The Barnett Shale Report | Nature | Business

The Barnett Shale

Visitors Guide to the Hottest Gas Play in the US

PICKERING ENERGY PARTNERS, INC.

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The Barnett Shale
Visitors Guide to the Hottest Gas Play in the US

October 2005
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Jeff Hayden jhayden@pickeringenergy.com (713) 333-2971

Dave Pursell dpursell@pickeringenergy.com 713-333-2962

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P I CK E RI N G E N E R GY P A R T N E RS, INC.

This report is meant to help investors better understand the Barnett Shale and the future development potential that exists in the core and non-core areas. Later in the report we will also address which E&P companies have the most exposure to the play and what “lessons learned” we can apply to other emerging North American gas shale plays. Some key takeaways are outlined below. Play economics work well at $6/mcf gas – At $6/mcf gas, Barnett drilling is full steam ahead. Economics work for vertical wells (39% cash flow rate of return) and horizontal wells (113% and 70% returns for Tier 1 and 2 non-core areas, respectively). Wells are still economic if gas falls to $5/mcf though vertical well economics are thin (12% return). Tier 1 and 2 horizontals still look good (73% and 38% returns). Uncertainties remain for Tier 2 – Not enough data exists to conclusively determine whether Tier 2 acreage (Erath, Jack, Palo Pinto, etc) will be successful. To date we have seen results from 6 wells (2 EOG, 4 IFNY). While each produced gas, some liquids (oil & condensate) were seen in the EOG wells and the production rates from the majority of the IFNY wells were not impressive. Additional data points and longer production history required to determine how prolific the play will be in Tier 2. Two words…size matters – The Barnett Shale is a highly complex reservoir. Significant variability of well results exists even within concentrated areas. As the industry has yet to figure out how to identify the good wells from the bad (yes…there are bad wells in the play), a large acreage position is a necessity in order to minimize the risks and allow the law of large numbers to take effect. Not every Barnett well is a good one – We know, we know…blasphemy. Just looking at the wells that were mechanical successes (i.e. gas producers), about 23% of the horizontal wells and 32% of the vertical wells drilled in 2004 would have been uneconomic if drilled at today’s cost levels, assuming a $6/mcf long term gas price. That said, the good wells tend to be really good, making the average results economical. Horizontal wells are superior to vertical wells – Probably not a surprise given the increased industry focus on horizontal wells, but the magnitude was surprising. Using $6/mcf as our benchmark gas price, the typical horizontal well generates a 100%+ return while the typical vertical well generates only a 39% return. Johnson County acreage looking good – Though the core area is commonly referred to as Denton, Wise, and Tarrant counties, the true sweet spot has been the Newark East field, which has been extensively drilled. Results outside Newark East have not been as impressive. However another sweet spot appears to be developing in Johnson County, which looks superior to much of the “core” acreage beyond Newark East. Stock Thoughts – Overall the value of Barnett Shale is appropriately discounted in the stocks. EOG looks the riskiest while CRZO looks interesting. Broad resource play implications (beyond the Barnett): Size matters Expect variability of results Learning curve – development progression takes time Location, location, location – reservoir parameters, gas window, etc. ***IMPORTANT DISCLOSURES ON PAGE 51 OF THIS REPORT***

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Table of Contents

Barnett at a Glance..................................................................................................................................... 5 Geological Backdrop ............................................................................................................................. 7 Geochemical Backdrop ......................................................................................................................... 9 The Barnett Today ............................................................................................................................... 11 The Players ................................................................................................................................................ 13 The Data.................................................................................................................................................... 14 Horizontal vs. Vertical wells............................................................................................................... 19 Well Performance Analysis by Company ......................................................................................... 22 Barnett Economics – The Bottom Line............................................................................................... 24 Vertical wells ......................................................................................................................................... 24 Horizontal Wells................................................................................................................................... 26 Summing it Up...................................................................................................................................... 32 Reserve Potential...................................................................................................................................... 34 What’s an Mcf worth anyway? ........................................................................................................... 36 Company-specific Barnett upside ...................................................................................................... 39 EOG – a closer look............................................................................................................................ 40 The Unknowns ......................................................................................................................................... 42 Summary/Conclusions............................................................................................................................ 44 Appendix A – Gas Shale Terminology................................................................................................. 45 Appendix B – Comparison of Organic Shales in the US .................................................................. 46 Appendix C – Example of Barnett NPV Model................................................................................. 47 Appendix D – Generalized Company Acreage Maps ........................................................................ 48

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Barnett at a Glance
The Barnett Shale is one of the largest and most active domestic natural gas plays in the U.S. Production is ~1.2bcf/d and there are ~100 rigs drilling. It’s likely that most investors are already familiar with the play background/basics, but we review them in the following pages. For a comparison of the Barnett to other productive shales, see Appendix B. When most investors (ourselves included) hear about the Barnett Shale, they immediately think of the play in the Fort Worth Basin, but other “Barnett like” resource plays are emerging in the Permian Basin to the west (Culberson/Reeves counties) and the Fayetteville Shale to the northeast. For the purpose of this report, Barnett Shale will refer to the Fort Worth Basin play unless otherwise specified. The charts below illustrates where the Barnett is located and the key counties involved in the play. We also show the growth of the play in terms of active rigs, wells drilled and gas production.
Figure 1 . Location of Barnett Shale

Source: Humble Geochemical, Pickering Energy Partners

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500 3.500 900 Number Active Wells 3.000 600 1.200 2. mmcf/day 1. .000 2. INC. Barnett Shale Production History 1.500 1.000 300 500 0 1990 1995 2000 2005 0 Source: IHS Energy and Pickering Energy Partners Figure 3.500 Gas Production Active Well Count Total Gas Production.Figure 2. Barnett Shale Rigcount History 100 90 80 70 Number of Rigs 60 50 40 30 20 10 0 1992 1994 1996 1998 2000 2002 2004 Source: Smith Bits and Pickering Energy Partners 6 P I CK E RI N G E N E R GY P A R T N E RS.

7 . the Barnett is split into the upper and lower Barnett by the Forestburg limestone.500-8. The play could be quite large.500 feet deep.Geological Backdrop The Barnett is a Mississippian-aged Shale located at depths of 6. Most of the development where this occurs has focused on the Lower Barnett. INC. potentially spanning 10-15 counties in the Fort Worth Basin of north Texas (the shale is bordered to the east by the Ouachita Thrust-fold Belt and the Muenster Arch and to the west by the Bend Arch). Fort Worth Basin Stratigraphic Column Source: AAPG PICKERING ENERGY PARTNERS. As we head northeast in the play. Figure 4. Figure 4 shows the stratigraphy of the Forth Worth Basin.

