Global Gas Plenary CERA Week Conference Global Gas: Breaking with Convention. Houston, Texas February 11, 2009

Transcription

1 Global Gas Plenary CERA Week Conference Global Gas: Breaking with Convention Houston, Texas February 11, 2009

2 CHK Overview #1 independent producer of U.S. natural gas 4Q 08 natural gas production of bcf/day; ~3.5% of U.S. production #1 driller in U.S. ~119 operated rigs currently, down from 158 in 8/08, on the way down to ~ operated rigs until gas markets rebalance (25-33% CHK operated rig reduction), ~75 non-operated rigs & ~15 info only rigs; collector of ~15% of all daily drilling information generated in the U.S. (~25% in our areas of interest) #1 large-cap production growth Increased production by 18% in 08 to 2.3 bcfe/day and projecting increases of 5-10% in 09 and 10-15% in 10 to ~2.4 and ~2.7 bcfe/day, respectively, while staying within cash resources #1 large-cap proved reserve growth ~12.1 tcfe of proved reserves at 12/08, targeting tcfe by 12/09 and tcfe by 12/10 #1 gas resource play 55 tcfe of risked unproved reserve potential; >10-year inventory of ~35,500 net drilling locations #1 inventory of U.S. onshore leasehold and 3-D seismic 15 mm net acres of U.S. onshore leasehold and ~21 mm acres of 3-D seismic data Data above incorporates: Information as of 9/30/08 - Pro forma for Marcellus Shale JV with StatoilHydro in 4Q 08 Press release dated 1/27/09 CHK s Outlook as of 12/7/08 Risk disclosure regarding unproved reserve estimates available at 2

3 CHK s Competitive Advantages CHK has many unique competitive advantages in this tough economic environment High quality U.S. asset base; only producer with #1 or #2 position in Big 4 U.S. shale plays #1 in Haynesville Shale; 480,000 net acres #1 in Marcellus Shale; 1.2 mm net acres #2 in Barnett Shale (Core and Tier 1 area); 315,000 net acres #2 in Fayetteville Shale; 415,000 net acres No other producer is #1 or #2 in more than one of the Big 4 shale plays Advantageous joint venture arrangements $8.6 billion of value captured vs. cost basis of $1.2 billion $26 billion of remaining implied value $4 billion of carry receivables not on books ~2.5 tcfe of future no cost reserves from carries are not in reserve report 2009 & 2010 finding cost advantage Able to add tcfe per year at ~$1.20/mcfe in 2009 and ~$1.50/mcfe in 2010 Maintenance cap-ex only 15% in 2009 and 25% in 2010 Strong hedging track record ~$2.0 billion in realized gains ~$1.7 billion in open MTM value at 1/23/09 3

4 Key Recent Developments in Natural Gas Markets from CHK s Perspective

5 Conversation Overview The Big 4 Gas Shales in the U.S. A game changer for the U.S. and the world (pg 6) The industry s cost curve is continuing to tilt to the advantage of shale haves vs. shale have-nots (pg 11) Collapsing drilling rig counts ensure that U.S. natural gas markets will be balanced by YE 2009 and gas prices should increase in 2010 (pg 13) Obama administration s policies will be very beneficial to natural gas If natural gas producers are willing to educate about the merits of our product (pg14) Just as oil was the preferred fuel of the 20 th century, natural gas can and should be the preferred fuel of at least the first half of the 21 st century (pg15) 5

6 The Big 4 U.S. Gas Shales A Big Time Game Changer From the development of the Barnett (Mitchell/DVN) beginning in earnest in through the discovery of the Fayetteville (SWN/CHK) in 2005, the Marcellus in 2006 (CHK/RRC) and Haynesville in 2007 (CHK), the North American (and perhaps the world s) natural gas markets have been fundamentally changed, perhaps for a very long time Size matters - CHK believes the Barnett will ultimately yproduce ~75 Tcf, the Fayetteville ~75 Tcf, the Haynesville 500+ Tcf and the Marcellus 500+ Tcf. These are enormous additions to the U.S. natural gas market. The Haynesville and Marcellus Shales will likely become two of the Top-10, or even Top-5, natural gas fields in the world These Big 4 shale plays are tightly held by no more than 10 companies, primarily U.S. public independents. As a result, these firms will have huge finding and producing cost advantages over rest of industry in the future 10 shale haves and 10,000 shale have-nots exist; enormous implications for the industry as the gap widens between those with great shale assets and those without; drilling and completion expertise and environmental sensitivity will be critical 6

