De-risking of Haynesville Shale play

In late March, Chesapeake CHK said that it believes the Haynesville Shale Play could potentially have a larger impact on the company than any other play in which it has participated to date.  It added the plays economics would rival the Barnett Shale play as the wells in play are capable of producing 5+ Bcfe for $5-6MM putting the acreage at a potential worth of $40,000/acre.  The comparisons to Barnett are/were no small feat and very bullish,  CHK had it's flag planted and interest spread to those who have well flags up in the Haynesville area.

As for traders here,  we said to watch for further catalysts off results of those companies with flags in area.   The results are pouring in and they have moved these stocks fast.   What you should be watching for is the above results 5+ Bcf which would suggest $40k/acre when viewing news releases of these stocks.   These are not vertical results that you may see in results of some releases such as GDP yesterday.  The more companies producing these results simply DE-RISKS the Haynesville Shale play (HSP) into a 'Commercial viable development'!.   The more positive exploration results the more de-risking of acreage in area occurs.   The acreage between Elm Grove and East Carthage is potentially worth 10-50k/acre and until a few weeks ago the stocks in this area had virtually none of this value in them, but since we alerted PVA May 30th in the $59 off exploration results,  we've seen this value go into many of the stocks GDP, XCO, GMXR, CRK, HK that have wells within 15 miles of CHK producing wells and even further away.  We noted all these stocks all around DJIM, including Forum June 2nd.   GMXR, PVA have data points further west away from CHK`s current activity and this suggests that the play is continuous to an area of 30 miles!.  Even HK`s wells suggest the play runs 30 miles east and 15-20 miles south, but the play may be limited to the north as results 25 miles were not so great.  So that pretty well draws you a map and if you see other stocks being pumped as a HSP, you`d better know where their flags are.  

Here are the stocks with best exposure numbers to CHK wells , others like EOG have 0 exposure within 15miles, while 150k outside and others with good exposure like DVN are not fit for our trading crtieria.

                                      Net acreage within 15miles -6 county acreage=  Total

GDP                                18,700- 47,000= 65,700= 281$MM value

XCO                                34,000- 120,000= 154,000=580$MM value

GMXR                              8,000-  13,000= 21,000=132,000$MM value

CRK                                15,000- 80,000= 95,000= 310,000$MM value

PVA                                 12,000-39,000= 51,000= 276,000$MM value

HK                                   40,000- 25,000= 65,000= 500,000$MM value

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CHK                                  75,000-125,000=200,000= 1,250$MM value

These assumptions are for $10k acre (price which acreage is being bought by CHK in area)value near CHK and at 2-4k for other acreage further away.  To get a further value such as value share you need to know the share count.  This is where we all need to look as far as trading is concerned.  GMXR has a share count of around 15m while an XCO has over 100m and CHK over 480m.  Simply this is where volatility and quickest price appreciation potential comes from.   We prefer to trade the 26m of GDP than the 480m of CHK.  XCO fits nicely in between if you want to put one away under a pillow based on share count and exposure to HSP.

Basically, this is to let you know what you are looking for as these stocks will move on catalysts such as acreage acquisition, you need to know how much is significant and where it is to CHK best flags.  You can now do this by comparing to the above stats.   Just like when we alerted GMXR June 17th had bought more acreage to add to the above acreage, more will come as yesterday did with GDP and the ensuing run.  GDP got a small amount of acreage, but a surprisingly great price of $1,147K-acre.   This is only because they are covering the capital on the 1st well from a private company they are partnering with here.   It does not de-value the HSP acreage paid by CHK and others.   You also know what is a good result and what will be a bad one to make a trading decision.   This is all about de-risking this HSP play.   If some result within 15 miles of CHK doesnt meet the +5 BCFE now expected, which is the ideal number,  than you know the whole HSP players will suffer. 