Given these two factors. which provide the upper and lower frac barriers for the Barnett. . the Barnett is ~1. At its thickest (just south of the Muenster Arch). Fracs that extend out of the Barnett Shale and into a water-bearing formation will result in an uneconomic completion. East-West Cross Section Source: Humble Geochemical Figure 6. especially since the play was being developed exclusively with vertical wells at the time. The figures also show roughly where the lower Viola frac barrier ends. and thins to ~30-50 feet thick as it heads south. North-South Cross Section Source: Humble Geochemical 8 P I CK E RI N G E N E R GY P A R T N E RS. The frac barriers are important because the tight Barnett Shale needs to be hydraulically fractured in order to be productive. Figure 5. and the water-bearing Ellenburger formation. INC.000 feet thick. Figures 5 and 6 show the east-west and north-south cross sections of the Fort Worth Basin. The play thickens and deepens heading north and east.Other key formations to note in the basin include the Marble Falls limestone and the Viola limestone. it’s easy to understand why the industry chose to develop the northeast corner of the play first.

4 indicates dry gas. Vitrinite Reflectance Table gas window immature oil window wet gas dry gas 0. gas. Also. Once again. RO<1. This is important because there is a linear relationship between TOC values and gas content.0 Source: Pickering Energy Partners Figure 8 shows the RO for the Barnett Shale. The Barnett Shale is a thermogenic reservoir. In a thermogenic reservoir. Ongoing activity is assessing the potential for gas production in areas commonly thought to be oil prone (i.e.0 Vitrinite Reflectance (Ro) 1. 9 .0 usually indicates the gas window.0 0.5% (immature outcroppings indicate it was as high as 11-13%). with higher numbers indicating a greater likelihood of gas.6 indicates the reservoir is too immature to produce hydrocarbons. PICKERING ENERGY PARTNERS.6 1. Figure 7. INC. A reading >1. A high TOC value suggests a large potential to generate hydrocarbons. The TOC of the Barnett averages ~4. or no hydrocarbons. while a reading >1.Geochemical Backdrop The Barnett Shale has been such a productive reservoir due to high proportion of total organic carbon (TOC) despite having likely leaked much of its gas to surrounding formations/reservoirs over time. hydrocarbons are created by the combination of time. A reading <0. temperature and pressure.0). note that northwestern Jack County and eastern Erath County appear to be in the oil window. the best readings tend to be in the northeast.4 2. The thermal maturity of the reservoir can help determine whether it contains oil. Time will tell. Thermal maturity is measured in the lab using core samples by vitrinite reflectance (RO).

Figure 8. Barnett Shale Isoreflectance Map Source: AAPG 10 P I CK E RI N G E N E R GY P A R T N E RS. INC. .

Barnett Shale County Map Wise Denton Newark East Field Parker Hood Tarrant Johnson Core Tier 1 Tier 2 Source: Pickering Energy Partners Core Area. more than 100 companies are active in the Barnett Shale. Figure 9. Although most of the wells drilled thus far have been in the core. DNR.800 wells drilled to date. When thinking about the Barnett Shale. and the industry has expanded the rig count in the play to ~100 rigs from only ~30 rigs in 2003. IFNY.2bcf/d. future activity will be focused on the non-core area.The Barnett Today The Barnett Shale has come a long way over the last 5-10 years. The play has now expanded well outside the original “core” area. CRZO. KWK. DVN. with over 3. We believe the rig count in the play will only move higher. PLLL and XTO. The Newark East Field covers a portion of Denton. Production from the Barnett is currently ~1. Public companies active in the play include BR. Currently. 11 . CHK. The vast majority of the Barnett Shale production has been from the Newark East Field in the core area. as light sand fracs and horizontal drilling have driven an explosion of activity in the play. Wise and Tarrant Counties. Much of the initial PICKERING ENERGY PARTNERS. EOG. we not only split the play into the core and non-core area but also further subdivide the non-core area into Tier 1 and Tier 2. INC. ECA. as many of the larger players are adding rigs over the remainder of the year and will likely have to increase their rig count further in the future in order to hold all of their leases. accounting for >2% of total domestic gas production.

Vertical wells with large hydraulic fracture treatments risk communicating with the waterbearing Ellenburger formation. south and west of the core area (Johnson. . Hill. Geographically. west and south of Tier 1 (counties include Jack. This is the riskiest area in the Barnett Shale. The ability to execute a large fracture treatment is made possible by a limestone barrier (Viola lime) which separates the Barnett Shale from the underlying water-bearing Ellenberger formation. Erath. This is the least developed area of the Barnett. These smaller fracture treatments are designed to avoid communication with the adjacent waterbearing zones. etc). This results in lower amounts of gas-in-place and recovery per section than the Core or Tier 1 areas. The core area has been most commonly drilled with vertical wells and completed with large hydraulic fracture treatments. as in Tier 1. INC. Geographically.development was performed by Mitchell Energy (now part of Devon Energy). a competent fracture barrier does not exist at the base of the Barnett. Though the term “core area” is typically used to describe all three of these counties. The Barnett Shale is thickest and deepest in the core area…which corresponds to the highest gas-in-place per section in the Barnett (see geological backdrop section). and Parker Counties). Palo Pinto. These uncertainties increase significantly as the industry tries to push the play even further west and south (into counties such as Comanche and Stephens). This portion of the Barnett generally lacks the Viola Limestone which separates the Barnett from the underlying waterbearing formations. There is no long term production performance. Tier 2. driving most operators to utilize (more expensive) horizontal wells to develop the resource. Conventional analysis has suggested that much of the Barnett Shale in Tier 2 has the likelihood to produce oil (uneconomic volumes) instead of gas. Hood. the true sweet spot is Newark East. Development is slowly ongoing in Tier 2 as companies attempt to identify the western boundary of the oil-gas window. Moreover. Horizontal drilling has been effectively employed (mainly in Johnson County) in conjunction with multiple (typically four or five) hydraulic fracture treatments along the horizontal well section. In addition to uncertainties surrounding the western extent of the gas window. Tier 1. 12 P I CK E RI N G E N E R GY P A R T N E RS. the Barnett Shale thins and is shallower to the west and south. Uncertainties surrounding the gas window and the lower resource potential due to thinner and shallower reservoir make widespread commercial development less certain in Tier 2. Production results so far are inconclusive.