7 Haynesville Shale Summary ~110 miles CHK Horizontal Producing Wells Industry Horizontal Producing Wells Haynesville Penetrations CHK Acreage ~95 miles Prospective Area = 3.5 Million Acres Horizontal Rigs Chesapeake Horizontal Rigs Industry CHK discovered this play in 2007, potentially largest field in the U.S. (Marcellus Shale may possibly become #1 post 2020) 80/20 JV with PXP in 7/08; received $1.65 billion in cash and $1.65 billion in carry in a $3.3 billion deal Play encompasses a ~3.5 million acre area in NW Louisiana and E. TX CHK is the largest leasehold owner in the core area of the play, ~460,000 net acres (after sale to PXP) 2009 planned activity ~$700 mm budget (CHK only pays 50% for an 80% WI) Average of ~23 operated rigs ~500 bcfe of reserve additions ~$0.70/mcfe net finding cost to CHK Eight recent wells have tested an average 16 mmcf/ day, two of which tested >22 mmcf/day Note: Risk disclosure regarding unproved reserve estimates available at CHK found the Haynesville through its proprietary shale evaluation capabilities in its unique Reservoir Technology Center 7

8 Marcellus Shale Summary ~360 miles CHK acquired leading position in this play in 2005 through $2.2 billion acquisition of CNR ~300 miles 67.5/ JV with StatoilHydro in 11/08; received Prospective Area = 31 Million Acres CHK Acreage CHK Rigs $1.25 billion in cash and $2.125 billion in carry in a $3.375 billion deal CHK is the largest leasehold owner in the Marcellus Shale play with ~1.2 million net acres of leasehold (after sale to STO) 2009 planned activity $320 mm budget, only $80 mm paid for by CHK Average of ~14 operated rigs (adding 1 rig per month in 2009) ~260 bcfe reserve additions ~$0.30/mcfe net finding cost to CHK How good was the CNR deal in retrospect? $2.2 billion purchase price from which CHK has recovered three years of cash flow, cash of $2.4 billion from a VPP and StatoilHydro JV, a $2.1 billion drilling carry and still have 1.2 mm net acres of Marcellus, 2.3 mm net acres of other acreage and 1.5 tcfe of remaining proved reserves (after VPP); in total, at least $10 billion value for $2.2 2 billion cost 8 Note: Risk disclosure regarding unproved reserve estimates available at

9 Fayetteville Shale Summary miles ~40 ~115 miles Fayetteville Penetrations CHK Acreage CHK Producing Wells Industry Producing Wells Prospective Area = ~1.7 Million Acres Chesapeake Rigs Industry Rigs 75/25 JV with BP in 8/08; $800 mm in cash received, $1.1 billion in carry in a $1.9 billion deal CHK is the second-largest producer in the Fayetteville Shale and second-largest leasehold owner in the Core area of the play with ~415,000 net acres (after 135,000 net acres to BP) 2009 planned activity $550 mm budget, only $50 mm paid for by CHK Average of ~20 operated rigs ~325 bcfe of reserve additions ~$0.15/mcfe net finding cost to CHK CHK s Fayetteville assets are approximately half the size of SWN s Fayetteville assets Valued at zero in CHK, but worth ~$4-5 billion based on an implied value of Fayetteville assets within SWN 9 Note: Risk disclosure regarding unproved reserve estimates available at

10 Barnett Shale Summary 67 Miles Core & Tier 1 Outline 82 Miles Prospective Area = ~1.5 Million Acres CHK Acreage CHK Rigs CHK is the second-largest producer, most active driller and largest leasehold owner in the Core and Tier 1 sweet spot of Tarrant, Johnson and western Dallas counties Industry leading urban-drilling expertise has become a significant competitive advantage 2009 planned activity it $1.0 billion budget Average of ~25 operated rigs ~800 bcfe of reserve additions ~$1.40/mcfe net finding cost to CHK Remember all the excitement about the western and southern counties? That has all faded away and what remains as the two best counties are Johnson and Tarrant In shale plays, as in all others, it s the core acreage that is the best and CHK always focuses on acquiring core acreage rather than fringe acreage 10 Note: Risk disclosure regarding unproved reserve estimates available at

11 The Industry s Cost Curve is Shifting Rapidly Very Important to Understand Up until 5 years ago, most every company in the U.S. owned an asset base that was more or less the same as everyone else s not true anymore and significant implications! Shale haves will have virtually riskless F&D costs <$2.00/mcfe for decades to come (and decreasing over time as efficiencies increase and shale gas reservoir knowledge improves) while shale have-nots will have F&D costs >$2.50/mcfe and increasing over time as most drilling will be increased-density, rate-acceleration wells in existing fields rather than new discoveries Pre-shale F&D Cost Curve Continuum Post-shale F&D Cost Curve Continuum In the Future $3.00 $3.00 $4.00 F&D/mcfe $2.00 $1.00 F&D/mcfe $2.00 $1.00 F&D/mcfe $3.00 $2.00 $ % 50% 75% 100% 25% 50% 75% 100% 25% 50% 75% 100% Industry Quartile Industry Quartile Industry Quartile 11 Those that missed the Big 4 shale land grab of will pay the price for years, if not decades, to come

