IB Net Payout Yields Model

Are Surging Land Prices in Shale Oilfields Sustainable?

Interesting article from the Financial Times about a subject I've wondered about as well. Will the surge in land prices for US shale oilfields last?

Every time you read an article, one wonders why Chesapeake Energy (CHK) can't translate purchases of acres at $1,400 that is sold for $15,000 into huge stock price gains. Also, it amazes me that none of the major energy companies with vast cash hoards aren't able to beat CHK to the punch for cheap acres.

Ultimately the issue with Chesapeake is that it requires a ton of debt to grab all this land and hold onto it until it is able to drill and recover oil or nat gas.

The big surge in nat gas production from these shale plays have already led to a price collapse in the domestic market. The recent expansion into oil plays isn't likely to cause the same collapse in price as oil is an international market. If nat gas was an international market as well, prices wouldn't have collapsed. Asian and European users pay double, triple, and quadruple the price currently.

Still Chesapeake's success level might be it's own undoing. The assets are only valuable if they remain scarce. If these foreign oil companies that are buying up assets from CHK and CRZO are able to learn the process and duplicate in other countries, than CHK might regret these deals.

If oil prices remain high and Iran causes supply interruptions or Iraq never gets back online, CHK will look like a genius. Most investors though would prefer that it sign a few more deals to reduce debt. Also, quit signing up millions of acres in the next great shale play as it only adds supply and highlights a region that the industry might overlook if CHK isn't involved.

Via FT article:

  • In the Utica shale in Ohio, Chesapeake Energy acquired 1.25m acres in the 18 months to July, at an average cost of $1,400 an acre. In early November the company outlined plans for a joint venture on a portion of that land, which valued it at $15,000 an acre.
  • In late September, Indian state gas company GAIL entered a joint venture with Carizzo, a small shale oil explorer based in Houston. The $95m deal valued Carizzo’s Eagle Ford land at $23,500 an acre. The Korean National Oil Corporation, China’s National Offshore Oil Corporation and Statoil, which is majority owned by the Norwegian government, have also concluded deals in recent months. 
  • “It’s too early to say that the large companies are overpaying for assets, because there is not much transparency on all of the deals,” said Mr Ferguson. “But it will be interesting to see if prices are still as high in a year’s time.” 

Disclosure: Long CRZO. Please review the disclaimer page for more details. 


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