300 Discussing the merits of a play is interesting.500 162. ~3.500 13mmcf/d 2 KWK’s acreage lies primarily in Hood and Somervell counties. ~25% of the company's acreage lies in the core area. the vast majority of which are either in the core area or Tier 1. EOG 90. Due to its (47% of proved early entrance into the play.000 acres in the Barnett.900 70mmcf/d 6 31.300 net acres. Assuming both counties are productive (still a big risk in Comanche). CRZO 19. with net production of ~100mmcf/d.500 reserves) net acres in the play. split roughly evenly between (50% of proved Tier 1 and Tier 2 (mainly Parker and Erath counties). 67.000 reserves) acres in the play. and is one of the larger producers in the play. The Barnett Shale has a number of public companies with significant exposure. with reserves) ~550.500 39.The Players Core Acreage Commentary BR has been active in the Barnett for awhile. split roughly evenly between Erath and Comanche counties (Tier 2). ECA holds 127. but useless to investors unless it is meaningful to public companies which can be owned by institutional investors. located mainly in Parker and Tarrant (>630% of counties.000 560mmcf/d 18 364. Cooke. Palo Pinto. INC. DVN is far and away the largest ~5.000 net acres.250 6mmcf/d 4 16. For company acreage maps. The company holds 43.000 70mmcf/d 9 0 EOG is one of the largest Barnett acreage holders with ~490. The company has 89. We have also reserves) heard from industry sources that EOG is leasing in Stephens County (due west of Palo Pinto). please refer to the appendix.000 400. (28% of proved all located near Forth Worth in Tarrant County.800 22. The company holds ~155. XTO became the second largest producer in (25% of proved the Barnett.000 0 50mmcf/d 6 0 570 Bcfe CHK has grown into a large Barnett player by buying Hallwood (twice).000 103mmcf/d 17 ~1.350 88. both in terms of acreage and production. located exclusively in reserves) Johnson County. IFNY 0 KWK 0 PLLL 2. ECA 6.000 net acres in Johnson County.000 80mmcf/d 6 899 Bcfe (7% of proved reserves) Tier 1 Acreage Tier 2 Acreage Current Production Active Rigcount Upside Potential BR 28.000 CHK 48. It is also one of the companies at the forefront of pushing the Barnett westward. where the ~1.000 net acres. and Erath counties.8 Tcfe player in the Barnett Shale. DVN holds one of the best acreage positions.5 Tcfe The company holds 90. * Note: acreage splits combination of company information and Pickering Energy estimates 0 60.000 net acres in the play.750 29. with the remaining (62% of proved acreage located mainly in Jack.000 693 Bcfe CRZO holds 65.000 18. 0 0 ~2mmcf/d 1 36 Bcfe PLLL is one of the smaller players in the Barnett Shale with only 2. and Bosque counties (ECA definitely has the largest acreage position north of the core area). located mainly in Tarrant. with ~30% in the core area. The (12% of proved company currently holds ~48. and Parker counties.000 net acres in the Barnett.700 net acres in the play.9 Tcfe company has a large (230.700 2mmcf/d 1 341 Bcfe (huge!) The company holds 60. IFNY’s net upside potential in the Barnett is huge relative to its proved reserve base of 9bcfe.000 net acres). We (200% of proved estimate ~30% of the company’s acreage is in the Tier 1 non-core with the reserves) remainder in Tier 2. 44. About 55% of the company’s acreage position lies in the core area or proved reserves) Tier 1 non-core. XTO 77.500 13 . PICKERING ENERGY PARTNERS.5 Tcfe Through its acquisition of Antero.000 net acres in the Barnett. ~50% in Tier 1.000 Thanks to its acquisition of Mitchell Energy.750 785 Bcfe (6% of proved reserves) Another large Barnett producer.000 17. relatively contiguous position.700 15mmcf/d 3 0 387 Bcfe DNR’s acreage is primarily in the non-core area. DVN 171. and ~20% in Tier 2 (Palo Pinto County). Johnson. DNR 20. reserves) 38. with the remainder spread around but concentrated in Montague.

Figure 10. This was the initial Mitchell Energy (now Devon) development. Even within Newark East Field. mcf/day Source: IHS Energy and Pickering Energy Partners To assess the Barnett. the areal variation in peak production/well quality (size of the dots) is significant. well vintaging). As an example.The Data Within the Barnett. mmcf 6000 R2 = 0. The production data was subdivided for various vintages and different operator classes. We use peak monthly production as an indicator of ultimate recovery and “well quality”. 14 P I CK E RI N G E N E R GY P A R T N E RS. The cluster of data in Wise. Wells Performance of Carthage Tight Gas Wells 8000 10 Year Cumulative. . INC. we utilized IHS Energy production data to analyze peak monthly production for Barnett Shale wells completed in specific calendar years (i. The following bubble map shows the areal distribution of peak monthly production. the chart below highlights data gathered over a decade in the Carthage Field (tight gas) in East Texas. and Tarrant Counties is the Newark East Field.e.70 4000 2000 0 0 2000 4000 6000 8000 Peak Monthly Production. Denton. This analytical method is well established for technical evaluation of unconventional gas reservoirs. The large dots represent high peak monthly gas production (and high expected recovery) and the small dots correspond to low peak monthly production (and low expected recovery). long-term recovery data are not available due to the immaturity of the play.

15 .Figure 11a. INC. Areal Distribution of Peak Monthly Production 1996-2004 Source: IHS Energy and Pickering Energy Partners PICKERING ENERGY PARTNERS.

Figure 11. . INC. Areal Distribution of Peak Monthly Production 1996-2004 (zoom-in) Source: IHS Energy and Pickering Energy Partners 16 P I CK E RI N G E N E R GY P A R T N E RS.

Figure 12. INC. Areal Distribution of Peak Monthly Production 2001-2004 Source: IHS Energy and Pickering Energy Partners PICKERING ENERGY PARTNERS. 17 .

.Figure 13. INC. Areal Distribution of Peak Monthly Production 1996-2000 Source: IHS Energy and Pickering Energy Partners 18 P I CK E RI N G E N E R GY P A R T N E RS.

We expect the production trend to reverse in future years as the focus in the play continues to shift to horizontal wells from vertical wells. both of which influence well economics (not to mention the obvious production implications). there is sufficient production history to determine the typical decline characteristics for Barnett wells during their first few years. decline rates typically level off around 10% in years 4-5. Possible explanations include the Newark East field continuing to mature and companies attempting to expand the field outside of the sweet spot. 19 . We care about this because of its impact on time value of money and expected ultimate recovery (EUR). Also as seen in Figure 15. Vertical wells Although long-term (10+ years) production data are not available. Median Initial Peak Monthly Performance (Horizontal + Vertical) 978 833 825 729 684 621 mcf/d 517 1999 2000 2001 2002 2003 2004 2005 Source: IHS Energy and Pickering Energy Partners Horizontal vs. PICKERING ENERGY PARTNERS. the graph highlights the high initial decline rate followed by flatter decline rate in following years. As expected.The figure below shows the trend in median initial well performance since 1999. Figure 14. Exhibit 15 shows the decline curves for vertical Barnett wells drilled in 1999 through 2003. Sample size isn’t an issue with our vertical well analysis as the lowest number of observations is 78 in 1999 and ranges from 171 to 788 in subsequent years. Well performance peaked in 2000 and has steadily trended down since then. We think the latter is a better estimate for future forecasts as recent vintage decline rates have consistently been in the mid-60% range. INC. Below we look at the decline curves of the typical wells for both horizontal and vertical wells. In 1999 the initial decline rate was only 52% but has since averaged 65%. which have higher production rates.

