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Keith L. Milberger, President
Proven Concepts, Inc.


Energy producers' 2009 spending plans look a lot different than 2008's


As oil and gas producers firm up their 2009 spending plans in response to lower petroleum prices, it’s clear the Barnett Shale is going to be a lot less busy.
The number of drilling rigs working in the big North Texas natural gas field has fallen by more than half, from a peak of 214 in October to 97 as of Friday. And XTO executives suggest that could fall to as low as 90 in coming months.
That means fewer wells, and nowhere is that more true than at Devon Energy, which announced that it expects exploration and production spending in 2009 to be less than half what it spent in 2008. Devon had resisted cutting back its Barnett Shale activity, but it now says it will drill something over 200 wells this year, or only about a third of the more than 600 it drilled in 2008.
"Our response to the current environment is to dramatically cut our capital expenditures," Devon Chairman Larry Nichols said during the company’s latest conference call with financial analysts. He said the company expects to spend between $3.5 billion and $4.1 billion, less than half its 2008 budget.
Other companies active in the field are also pulling back, albeit generally at lesser rates.
XTO Energy, which ran about 20 rigs in the Barnett for much of last year, expects to drop to 12 this year.
Chesapeake slashed its active rigs from 43 in September to 32 by year’s end. It now plans to keep 20 to 25 rigs busy in 2009, said Julie Wilson, the company’s top officer in the Barnett Shale.
It all comes back to price. Natural gas futures prices are hovering just above $4 per 1,000 cubic feet, down more than two-thirds from their peak in July and a le- vel not generally seen since 2002.
But as bad as that sounds, the picture for Barnett Shale producers is actually somewhat worse. The field’s rapid growth, to daily production of about 5 billion cubic feet at the end of 2008, has swamped the pipeline hubs where gas is sold, driving down those local prices even more.
For example, some sales are tied to prices at the Houston Ship Channel, where natural gas was trading for $3.55 last week. In Carthage, a destination for much Barnett Shale gas, the price was $3.73. But at Waha, a far West Texas hub that some buyers are using, gas fetches just $2.82.
And then producers have to pay transportation expenses of perhaps 30 cents to 70 cents per 1,000 cubic feet, depending on the distance to those hubs.
Mark Whitley, senior vice president at Range Resources, said the company’s selling prices for its Barnett Shale production generally are about 75 to 80 percent of the price on the New York Mercantile Exchange, or NYMEX.
Marc Rowland, Chesapeake Energy’s chief financial officer, told financial analysts recently that the company averaged $3.97 for its Barnett Shale production during the fourth quarter, compared with $6.16 along the Gulf Coast. In those same three months, the average NYMEX price was $6.40.
Those spreads, called differentials, are bigger than anything the industry has previously seen, Rowland said.
Although the decline in drilling has meant job losses among drilling contractors and the service companies that support them, producers say they don’t plan layoffs.
"Our growth has been so fast, we’re typically understaffed," XTO President Keith Hutton said.
"We may not hire as many as we would have, but we’re sure not going to lay anybody off," he said. He said the company, which has about 1,200 Fort Worth workers and 3,200 overall, likewise avoided layoffs in previous downturns.
"Our thought is, people are really not that expensive compared to a well that costs $5 million, and you’re only as good as your people," Hutton said. "We’ll cut bonuses and everything else before we lay people off."
Fort Worth-based Quicksilver Resources feels likewise.
"We don’t anticipate any cuts," said Rick Buterbaugh, Quicksilver’s vice president of investor relations and corporate planning. "You’re still maintaining as many activities," he said.
Chesapeake, which just last week said it would move 210 jobs out of its Charleston, W.Va., regional office, also is holding steady here. The company expects to slightly increase its local payroll as new wells come online, Wilson said.
If there’s a silver lining in the downturn, at least from the producers’ perspective, it’s in falling prices for the services the companies buy, such as contract drilling and fracturing.
Quicksilver President Glenn Darden, speaking to financial analysts last week, gave an example based on the company’s 2009 budget, which calls for Quicksilver to spend about $450 million on drilling and production.
"All of those costs were based on 2008 costs. We’re not seeing 2008 costs," he said. "We’re seeing easily 20 percent, maybe closer to 30 percent savings across the board.
"So that’s well over $100 million of savings, just at the drilling/completion level," he said. Rather than spend that money on more drilling or completions, Darden said, "we’ll just use those dollars to pay down debt."
Quicksilver is also putting off completing wells after they’re drilled, as are other producers.
"If we spend our full budget — that’s debatable with current prices — we’ll drill 180 Barnett wells, and we’ll complete about 100," Darden told analysts. The other 80 would join about 90 uncompleted wells the company already has, he said.
Or consider Chesapeake’s backlog.
Rowland told analysts that just in the Barnett Shale it has "probably 250 or so wells" that either are not completed or have been completed and are still waiting to be connected to a pipeline.
"Certainly, we’ve heard others comment about similar numbers, particularly in the Barnett," he said, owing to the challenges of urban drilling and production.
All the cuts mean that the meteoric production growth in the Barnett Shale will level off in 2009. There is even a growing consensus that production is at or near a peak and could end the year lower than 2008.
EOG Energy Chairman Mark Papa expressed that view during the Houston-based company’s fourth-quarter conference call with analysts. EOG is one of the Barnett Shale’s largest producers.
"Based on what we see, with the rig count dropping and also factoring in that there is an inventory of wells yet to be completed, it’s our belief the Barnett Shale is going to peak at about 4.9 billion cubic feet a day in the first quarter of this year," Papa said. "And by the end of the year, the Barnett Shale will be down to about 4.3 billion cubic feet a day."
That compares to the expectation just a year ago that the field probably would not peak until between 2010 and 2012 at 6 billion cubic feet a day or more.
"That doesn’t say that the Barnett is completely tapped out," Papa said, just that the sharp decline in drilling means that new production won’t be able to outweigh the sharp decline that shale gas wells experience in their first year of production.
Hutton voiced a similar view.
"You would need to get back to 150 or 160 rigs" very quickly to get back to a growth in production in the Barnett, Hutton said. And since that doesn’t look likely, the field could peak in 2009 at about 5 billion cubic feet a day, he said.

