I haven't spent a lot of time with CHK, but your point concerned me in their calculation of finding costs. I just take the capital expended in the year divided by the reserves added. In their numbers, they exclude things like prospective acreage... If you add back those items, you get a number close to $4 /mcf, but they continue to talk about the less than $2 range. Is there a convention for reporting findindg costs? They seem to me to be understating their costs but if they included all those cost upfront and they don't do acquisitions or acquire more acreage, the costs will decline over time. Their approach may be more accurate, but most cos don't report it that way, I believe. And, they now say that they are out of the acquisition arena for a while and are into reserve "conversion". Any enlightenment would be appreciated.
"On a per thousand cubic feet of natural gas equivalent (mcfe) basis, the company's total drilling and acquisition costs were $1.93 per mcfe (excluding costs of $154 million for seismic, $3.472 billion for unproved properties and leasehold acquired during the period and $203 million relating to tax basis step-up and asset retirement obligations, as well as downward revisions of proved reserves from lower natural gas prices). Excluding these items described above, Chesapeake's exploration and development costs through the drillbit were $2.00 per mcfe during 2006 while reserve replacement costs through acquisitions of proved reserves were $1.76 per mcfe. Total costs incurred in oil and natural gas acquisition, exploration and development during the full-year 2006, including seismic, leasehold, unproved properties, capitalized internal costs, non-cash tax basis step-up from corporate acquisitions and asset retirement obligations, were $8.126 billion."
CHK has always been a bit of an odd man out in talking about acquisitions and reserves because they consistently talk about not just proved but also probable. Probable is a class of reserves that the Canadians also always talk about because they are permitted to in their regulatory environment while US companies typically stay away from the idea I guess because SEC PV 10 analysis can only be done on a proved basis.
There is a range of approaches to talking about acquisition math from conservative to agressive. Let's say you bought 50,000 acres of leaseholds in Wyoming that had 20 producing wells on it for $50,000,000. If only 20% of the field had been drilled and an engineer had said that reserves in the 20% that had been delineated were 8 Bcf, then maybe you could make the argument that you only paid $10 to $20 mm for the Proved while the rest had been paid for the acreage and, therefore, not for reserves. In another type of acquisition, say some very old Permian Basin assets, it would be very unusual to see anything as not paid for reserves because the field has been so completely explored. Then, of course, there's good old XEC which won't even book new PUDs.
You'd like to believe that all companies are doing that kind of math honestly. None of us are qualified to analyze the numbers because we really have no way of knowing what the truth is but you can get a general sense for yourself about the reasonableness of FD & A math by thinking about how much virgin territory is included in any transaction.
One thing that should be noted about CHK's approach is that, eventually, the $3.72 billion that they didn't book as cost of reserves added, is going to have to be rolled into reserves costs when they actually drill the acreage and make discoveries. If they add reserves at reasonable drill bit costs then F & D for proved won't rise dramatically, but if they don't find them at reasonable costs then costs will rise.