.Figure 15. However we should note that the data is fuzzier for horizontal wells due to the lack of a significant sample size until 2003. Longer-term decline rates for horizontal wells have yet to be established. We show both 2002 and 2003 data in the Exhibit 16 below but note that 2002 includes only 3 wells. Horizontal well decline curve (core + non-core) 3000 2002 2003 2500 3 Wells Production (mcf/d) 2000 1500 64 Wells 1000 500 0 Peak t+1 Years t+2 Source: IHS Energy and Pickering Energy Partners 20 P I CK E RI N G E N E R GY P A R T N E RS. INC. Figure 16. Vertical well decline curve (core + non-core) 1200 1999 2000 2001 2002 2003 1000 Production (mcf/d) 800 600 400 200 0 Peak t+1 t+2 Years t+3 t+4 t+5 Source: IHS Energy and Pickering Energy Partners Horizontal wells appear to have a shallower decline curve than their vertical counterparts. the initial decline rate of horizontal wells appears to be 50-55%. The 2003 sample size is better with 64 wells. Focusing on the 2003 numbers.

INC. Thus the calculated decline rates will likely change over time as additional wells are drilled and more production history is available. See Figure 17 for KWK’s current decline curve assumptions compared to its prior assessment. but the NPV is now lower. Figure 17. A recent example of this is KWK’s update of its “average well” type curve for its acreage in Hood county (Tier 1). we realize that horizontal drilling in the Barnett is still in its infancy. 21 . KWK Decline Curve (Hood county acreage) 1600 1400 1200 1000 mcf/d 800 600 400 200 0 IP r7 1 5 8 9 6 0 3 4 7 1 2 4 r2 Ye a Ye a r9 0 2 r2 r1 r3 r4 r5 r6 r8 3 r1 r1 r1 r1 r1 r2 r2 r1 r2 r2 r1 Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a r1 Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a Ye a r2 r1 r1 5 OLD NEW Source: KWK and Pickering Energy Partners PICKERING ENERGY PARTNERS. The company’s old type curve assumed a shallower initial decline (~45%) than our data suggests. Net-net the company’s model still forecasts the same reserves per well. Its updated decline curve now forecasts a steeper initial decline (~65%) followed by a shallower decline in later years. It is interesting to note that KWK’s new type curve is similar to the vertical decline curves seen in recent years.While this report focuses on well data from IHS.

as well as the aggregate of the smaller operators. Figure 18 graphs the well results of five of the largest producers in the Barnett. Private player Chief came in second. Looking first at the vertical wells drilled in 2004. 2004 Vertical Well Performance by Company – Peak Monthly Production Median Well 960 974 Average Well 789 666 670 590 551 418 321 584 Mcf/day 618 622 Antero Chief ECA DVN BR Others Source: IHS Energy and Pickering Energy Partners 22 P I CK E RI N G E N E R GY P A R T N E RS. .Well Performance Analysis by Company The bubble graph earlier highlighted the large variability of well results within the Barnett. our math suggests the breakeven monthly peak production level for a vertical well in the core area is ~450mcf/d in a $6/mcf scenario. INC. While we will discuss well economics in more detail in the following section. Using this as the bogey. Antero (now XTO) appears to have had the best results. with median production of 960mcf/d and average production of 974mcf/d. Figure 18. the average well of each of the larger operators was economic in 2004 while the average of the smaller producers was not. so it should come as no surprise that a significant amount of variability exists between the results of different companies. Each of the larger producers delivered better results than the aggregate of the smaller players (others). It is interesting that the best two performers were private companies.

Looking at horizontal wells.786 1585 1. 23 . However unlike in the vertical well results. That said each company’s average 2004 well would be economic in our $6/mcf gas price scenario (740mcf/d breakeven). BR and ECA underperformed the smaller-player aggregate. Figure 19 shows the full results: Figure 19.041 Chief DVN Antero Others BR ECA Source: IHS Energy and Pickering Energy Partners PICKERING ENERGY PARTNERS. Chief delivered the best results in 2004. INC.369 1.087 1008 1.0mmcf/d.004 1. with median production of 1.657 1300 1285 Average Well Mcf/day 1166 1. 2004 Horizontal Well Performance by Company – Peak Monthly Production Median Well 1941 2.9mmcf/d and average production of 2.

900 53% 1395 $1. While the following sections detail our analysis of the well economics for various Barnett wells.71 $1. the industry has drilled over 1.5 Peak Monthly Prod. Due to various factors such as depth. Figure 20. we need to discuss the proper inputs. Before we detail the well economics model.7 73% 113% 153% $1. The Barnett is a highly complex play that spans a large area. The following analysis is our best attempt to look for general trends to help analyze the play.1 $0. the economics of the play are not uniform across all areas. Some operators will be able to deliver better results while others won’t.000 $2.Barnett Economics – The Bottom Line Just how economic is the Barnett Shale play? Public companies often list rates of return from the play in excess of 100%.500 $1.3 $3.0 $1.but is this reasonable? Are the economics better in some parts of the play than in others? Or is the play a slam dunk no matter where a company’s acreage lies? These are some of the questions we will try to answer.000 $1. As a result we will look at the economics for the three types of wells we expect to be most prevalent going forward – Core area vertical.5 $2. pay thickness and optimal type of well drilled. Comparative Barnett Economics Core Vertical Tier 1 Horiz. The drilling pace did slow noticeably in 2004 relative to 2003 as industry focus shifted to drilling (theoretically) higher-return horizontal wells in the core and non-core. Three of the most important variables to consider are peak monthly production rate. Tier 1 horizontal and Tier 2 horizontal. INC.6 $1. the following table summarizes the results.100 vertical wells in the core area of the Barnett. (Mcf/d) Year 1 Decline EUR (MMcf) Well Cost ($M) F&D Cost ($/Mcfe) Rate of Return: @ $5 @ $6 @ $7 NPV per Well: @ $5 @ $6 @ $7 Source: Pickering Energy Partners Vertical wells The general consensus in the industry (which we agree with) is that vertical wells do not work in the non-core area. . as well as shows the returns in two scenarios not detailed ($5/mcf and $7/mcf gas).34 38% 70% 101% $0. 650 1520 61% 53% 733 2356 $1. We caution that the Barnett is a very complex play with large variability of results within each of these three regions as well.4 $0. Over the last two years. As such our analysis of vertical well economics will focus on the core area.06 12% 39% 65% $0.. In short horizontal wells are superior to vertical wells and Core/Tier 1 horizontal wells are superior to Tier 2 horizontal wells. decline rates (these two factors drive 24 P I CK E RI N G E N E R GY P A R T N E RS..1 Tier 2 Horiz.