As we always say, it is best to be ahead of the herd and dump unto them when they come.  This is from a trading perspective and it has been happening since we took on this play at the end of June.   This will continue and the potential is great as there are not a lot of shares available in the float of a GMXR, GDP etc. for the institutions that will want to be in HSP.    We noted recently when a money manager came on CNBC and said well you heard it here first in regards to HSP, since Jefferies'  Hogan has pumped our plays and Erin Burnett is counting the times HSP comes up.   Simply, despite this tremendous run in just over 3 weeks this has potential to be on many more radars as time goes on as this play gets de-risked for commercial development.

As far the rest of the market,   it was a disappointment again as no buying came in after Fridays dump.   Not a good sign as the market continues to show vulnerability.   Today will be no different as UPS gave the market another kick with the magnitude of their 2Q downside.  But again, all this is happening in our neighbours backyard, our DJIM yard had at least 13 stocks from our shadowlist making new highs with many of our most recent alerts such as X SCHN ENER having incredible days.  We also had very positive news late for US carbon steels producers CLF, X as Rio Tinto announced it had achieved a 96.5% increase just for iron ore lumps.   Expect more EPS/price increases in days ahead for these, we already told you of one not publically released for X the other day.

holiday spirit

Walking around town in this fine city of Toronto this week, there's no hint of a slowed economy.   Of course, we are talking about a big holiday week here where most people try to enjoy themselves.      When we walk away from our trading screen, and out on the street, we really don't feel the kind of gloom and doom this market fears.  Maybe that's because the major Canadian exchange (TSX) has been up around 20% in 2008, one of the world's best performers.  Why?.  Well, that's because the index is about 50% resource plays!.  So, Happy Canada Day, today.  Hopefully, our resource plays can survive today with the TSX closed today.;).   There's no hint of inflation, no stress and everyone just goes about his/her business it seems.    This is definitely a strange feeling, for us traders who witness all the daily doom and gloom reporting !    When we get back to work and look at the quotes of many companies that supposedly represent the pillars of the economy across the border, things can be so far from the truth.    Companies that are perceived as "American Icons", such as GE, GM, Citi..., their stocks are hitting new low on a "daily" basis!    On the other hand, there are those companies that do nothing but dig stuff out of the ground, are hitting new high on a daily basis.   Even US coal companies are popping IPO's onto the TSX here, one PHC, Phoenix coal just had a 18% pop going from 1.76 to over $2 yesterday.   Ok, the comparison ends here and no more philosophical discussion on how and why or if...

What we want to know, as traders, are questions of when is the overall market going to rebound and when is the madness of the commodity plays going to end?    Either question, if you attempt to answer this in some sort of logical way during the last couple of months, you'd have simply driven yourself insane by now.    We feel the questions are best answered by the market itself, whenever they happen! 

In the mean time, today's strength from DJIM shadowlist came from HK's rosy drill report.  We've highlighted these intertwined HSP plays, GDP, CRK, PVA, XCO will live off 'catalysts' such as results, acreage acquisition etc.   This could not have been more true than yesterday as these plays exploded.    HK provided very strong results, the initial rate is the highest rate so far of 16.8 mmcfpd.   It is twice the rate of those recently announced by ECA, PVA and an average of 5 Bcf per well can easily be assumed based on this.   They also announced acreage increased 83% from 150 to 275K net acres.

We noted before the open of possible catalysts for our resource plays.  We had a timely upgrade of CLF, and continued follow through action from coal plays including JRCC, also highlighted.    In essence, resource plays have covered about 90% of our most recent favourite trades.    Yes,  it'd be hard not to have a great day, even 20 minutes into the open.    Excitement aside, we still have to do enough profit taking to ensure that our hard work get recognized.    Also, we wouldn't want to call today's action a gift either because we'd been riding this for quite sometimes now.    The probability of an upgrade in the steel sector to estimates and stocks themselves, a turn in coal sector and positive catalysts from shale plays have all been discussed extensively in the Journals.  Don't shoot the messengers,  if sooner than later these pause, money should have been made already.  To start, it will be interesting to see the reaction to SCHN's eps today in the entire steel sector.  Will the probably great numbers be cooked in or not, that is the question!!.  Wait and see, here this morning.