12 CHK is Efficiently Allocating Capital to Low-cost, Top-Tier Assets (1) Pre drilling-carry ta argeted F&D co osts ($/mcfe) $3.00 $2.75 $2.50 $ $2.00 $1.75 $1.50 $1.25 $1.00 $0.75 Anadarko Basin Other Permian 1% (2) 2% (2) NW OK Sahara 2% (2) Delaware Barnett Shales Shale 3% (2) 29% (2) Fayetteville Shale Haynesville Shale 19% (2) CHK has built the nation s largest resource base through a #1 or #2 position in the Big 4 premier shale plays They account for >60% of the company s proved and risked unproved reserve base Science and technology have transformed these premier shale plays into predictable, low-cost, high rate of return assets Only 10 or so companies have captured meaningful positions in the plays The remainder of the E&P industry is challenged to generate acceptable returns in 14% (2) higher cost, less-efficient plays Industry supply is determined by the marginal cost of the high-cost, not low-cost, plays ~70% of CHK s 2009E gross drilling capex will be directed to the Big 4 premier shale 9% (2) plays (~60% net of drilling carries) Marcellus Shale ~$1.50/mcfe drilling F&D cost before drilling carries (~$1.20/mcfe with carries) 12 (1) Size of bubble corresponds to relative size of CHK proved and risked unproved reserves in each play (2) Percent of 2009E gross drilling capital expenditures (before ~$1.1 billion of drilling carries)

13 Market Forces = Problem Solved for U.S. Natural Gas Markets Against unrelenting pessimism about U.S. natural gas prices in early 2009, there is emerging evidence that market forces are creating the conditions for a strong natural gas price recovery in 2010 and 2011 What is that evidence? It s plunging rig counts (40-50/week lately) and accelerating decline curves (the dark side of technology) What do we know today? First year U.S. decline rate is 25-30%, i.e bcf/day 2008 U.S. gas production YOY increase of 7-8%, or 4-5 bcf/day 2008 natural gas rig count averaged 1,500 rigs this overcame first year depletion of 25%-30% and generated growth of 7-8%, for a combined 32-38% growth rate If natural gas rig count went to zero, then all would agree this 32-38% number would also become zero So, if natural gas rig count goes down by 50% in 2009, CHK believes industry will lose ~40% of this 32-38% production capacity increase, through which 7-8% growth disappears and 7-8% production declines appear by YE So, YOY growth of 4-5 bcf/day in 2008 will give way to a decrease of 4-5 bcf/day a year later, setting up a big price rebound in 2010 and 2011 if U.S. economy does not materially weaken from here 13

14 Politics and Natural Gas It is quite likely that E&P industry leaders have consistently supported Republican candidates for the past 30 years. However, recent history has shown that Democratic administrations often bode well for natural gas (Clinton, and likely Obama) while Republican administrations (Bush) historically don t differentiate among fuel types Why? Democrats tend to promote policies and regulations that constrain natural gas supply, yet promote its use Republicans have been unwilling to factor in environmental costs At this point, it seems likely (to CHK anyway) we ll see at least 8 years of Democratic rule in D.C. therefore natural gas wells will become tougher to drill in many parts of the U.S. (esp. Rockies), but it will become much tougher to mine and burn coal Many strong environmental support groups of this administration are not satisfied with defeating new coal plants, they want to roll back old coal plants and now they can with plenty of natural gas as the replacement fuel Potential natural gas Black Swans : Is Chairman Waxman the potential unknowing savior of U.S. natural gas markets? A more rapid transportation network transition to natural gas through CNG and electric cars and trucks 14

15 Summary Shale gas has, and is, creating new set of industry winners and losers before our eyes in real time; lower natural gas prices will accelerate this widening ggap between shale haves and shale have-nots U.S. natural gas market is correcting itself rapidly as we speak through lower rig counts and low natural gas prices Current political leaders have great incentive to support more natural gas usage as a bridge to their carbon-less energy utopia Increased market share for natural gas vs. coal for electricity consumption and vs. oil for transportation will provide the demand growth needed to absorb the new 1,100 tcf of new U.S. gas shale reserves found in past 5 years in the Big 4 shale plays, while reducing GHG s substantially Natural gas can lead an industrial renaissance in U.S. as we should have the lowest natural gas prices in the industrialized or emerging worlds for decades to come this is a huge competitive advantage for the U.S. Stable, predictable demand will lead to reduced price volatility and therefore reduced demand, the key is less seasonable demand which the transportation sector (either CNG or PHEV s) can provide Likewise, abundant U.S. natural gas can allow the U.S. to lead the world on clean air and climate change issues for decades to come first, though, we must overcome the myth of natural gas scarcity 15