01 0.55 0.01 0.01 0.15 Source: Pickering Energy Partners We can also see why vertical wells in the non-core area don’t really work.00 0.11 0. (80% net revenue interest) Figure 21 below shows our well economics calculation for the median core area vertical well.07 0.23 0.52 0.21 0.15 0.95 3.00 6.79 3.87 3. 45-50% of the wells completed would not have been economic under this scenario).09 0. Decline curve – 60% in year 1.00 6.71/mcf. Of note.04 0.06 0.04 0.01 0.50/mcf differential to NYMEX for transportation and btu content.73 3.48 0.05 0.03 0.00 6.02 0. using a 30-year life.11 0. We estimate that the median well (650mcf/d) will generate a 39% rate of return in a $6/mcf NYMEX price environment. looks better at 585mcf/d.71 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Years 11-30 1. This is the median peak production of the total vertical wells drilled in 2003 and 2004. Peak monthly production – 650mcf/d.00 0.4 39% 0.10 0. The steepness of the declines surprised us a little bit.28 0.00 6.02 0. Reserves per well – 0. Any wells which did not flow (due to fracing into the water-bearing Ellenburger.02 0. generating a 26% return.07 0.13 0.7bcf gross.) Figure 21. Johnson County should have the best vertical wells of the non-core area because the Barnett Shale is the thick and deep.08 0.00 251 181 151 134 119 105 93 83 73 65 6 95% 33% 18% 12% 12% 12% 12% 12% 12% 12% 12% 123 63 48 42 37 33 29 26 23 20 164 0. Barnett Shale Core Area Vertical Well Economics Summary Initial Production (Mcf/d) Net Reserves (MMcf) Discounted Cash Flow ($MM) Discounted Cash Flow ROR NPV ($MM) NPV/Mcfe Incremental F&D ($/Mcfe) Capital Cost ($M) Gas Price ($/Mcf) End Period Prod (Mcf/d) Decline (% of Year 1) Net Production (MMcf) Revenue ($MM) LOE ($MM) Production Tax ($MM) Overhead ($MM) DD&A ($MM) Tax ($MM) Cash Flow ($MM) Cash Flow ($/Mcf) P/T Disc.00 0.00 0.01 0. which is only slightly economic at $6/mcf gas (10% return.46 0.18 0.02 0. .04 0.00 6. The average well looks better at ~725mcf/d.01 0.01 0.00 6.01 0. The median Johnson county vertical well had peak volumes of 500mcf/d.4 0. which would generate a return of 53%.58 3.03 0. 30% in year 2.02 0.03 0.27 0.03 0.02 0.04 0.02 0. Thus these results should be viewed as a best case scenario since it’s been well documented that penetrating the Ellenberger with a frac is a problem in the non-core area.08 0.02 0.10 0.02 0.01 0.01 0.07 0.01 0. as expected. calculated from average decline curve.75 3.17 0.00 6.01 0.16 0.90 0.83 3.34 0. We were able to calculate both the peak monthly production rate and the decline rates from the IHS data set.05 0. 10% thereafter.03 0.07 0.68 3.01 0.00 6. INC.13 0. a productive well).09 0. Cash Flow ($MM) Discounted Cash Flow ($MM) 650 586 1.12 0.$1.02 0.05 0. (Note that the model assumes core area gas receives a ~$0.13 0. but the data doesn’t lie.00 0.e.03 0.00 0. 25 PICKERING ENERGY PARTNERS.77 3.recovery) and well cost.00 6.02 0.09 0.06 0.00 6.20 0.02 0.08 0.24 0. 15% in year 3. Here’s what the typical vertical well looks like in the core area of the Barnett Shale: Well cost – about $1 million to drill and complete.16 0.81 3. the median rate was ~690mcf/d in 2003 and only ~580mcf/d in 2004.67 0. F&D cost . But here’s the rub…these numbers all assume mechanical success (i.19 0.18 0.) are not included in the data set.70 3.21 0. The average well.01 0.000 6.11 0.25 0.06 0.06 0.04 0.66 1. We turned to operators (both public and private) to get a handle on well costs.14 0.06 0.03 0.11 0.14 0.11 0.00 0. etc.

$1. average production rates are the better measure of the aggregate success. Not quite as steep as in the vertical wells.Mean vs. calculated from average decline curve. 10% thereafter. Peak monthly production – 1. we will assume the results also apply to much of Parker and Hood counties. This is the median peak production of the total horizontal wells drilled in 2003 and 2004. F&D cost . We estimate that the median well (1. Here’s what the typical horizontal well looks like the core and Tier 1 non-core Barnett: Well cost – about $2 million to drill and complete. which is no surprise when we look at the far superior economics of horizontal vs. which would generate returns of 113% and 135% (for core and noncore. In fact the magnitude of the difference is so large that the only vertical wells we’d expect to see going forward are in areas that have already been densely drilled (downspacing) or near lease lines.520mcf/d. 26 P I CK E RI N G E N E R GY P A R T N E RS. 25% in year 2. . whereas median rates do not. causing their production to receive a lower price than that of the non-core wells. This is because average production rates tend to be skewed upwards by a few very good wells. It’s difficult to nail down what an “average” horizontal well looks like. However when looking at a total fieldwide drilling program in the Barnett. Though our data focuses on the core area and Johnson County (where we have the best data). Reserves per well – 2. Horizontal Wells Horizontal drilling technologies are a major part of the boom in Barnett activity that we see today. where the shale remains relatively deep and thick.06/mcf. 0. producing ~1. vertical wells.685mcf/d.4bcf gross. respectively). using a 30-year life. as factors such as lateral length and completion effectiveness will have a large impact on both reserves/production as well as cost. We will examine Tier 2 well economics later in this section. INC. The returns from the core area wells are lower because the gas is dry (~50c lower realized gas price). Similar to the results from the vertical wells. We view the median production rate to be a better tool for analyzing what the average individual future well will deliver.7mmcf/d). 15% in year 3. Decline curve – 55% in year 1. rates in 2004 were lower than in 2003 in each county except Johnson (2. Median. which produce wet gas (higher btu content gets a higher price). No it wasn’t a typo when we used median production rate in our analysis.520mcf/d) will actually generate a >100% return in the Tier 1 non-core area and a 93% return in the core area (in a $6/mcf NYMEX price environment)…a big jump relative to vertical well economics! Much like we saw with vertical wells. (80% net revenue interest) Figure 22 shows our well economics calculation for the median core area or Tier 1 non-core horizontal well. the average horizontal well looks better than the median well.1mmcf/d vs.

