to enact field rules whereby landowners can't develop their own land or they make it uneconomic to do so. There are storm clouds on the horizon that operators are going to be asking the Texas Legislature to take away landowner rights in the next legislative session by changing the law to require forced unitization and pooling. This naked aggression by operators on landowner rights will be promoted under the false flag of orderly development. I have heard, but not seen, a lot of talk about the government coming for our guns, but I have never seen any evidence of that. Unlike the threat to take away our guns, the threat that the Texas Legislature will take away our landowner rights is very real and the battle will most probably be waged during the next legislative session. Hopefully, we will be able to convince our legislators that property rights are sacred. Now is the time to contact your state representative and state senator to let them know you are against big oil taking landowner rights.
Friday, November 19, 2010
Friday, November 12, 2010
70.15 Acres In Eagle Ford Overpressure Volatile Oil Window
Minerals No Longer Available
Accepting Offers For Surface Use Only
HIGH GRADE PREMIER EAGLE FORD TRACT
Eagle Ford Volatile Oil Window PUD Status Acreage
DeWitt County In The Heart Of The Best Acreage
contact owner Mike Green at 361-648-5800 email libertadormg@gmail.com
OWNER MIKE GREEN 361 648 5800
There is extensive drilling being done in the immediate area and the 70.15 acres tract available is located right in the sweet spot middle of several drilling units in the area.
High Grade Area
The Meyer Unit is across the road on US 183 and Burrow B Unit next door from the subject property, indicating PUD status. This property is sandwiched between leased property nearby.
Wednesday, November 3, 2010
The Eagle Ford Overpressure "Goldilocks" Oil Window: $30,000 IS TOO CHEAP!
Through the process of observation and analysis, it has now become abundantly clear, and it's safe to say, that a "Goldilocks" zone runs through the Eagle Ford oil window. The Eagle Ford itself is a complicated play with a gradual transition from crude oil to NGL to dry gas, in shale of varying thickness. However, there exists a narrow overpressure oil window that is quite simply a marvelous golden zone, and it is coveted by operators due to it's extreme economics. Those owning the minerals to this strip of land are sitting on a untapped Elephant Field bonanza that is a veritable black gold mine.
Operators have been disclosing, actually downright bragging, about just how valuable that this “Goldilocks” acreage is while presenting at their numerous dog and pony shows at recent investor energy conferences across the country these past few months. These operators have provided their investors with virtually full operational transparency in their hopes of driving up their stock price. By way of these energy conference presentations, streamed over the internet, those of us with the curiosity to learn, have been able to drill into a gusher of technical data giving us the equivalent of a 3D seismic view of what they know, how they operate, and how they have cheated some landowners who signed leases early. By providing their investors this information we have learned there exists what they themselves describe as a "sweet spot" that runs through the play. This "sweet spot" contains the most valuable acreage imaginable. This “Goldilocks” zone is rich in high quality light sweet crude oil that is under pressure and it lays where the shale is at it thickest. Operators are hinting that there may be well in excess of 750,000 recoverable barrels of this high quality crude oil per well. Let's merely use their figure of 750,000 boe and multiply that by today's NYMEX price of $84.40 and you get a whopping $63,300,000 net pay from a “Goldilocks” well. When you are talking about acreage that will produce earnings near $800,000+ per acre you quickly come to the realization this particular acreage is extremely valuable. It's not just leasehold acreage getting much more expensive either, everything is far more expensive for operators today. By their own admission frac jobs have gone from $600,000 per well in the summer of 2009 to a blistering $3.5 million today. Lease bonuses and royalty will follow suit. You like apples? How do you like them apples?
With NYMEX crude oil on the rise, I am going to go out on a limb and predict that historic new highs in both lease bonuses and royalty percentage will be established prior to the Eagle Ford being fully developed. I am willing to go even farther out on a limb and predict the strong likelihood of lease bonuses of $100,000 per acre and royalty of at least 30% at some point in select areas of the sweet spot. Right now, the terms you negotiate for your oil and gas lease are far more important than the actual timing of doing a deal. Time is definitely on your side. We are merely in start up mode at the present time.
The process whereby you can fairly value what lease acreage is worth is rather straight forward. The value is directly related to how much and what kind of hydrocarbons are under your land. Both of these questions can be answered within relative broad parameters by simply plugging in operator provided EUR's and the API grade of crude oil. Goldilocks generally runs in a line from Karnes County, following the general direction of Cheapside and then to the Shiner area where the oil window veers somewhat to the north east. You simply have to get it in your head and think of you land as being a container of crude oil and you own this valuable commodity. You own it, it belongs to you and if somebody wants it from you they have to pay you for it. Good business people don't have to cheat, lie, and steal to make a profit. You own many birds in the hand and the tired cliché of a bird in the hand being worth two in the bush is nonsense. Don't become a landman victim, demand a fair price for the minerals "YOU OWN."
For what it is worth, I come to this discussion with a background in finance, having been a stockbroker for a national securities firm. My resume includes successfully passing the Series 7 exam, the most comprehensive financial securities exam offered by the FINRA. My bold predictions about future huge lease bonuses and royalty are grounded in my financial background. I am as serious as a heart attack.
IS A HONEYCOMB FRAC DESIGN BEING EMPLOYED IN UPPPER & LOWER EFS FRAC'S? I don't know for certain, but the suggestion certainly is there, that at least one operator is using a frac design similar to a honeycomb to efficiently drill, frac and produce the thicker part of the "Goldilocks" zone. This design might ultimately result by order of magnitudes in greater recovery of the light sweet crude from the reservoir. I believe chief geologist for EOG Loren Leiker calls this Matrix Flow. 11/5/10 Perhaps this is what EOG Resources CEO Mark Papa was alluding to when he said "This is the nature of the development of these horizontal assets for maximum reserve recovery, whereby we drill and complete a group of five to 15 wells together before bringing any of them to sales."
http://seekingalpha.com/article/219219-eog-resources-q2-2010-earnings-call-transcript
LANDOWNERS, BE LIKE OLIVER TWIST, DON'T BE AFRAID TO ASK FOR MORE!
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