Chesapeake Energy Corporation Conference Call to Discuss Haynesville Shale Joint Venture - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day everyone, and welcome to the Chesapeake Energy and Plains Exploration joint conference call. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Aubrey McClendon. Please go ahead sir.

AUBREY MCCLENDON, CHAIRMAN AND CEO, CHESAPEAKE ENERGY CORPORATION: Good morning, thanks for joining me, Jim Flores, and our respective teams to discuss the exciting news of the formation of our Haynesville joint venture today. I'll speak for about ten minutes, and then turn the call over to Jim for his remarks, and then we'll be available for your questions. I might add that this is Chesapeake's first ever joint conference call, and I assure you it is completely unrehearsed. We will do the best we can, but this might become amateur hour.

I know it's a cliche to use the phrase win-win, but that is clearly what the deal represents for both companies. For Jim and PXP it represents their entry into what is quickly developing into what is likely to become America's largest natural gas field, and perhaps even more remarkably, the fourth-largest gas field in the world. This deal also accelerates PXP's growth, wisely invests their excess cash flow and helps them achieve a better portfolio balance between oil and natural gas.

For Chesapeake, it rewards our shareholders by confirming and showcasing how rapidly we're creating value from our new shale plays. In the past year we have invested or committed about $2.5 billion in the Haynesville, and today we're proving that our Haynesville assets are worth at least $16.5 billion. That is $30 per share of value creation in less than a year, and that's just from one of our many plays.

I want to emphasize the "at least" part of that last sentence. Although the play is just under way, the data to date from Chesapeake and other operators strongly suggests the Haynesville holds estimated ultimate recoverable gas reserves of 250 TCF from over 700 TCF of gas in play. By comparison, the Barnett Shale in North Texas will ultimately produce about 50 TCF, or in quotation marks, only 20% of what we see in Haynesville.

In our opinion, it will be the Haynesville more than any other field that will enable our country to realize that we have been blessed with enormous endowment of previously undiscovered natural gas resources. And I believe we must use this natural gas abundance to finally begin freeing the US from our dangerous and debilitating dependence on imported oil by converting some of our transportation fleet to compressed natural gas and plug-in hybrids.

So why are we so confident of the enormous potential of Haynesville? First, we know the formation is present over a large area. In fact, about 3.5 million acres will likely end up being defined as the Core Area. This prediction comes from our two-year geological and petrophysical study of the area, during which time we analyzed over 70 penetrations of the Haynesville and evaluated important core samples in our one-of-a-kind proprietary reservoir technology center on Chesapeake's Oklahoma City campus. All of this research confirmed the existence of very good-looking, homogenous, thick and over-pressured shale reservoir rock in the Core Area.

So far our theories are working. Chesapeake has drilled 8 horizontal wells to date, with initial flow rates of 5 to 15 million cubic feet of gas equivalent per day on very restricted chokes, with very high casing pressures of up to 6500 PSI. Contrast this with initial production rates of 3 to 6 million per day from the very best Barnett wells that are almost always tested on wide open chokes.

It's clear that Haynesville wells will be in a class of their own. If 5 million per day Barnett wells have been called monsters, I'm not sure what to call these Haynesville wells. But since they appear to be three times better, maybe we will call them triple X monsters. If you have a better name in mind, please send it in. We will be all ears.

And please remember our Haynesville wells are likely to get better over time, as they always do in shale plays. For example, our eighth well brought on just two days ago appears to be our best well to date. But I would bet it will not hold that distinction very long. We are currently estimating that Haynesville wells will recover between 4.5 and 8.5 Bcfe. We're comfortable for now, anyway, using 6.5 Bcfe as our estimated ultimate reserve, or EUR, midpoint estimate.

We're drilling and completing Haynesville wells for approximately $6.5 million each, and expect that cost to decline by 10% or so, as the play moves to full development mode. Assuming 25% is an average royalty rate in play, you can see the drilling and completion costs may average only $1.33 per Mcfe before leasehold costs.

Now I would like to return to what this transaction does for Chesapeake's shareholders. First of all, it confirms and showcases how we have created roughly $30 per share value in the past year from just this one play, only a small portion of which we believe has been reflected in our current stock market valuation. Secondly, this deal returns to us 120% of our costs incurred to date, and we will still retain an 80% ownership of the commanding acreage position we have built.

Further, the capital received from the PXP transaction illustrates an alternative and attractive future capital funding source for the Company, and helps us continue acquiring leaseholds in this and other emerging plays. In addition, I believe today marks the beginning of a new and exciting chapter in Chesapeake's strategy for creating value. In this new chapter, once we have discovered or helped discover a big new play, established its commerciality and secured a large leasehold position, we may then sell a minority interest to recover our cost, mitigate our risk and confirm and showcase value creation from a new play.

In addition to the Haynesville value creation we're discussing today, I would like to inform you and the industry that we're also pursuing strategic partnerships on our Fayetteville and Marcellus leasehold positions. To remind you, we own more than 550,000 net acres in Fayetteville and are producing over 150 million cubic feet of gas per day which we believe makes our Fayetteville assets worth up to $15 billion. If we were to sell say 25% of our position in that play on that valuation, I believe we will have proven that the Fayetteville is worth almost $25 per share to our shareholders.