14 0. because we do not have enough production history from the region to calculate meaningful median/mean production rates or decline curves. INC.74 0.07 0.3 113% 2.8bcfe gross (the downspaced well would be 50% new reserves. Data from EOG suggests that a 2.46 0.20 0.000 6.01 0. this would equate to 60-acre spacing. Thus the best we can do is work with the limited data we have from public companies and industry sources and assume decline rates will be similar to horizontal wells in the core and Tier 1 non-core.00 6.04 0.20 0.73 1.52 0.14 0.93 3. However.88 3.02 0.04 0.00 718 532 458 414 375 339 307 278 251 227 31 75% 30% 15% 10% 10% 10% 10% 10% 10% 10% 10% 312 181 144 127 115 104 94 85 77 70 644 1.42 3.46 0.46 0.07 0.64 0.17 0.04 0.69 0.11 0.25 0.00 6. our initial rough guesstimate is that the per-well reserves would fall ~25% to 1.04 0.38 3.46 0.01 0.01 0. it appears that well spacing down to 1000 feet will still result in the economics shown above.05 0.33 0.02 0. Cash Flow ($MM) Discounted Cash Flow ($MM) 1520 1885 4. 50% rate acceleration).17 0.42 Source: Pickering Energy Partners Running well economics for a Tier 2 well is more difficult.87 1.70 1.4bcf well).7 1.30 0.03 0. Tier 2 Barnett PICKERING ENERGY PARTNERS.00 6.03 0.09 0.07 0. While it’s still too early to know precisely how much overlap exists on 30-acre spacing. Assuming the same well cost and decline rate characteristics.07 4.30 0.03 0.05 0.07 0.62 0.00 6.08 0.09 0.05 0.Figure 22. Figure 23 – Barnett Shale Core/Tier 1 Horizontal Well Economics – Downspaced Well Summary Initial Production (Mcf/d) Net Reserves (MMcf) Discounted Cash Flow ($MM) Discounted Cash Flow ROR NPV ($MM) NPV/Mcfe Incremental F&D ($/Mcfe) 1520 1413 3.04 0.11 0.30 0.11 0.22 1.08 0. Given new data released by EOG.04 4.02 0.19 0. Barnett Shale Core/Tier 1 Horizontal Well Economics Summary Initial Production (Mcf/d) Net Reserves (MMcf) Discounted Cash Flow ($MM) Discounted Cash Flow ROR NPV ($MM) NPV/Mcfe Incremental F&D ($/Mcfe) Capital Cost ($M) Gas Price ($/Mcf) End Period Prod (Mcf/d) Decline (% of Year 1) Net Production (MMcf) Revenue ($MM) LOE ($MM) Production Tax ($MM) Overhead ($MM) DD&A ($MM) Tax ($MM) Cash Flow ($MM) Cash Flow ($/Mcf) P/T Disc.10 0.12 0.97 3.00 6.58 0.07 0.51 0.91 3. Initial results imply that there is overlap of the frac networks on this denser pattern resulting in some rate acceleration.16 0.00 6. As we mentioned earlier.00 6.31 0.57 1.27 2.25 0.24 0.37 0.41 0.95 3.09 0.7 86% 1.03 0. the industry is experimenting with even tighter spacing as EOG is drilling pilots on 500-foot spacing (30-acre spacing).15 0. Figure 23 shows our estimate of the well economics for a downspaced Tier 1 well.37 0.01 3.500-foot lateral may be optimal (still resulting in a 2.86 0. 27 .57 0.37 0.20 1.00 6.87 0.07 0. per well returns would only fall to 86% (obviously still attractive). Thus doubling the locations does not double the reserves.68 0.18 0.14 0.05 0.08 0.45 0.06 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Years 11-30 2.92 4.57 0.06 0.51 0.13 0.3 1.01 0.500-foot lateral is equivalent to 100-acre spacing.00 6.01 0.34 0.09 0.76 0.08 0. 1000foot spacing coupled with a 4.80 0.10 0.30 0.59 Source: Pickering Energy Partners The above well economics calculation assumes no drainage overlap between wells.06 0.22 0.99 3.01 0.00 6.13 0.

INC.00 6.02 0.00 6.03 0. These wells have averaged 100.01 0.44 0. Decline curve – 55% in year 1.25 2.01 0.15 0.25 0.12 0.acreage has less gas-in-place (thinner and shallower) and questions persist regarding the western extent of the “gas window”.02 4.41 0.08 0.22 0.25 0.05 0.22 0. F&D cost .64 0.06 0.00 6.18 0.68 0.45 0.31 0.34 0.02 0. which are strong. but not as favorable as in the Tier 1 and core horizontals. Although we expect results to improve as companies improve the completion techniques in the area. less than core/Tier 1 due to shallower target.11 0.00 6.10 0. higher than our assumptions).0 0.00 6.02 0.06 0. Data from core/Tier 1 wells.00 6. and 1.14 4. We will ignore the EOG results for now (tested at 0.11 4. Figure 23.34/mcf.30 0.02 0.15 0.01 0.33 0.47 0.04 4.04 0.08 0. 25% in year 2.01 0.18 0.06 0.08 0. Of these the last two wells look to be economic in our scenario (we have also heard well costs were >$2 million.04 0.04 0.43 0.06 4. The median well return will likely be below this. derived from both EOG’s bottom-up estimate of reserves per well and our top-down estimate of ~75bcf gas-in-place per section. Reserves per well – 1.09 0. Peak monthly production – 900mcf/d.39 0.10 0.03 0. Cash Flow ($MM) Discounted Cash Flow ($MM) 900 1116 2.03 0.00 6. We estimate that the average well (900mcf/d) will generate a 70% return in a $6/mcf NYMEX price environment.02 0.00 425 315 271 245 222 201 182 164 149 135 18 75% 30% 15% 10% 10% 10% 10% 10% 10% 10% 10% 185 107 85 75 68 62 56 50 46 41 381 1. Barnett Shale Tier 2 Horizontal Well Economics Summary Initial Production (Mcf/d) Net Reserves (MMcf) Discounted Cash Flow ($MM) Discounted Cash Flow ROR NPV ($MM) NPV/Mcfe Incremental F&D ($/Mcfe) Capital Cost ($M) Gas Price ($/Mcf) End Period Prod (Mcf/d) Decline (% of Year 1) Net Production (MMcf) Revenue ($MM) LOE ($MM) Production Tax ($MM) Overhead ($MM) DD&A ($MM) Tax ($MM) Cash Flow ($MM) Cash Flow ($/Mcf) P/T Disc.15 0.4bcf gross.03 0.00 6.11 0.20 0.04 0.9mmcf/d) as they were not drilled with full laterals.04 0.04 0.00 6.07 0.29 0.08 4.14 0.77 0.01 0.01 0. we’d be lying if we said the rates didn’t give us some concern.16 1.35 0.51 0.12 0.01 0. This is what we think the typical Tier 2 horizontal well in the Barnett looks like: Well cost – about $1.$1.01 0.71 0. .5 70% 1.84 4.10 0.08 0.36 Source: Pickering Energy Partners We do have a small amount of data about the wells in Tier 2.05 0.5 and 0.37 0.06 0.10 0.27 0.06 0.31 0.07 0.05 0.00 0.5 million to drill and complete.98 3.95 3.03 0. 28 P I CK E RI N G E N E R GY P A R T N E RS.04 0.4bcf/well when assuming the same decline curve as seen in the core/Tier 1 horizontals.27 0.08 0.00 3.02 0. 640.03 0.22 0.500 6.00 6.44 3.18 0.18 0.18 0.02 0.130mcf/d. However the IFNY wells were drilled with full laterals.93 1.34 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Years 11-30 1.51 0.31 0. EOG has announced flow rates from 2 wells and IFNY has announced flow rates from 4 wells.07 0. So far most of the wells are noticeably below our assumed average.28 0. The biggest risks to Tier 2 economics are initial production and decline rate. 210. The calculated rate equivalent to an EUR of 1.82 0.28 0.02 0. (80% net revenue interest) Figure 23 shows our well economics calculation for the median Tier 2 non-core horizontal well. 10% thereafter. 15% in year 3.