Producers scale back
Here are the announced drilling plans by some of the larger operators in the Barnett Shale.


2008 wells

2009 wells

Devon Energy



EOG Resources*



Chesapeake Energy



Quicksilver Resources



Range Resources



*Gas wells only; EOG also plans 60 oil wells in 2009 Sources: The companies
JIM FUQUAY, 817-390-7552




Barnett Shale still tops list of tax twisters

By BARRY SHLACHTER of the Forth Worth Star Telegram

North Texans are still scratching their heads over those Barnett Shale bonus checks.
As with last year, many of the hundreds of residents taking advantage of a free income tax hot line with local accountants Sunday were unsure about how to report their Barnett Shale gas lease signing bonuses and royalties.
The Barnett Shale was the most popular tax topic; many others were curious about whether they owed money on last year’s economic stimulus payments. The answer is no.
The hot line, co-sponsored by the Star-Telegram and the Fort Worth Chapter of the Texas Society of CPAs for the fifth year running, featured free professional advice dished out from the Star-Telegram’s downtown building.
As for reporting gas lease income, the lease or signing bonus is considered "rent" and should be reported accordingly. The subsequent royalty checks should be listed, not surprisingly, under royalties, accountants repeatedly told callers.
But confusion reigns for many, however, because several major energy companies operating here continue to incorrectly state the lease or signing payments as "royalties" or "other income" on 1099-MISC forms instead of as rent, said Walter D. Hatter, a Fort Worth CPA.
To avoid a "matching" issue with the Internal Revenue Service, Hatter and others advised, report the bonuses exactly as the energy company did. If it declared them royalties, report them as royalties.
And if you do report them as royalties, be mindful that you can’t apply a depletion allowance to the bonus money, the CPA said.
When royalties do start coming through — and they have for some taxpayers in the region — those payments qualify for the allowance.



SEC: Dallas energy firm puffed up assets

Star-Telegram Staff Writer

Terax Energy, a small Dallas energy company that boasted of its Barnett Shale production, is at the center of a lawsuit filed by the Securities and Exchange Commission against the company, two Los Angeles residents and the Beverly Hills oil company they control.

Early Wednesday, the SEC temporarily suspended trading in Terax shares, which are traded over the counter, saying "questions have been raised about the accuracy and adequacy" of the company's disclosures of its operations, financing, pending transactions and "the identity of the persons in control of the operations and management of Terax."

The agency later sued in Dallas federal district court, claiming fraud and seeking to freeze the defendants' assets.

According to the SEC's complaint, Mark Roy Anderson, 53, a felon and disbarred lawyer, in late 2006 solicited a Dallas resident in an effort to raise $5 million for Westar Oil of California. The offering promised a "huge play" in Nye County, Nev., that would increase Westar's value tenfold.

By March, 30 of the Dallas resident's friends and relatives, most of them Texans, had invested just over $1 million in Westar. Five later sought and received refunds totaling $170,000, the suit says.

On May 1, the suit alleges, Linda Contreras, an Anderson associate and the new chief executive of Terax, filed an SEC report announcing that Westar had agreed to buy 55 percent of Terax's shares. On June 8, Terax issued a news release announcing that it was extending its leases in Erath County, southwest of Fort Worth, and expected six wells to generate more than $750,000 per month in oil and gas within 30 days.

But the SEC said that on June 1 the owner of Erath County mineral rights had told Terax that he was terminating the leases for failure to pay royalties and had locked the company out of the well sites, and on June 6 the leases were put into receivership. Texas Railroad Commission records, the agency charged, showed that the wells operated only a few months in mid-2006 and produced only about $100,000 worth of petroleum before being shut in.

A phone call to Westar's offices was not returned. Terax officials also could not be reached.

In its previous disclosures, Terax claimed to hold 27,500 gross acres in Erath and Comanche counties, which are on the western edge of the Barnett Shale. Of the nearly 200 drilling rigs working in the Barnett Shale as of Sept. 7, four are in Erath County and none are in Comanche County, according to RigData.

Terax's shares were at $2.65 when trading was suspended. In the past year they have traded as high as $15, one year ago, and as low as 13 cents, in April.
Jim Fuquay, 817-390-7552
Proven Concepts, Inc., PO Box 2267, Frisco, Texas, 75034 Tel: 972 529-1253, Fax: 214 592-9881