Furthermore, we own approximately 1.2 million net acres of Marcellus leasehold in Appalachia. And in new disclosure today, I am informing you that our two most recent horizontal Marcellus wells during the past month have produced more than a combined 9 million cubic feet of gas per day. We're not quite ready to release our EUR projections for the entire play, but four plus Bcfe for the two wells in question surely seems reasonable based on what we've seen to date.

This means that if our Geoscientific and petrophysical models work as well in Marcellus as they have in Barnett, Fayetteville and Haynesville, later this year we will likely be able to prove that our Marcellus assets are also worth up to $15 billion or almost another $30 per share of value.

I might add there will be one notable exception to this model of bringing in partners on our biggest unconventional plays, and that will be in Barnett. The nature of our assets there, deeply embedded in the urban Fort Worth area, would be difficult to bring a partner into at this stage of the program. However, I would like to remind you we still have 220,000 net acres of undrilled leasehold there, on which we plan to drill at least another 3500 wells in the next five to ten years, to develop a net 6 to 7 TCF of new reserve to Chesapeake.

As a result we believe this undrilled Barnett leasehold is also worth at least $11 billion, or approximately another $20 per share. Our new leasehold capture rate continues to run at about 50,000 net acres per year in the core area of the Barnett. So in just our four big shale plays, the Haynesville, the Fayetteville, the Barnett and Marcellus, that today account for less than 25% of our production proved reserves and undeveloped leaseholds, we identified for you about $55 billion of value, or roughly $100 per share.

But there is still more after that $100 of value. After subtracting those four plays to Chesapeake would still be a company with 1.8 Bcfe per day of production and would own more than 10 million net acres of undeveloped leaseholds in other plays. Using a large cap peer group average valuation, the rest of the Company will be worth approximately $35 billion. Adding in $5 billion in value for our midstream and service businesses and subtracting $13 billion of liabilities results in equity value for Chesapeake of $82 billion, or roughly $150 per share of net asset value.

We believe we're just in the beginning stages of the market fully recognizing Chesapeake's tremendous net asset value and our transaction today with PXP is an important first step in highlighting that value. We understand for that value to be fully recognized we must capture the full potential from our huge land positions. To do so, we've concentrated on building the human capital and corporate infrastructure to develop these large plays quickly and efficiently. We identified all the critical aspects needed for success in these massive drilling campaigns and have assembled the people, equipment and technical skills to get it done.

We believe our ability to tackle large drilling programs is unmatched and that is a key reason why PXP is partnering with us. Through the combination of our leading land positions, deep understanding of unconventional reservoirs, and ability to drill large numbers of successful wells efficiently, we have developed durable competitive advantages that should help us deliver superior returns and growth rates for years to come.

Before I turn the call over to Jim I would like to return to Haynesville for two final thoughts. First, we chose PXP as our partner because I know Jim, I trust him, and I admire the company he has built. We also believe that PXP's deep Louisiana roots will be very helpful to us as we further develop the Haynesville in the decades to come. Jim and I are both land men, so we especially understand the value in today's world of having a huge land machine that can devour big chunks of land across these massive new unconventional plays. In these plays, if you snooze, you lose. And with over 4000 land men in the field every day buying new leases, I can assure you that Chesapeake is not snoozing.

Second, please keep in mind that the Haynesville will in some ways develop similarly to how the Barnett has developed, but in other ways it will be very different. On the different side I would say that everything will happen much more quickly and much more easily in the Haynesville. On the similar side, I would say there will be a highly productive core area, but say the Haynesville equivalent to Johnson and Tarrant counties in the Barnett, and there will be a much less productive noncore area. Just like in the Barnett, some companies and investors will undoubtedly confuse the two.

However, you may recall four years ago Chesapeake entered the Barnett with a desire to own acreage only in the very best area. And we are determined before our entry that the best area would be in Johnson and Tarrant counties. You may recall at the time other companies were saying the Western and southern counties, counties with names you may recall such as Palo Pinto, Erath, Somerville and so forth, would be just as good as Tarrant and Johnson.

We said otherwise, invested our capital accordingly, and I believe time has proven Chesapeake's laserlike focus on understanding where the best rock is located and buying all the leases that we can over that superior rock has proven to be the best strategy in the Barnett. And I believe it also will be in the Haynesville. Today I firmly believe that PXP is buying 110,000 net acres of prime, center cut Haynesville leaseholds at a price that is fair to both companies and provides very attractive returns for each of our shareholders.

I am very proud to welcome PXP as our partner in the Haynesville, and without further to do, I will now turn the call over to Mr. Jim Flores.

JIM FLORES, CHAIRMAN, PRESIDENT AND CEO, PLAINS EXPLORATION: Thanks Aubrey and good morning everyone. It's great to be here in Oklahoma City with you and your team this morning. I have with me today Winston Talbert, our CFO, and Marc Hensel, our VP of Acquisitions and Divestitures and Hance Myers, our VP of Investor Relations. I also have a few remarks about PXP's thoughts about the Haynesville JV, and I would like to share them with everyone then I will turn it back over to you, Aubrey, for questions.

Today PXP is in an enviable position. The significant high margin oil and gas production combined with record high prices, creating a very strong cash flow both currently and in future years. As our stakeholders know, this strong cash flow outlook far exceeds our capital expenditure opportunities for 2008, and is projected to do so in 2009 and 2010 due to the recent $100 barrel floors we're able to purchase on our oil production and our $10 MMBtu protection on our natural …