How would the steeper decline curve seen in the KWK model impact our economics? For core/Tier 1 horizontals. it would lower the average return to 47% from 70%.000 1. pulling up the average. 29 . As the average vertical and horizontal well looks economic in our base case scenario. Peeling Back the Onion One piece of data we found interesting is that the average production rate was consistently above the median production rate. Clarity on the actual decline will occur over time with more production history.250 1. A log normal distribution simplistically means that there are more below-average wells than above-average wells. Figures 24 and 25 show the distributions of the vertical and horizontal well results for 2004. it would lower the return in our $6/mcf scenario to 85% from 113%.750 2.500 Peak Monthly Production (mcf/d) Source: IHS Energy and Pickering Energy Partners 0% More PICKERING ENERGY PARTNERS.000 2. INC. However. Figure 24. the good wells tend to be really good. it is important to analyze the downside cases.250 2.500 1. For Tier 2 wells. 2004 Vertical Well Distribution 140 120 120% 100% 100 # of Wells 80 60 40 20% Frequency Cumulative % Average: 652mcf/d Median: 571mcf/d 80% 60% 40% 20 0 250 500 750 1. This implies that the well results are not normally distributed…in fact the data appears to be log normally distributed.

000 2.500 2.000 1. Tarrant. For a vertical well. 23% of the horizontal wells and 32% of the vertical wells would be uneconomic in our $6/mcf gas price scenario. we estimate the minimum peak monthly production necessary for a horizontal well to break even to be ~650-750mcf/d (depending on richness of gas production).500 3.000 3. the minimum peak monthly production would need to be ~400-450mcf/d. .Figure 25.500 4. Figure 26 shows the breakdown of this data for Denton. INC. 2004 Horizontal Well Distribution 50 45 40 35 30 # of Wells 25 20 15 10 5 0 500 1. 30 P I CK E RI N G E N E R GY P A R T N E RS.000 Peak Monthly Production (mcf/d) 4.638mcf/d Median: 1. Looking back at the wells drilled in 2004. Wise and Johnson counties.500 More 0% 40% Frequency Cumulative % Average: 1.402mcf/d 100% 120% 80% 60% 20% Source: IHS Energy and Pickering Energy Partners In a $6/mcf environment.

Well Med. Well Performance Breakdown by County – Vertical Wells Vertical Wells 2003 Production (mcf/d) % Wells Uneconomic County Well Count Avg. Well Med. 31 . Well $5/mcf $6/mcf $7/mcf Denton 180 614 559 52% 34% 23% Tarrant 126 785 685 34% 21% 14% Wise 145 594 519 59% 35% 26% Johnson 24 578 428 54% 46% 38% 475 652 573 50% 32% 22% Total Vertical Breakeven Economics mcf/d Production (mcf/d) Core Johnson Benchmark Price: $5/mcf 570 500 $6/mcf 445 400 $7/mcf 365 335 Source: IHS Energy and Pickering Energy Partners Figure 26b. Well $5/mcf $6/mcf $7/mcf Denton 378 695 637 40% 24% 14% Tarrant 130 937 874 24% 15% 11% Wise 297 772 682 39% 24% 16% Johnson 15 597 620 47% 40% 20% 820 759 690 37% 23% 14% Total 2004 % Wells Uneconomic County Well Count Avg. INC. Well Med. Well $5/mcf $6/mcf $7/mcf Denton 62 1448 1336 29% 23% 15% 47 1990 1821 15% 11% 6% Tarrant Wise 59 1208 902 53% 37% 34% Johnson 41 2139 2107 22% 17% 10% 209 1638 1474 31% 23% 17% Total Horizontal Breakeven Economics Production (mcf/d) Core Johnson Benchmark Price: $5/mcf 950 830 $6/mcf 740 670 $7/mcf 610 560 Source: IHS Energy and Pickering Energy Partners PICKERING ENERGY PARTNERS. Well Med. Well Performance Breakdown by County – Horizontal Wells Horizontal Wells 2003 Production (mcf/d) % Wells Uneconomic County Well Count Avg.Figure 26a. Well $5/mcf $6/mcf $7/mcf Denton 30 1856 1625 13% 13% 10% 17 2134 1967 12% 12% 12% Tarrant Wise 17 1756 1673 29% 18% 6% Johnson 5 936 704 60% 40% 0% 69 1833 1654 20% 16% 9% Total 2004 % Wells Uneconomic Production (mcf/d) County Well Count Avg.

Roughly 50% of the vertical wells drilled in the core area would be uneconomic at $5/mcf gas. both the average and median well is economic in each of the four counties. the play looks quite good. If gas prices fall significantly. but the good wells make the average work. where ~55% of the 2004 horizontal wells would have been uneconomic. despite consistently hearing that the core area is the best acreage in the play. Lowering our gas price to $5/mcf doesn’t have the same impact to a horizontal drilling program. . In a $6/mcf gas price environment. The exception is Wise County. In our base case scenario. Now let’s just hope drilling and completion costs don’t go up any more… 32 P I CK E RI N G E N E R GY P A R T N E RS. it’s full steam ahead in the play. Horizontal wells in Johnson County bucked the poorer year-over-year results as the county is less developed and the industry made significant strides in completion techniques. Similar to what we see with the vertical wells. both the average well (656mcf/d) and the median well (581mcf/d) were economic. Looking first at core area verticals. Horizontal wells have consistently generated better returns that verticals wells over the last 2 years. INC. However this could also indicate that the sweet spot of Wise is more mature than in Tarrant and Denton… If we lower our benchmark gas price assumption to $5/mcf. a large. a $7/mcf gas price means everything works. Summing it Up Two words…size matters! The primary take-away from this data is that a large acreage position is necessary. In both 2003 and 2004. expect vertical wells to be the first to get cut back. Even in a $5/mcf gas price environment. 2003 in the core area. it could also miss it entirely… Horizontals rock. The poor core area trend likely results from some combination of two factors: the relative maturity and the industry’s continued downspacing of the Newark East field and an increased percentage of the wells drilled outside of the sweet spot. As mentioned. The best core area horizontals are in Tarrant County. In 2004 Wise County wells delivered the poorest performance. the best wells are the Johnson County horizontals (2. Overall. Tarrant County wells were superior to those in Denton and Wise. average well returns remain attractive. In 2004 the median well would have been economic only in Tarrant County. Surprisingly. The Barnett Shale is a highly complex reservoir with economics that vary widely from well to well. vertical wells become a lot dicier. regardless of where they are drilled. One thing jumps out at us immediately…production from both vertical and horizontal wells got worse in 2004 vs.139/mcf average rate). horizontal wells look better than vertical wells. as average and median wells for the most part remain economic. contiguous acreage position is desired in order to minimize the risks in the play. If we bump our gas price assumption up to $7/mcf. with superior economics to both core area horizontals and verticals. as both the average and median well are quite economic in every county. Of course. One possible explanation for this is that a large number of the Wise wells in 2004 appear to be field extension wells well drilled outside of the sweet spot. The data shows that a fair amount of the wells drilled are uneconomic in a $6/mcf environment. While it’s true that a smaller acreage position could be entirely in a sweet spot. they look far better for horizontal wells than they do for vertical wells. Since the industry has yet to figure out how to distinguish good wells from bad wells prior to drilling. rates of return in the Barnett look quite attractive.The prior tables also add color to our earlier discussions of sweet spots in the play.

At this point in the play’s development. and it appears that another “sweet spot” trend is emerging. The Johnson horizontals. we’d take random acreage in Johnson County over the core counties (Tarrant. 33 . INC. Denton. have been quite good. Tier 2 – still too early to tell… PICKERING ENERGY PARTNERS.Johnson looks sweet. however. Wise) any day of the week. The Newark East field looks relatively mature (which is consistent with statements from DVN that its core area production has peaked) and core area results outside of Newark East haven’t been nearly as good.

Gas in place. so a smaller quantity of gas will be crammed into an equivalent pore space when compared to the deeper sections. And second. As there is still limited data on how extensively downspacing will work and just how many new reserves it will add. As a result. The recovery factor (rf) for the core area of the Barnett Shale has been estimated at 1015%. ultimate recovery will only be 18% of the original gas in place. the shallower depth means there is less pressure. As this is the most recent datapoint we have. This affects reserves in place from two angles. That is. As it is still unclear what the optimal spacing will need to be or how many stacked laterals will be required to effectively develop the resource base. Remember that 1 section = 640 acres (1 square mile). the gas in place in the Tier 2 noncore area is likely to be much lower than it is in Tier 1. Estimates for gas in place in the core area of the Barnett run ~140-145bcf per section. we use 18% as the average rf in the core and Tier 1 non-core areas for our analysis. there is less volume available for the gas to occupy. . we need five pieces of information: net acres. the Barnett shale gets quite thin and shallows significantly.Reserve Potential There are two ways to calculate reserve potential net to the companies – top down (reserves/section) or bottom up (reserves/well). though recent data indicates this range may be too low. Recovery factor. First. Our discussion with industry contacts and Barnett operators indicates this is a reasonable starting point given what’s known about the area. As the play moves to the south and west. recovery factory. As the Barnett shale remains thick in much of the Tier 1 non-core. it does little to convey information about the resource potential of an individual company’s acreage position. we think it’s best to throw it in the unquantified “upside” category for the time being. Studies on the play’s resource potential have indicated that the Barnett can have gas in place ranging from 50-150bcf per section. we will also use this gas in place estimate for Tier 1. We assume that 75bcf per section will be the average for Tier 2 (the range is likely 50-125bcf per section). Admittedly. A more useful number is gas in place per section. As there is little production data from this area. This implies an rf of 18%. While this is certainly an impressive number. Self explanatory. this number seems high to us. EOG recently announced that it expects to drill 2. we choose to use the top down method to estimate reserves. 34 P I CK E RI N G E N E R GY P A R T N E RS.4bcf wells on 60-acre spacing in Johnson County. How much acreage each company owns. gas in place per section. Some companies are currently working to further increase the rf by drilling downspaced pilot tests. Any further increase in the overall recovery factor would be very significant to reserves. We use the midpoint of this range.royalty rate) Net acres. drillable acreage and royalty rate. but it is what it is. The total resource potential of the Barnett Shale is estimated by the USGS to be ~200tcf. depending on the thickness of the shale. In order to estimate reserve exposure per company. this estimate is quite rough. INC. Reserve Potential = Net acres x Gas in place per acre x Recovery factor x % of acres that can be drilled x (1 . Our initial take on EOG’s 30acre pilot implies an rf of 26% as the new wells are adding some incremental reserves.

As a result. E&P companies must use 3-D seismic defensively to avoid these structures. More recently. PICKERING ENERGY PARTNERS. IFNY has ~31. This complexity implies that <100% of the acreage in the play will be productive. We are using 50% for our analysis. we are using an rf of 12% for the acreage until we know whether tighter spacing or shorter laterals will be successful in Tier 2.000 acres in Comanche County. we are not comfortable assuming the higher rf at this time.As there is still little information available on the Tier 2 non-core. The Barnett Shale is a very complex reservoir. The table includes all of the companies’ acreage positions. The real question is just how much less… We have talked extensively with public and private companies that operate throughout the Barnett. regardless of whether or not we think the acreage will be productive. we have found this to be ~20%. KWK (200%). a few companies have estimated that up to 85% of their acreage could be productive. Their assessment of productive acreage has been ~50% based on analysis of partial 3-D seismic coverage and “experience”. we think it would be rare for a sizeable acreage position to have so little karsting/faulting. E&P companies don’t get acreage for free (unfortunately for shareholders). leaseholders also typically keep an overriding interest in any production from the lease. CRZO (>600%). Royalty rate. Drillable acreage. As a result. While possible over small acreage positions. leaving 80% of the reserves for the E&P company. On average. We think this acreage is risky as it may not have been exposed to enough temperature and pressure to be in the gas window. The companies with the most upside reserve exposure to the play are IFNY (huge!). 35 . and EOG (>60%). That said. In addition to receiving an upfront lease payment from the operators. INC. For example. this acreage position is included under IFNY’s Tier 2 acreage. And the most reserve growth potential belongs to… Figure 27 shows the main public companies with exposure to the Barnett Shale. Geologic features such as karsts (sinkholes in layman’s terms) and faults can cause wells to be wet or unproductive.

700 683 580 341 341 0 0 341 3711% 9 KWK 67. CRZO actually has a greater percentage of its acreage in the Core/Tier 1 than KWK.546 3.300 72 61 36 36 0 0 36 28% 130 XTO 116.039 3.800 33 143 4.940 752 5.322 14.097 300 12 785 6% 13.972 1.279 752 752 175 7 570 12% 4.000 181 143 25.828 230.475 25% 5.250 46 75 3.000 28 75 2.000 2.965 16.505 1.500 254 75 19.285 1.038 2.300 4 143 512 90 72 0 0 75 0 0 0 2. EOG and IFNY both get a qualitative ding for the high percentage of western county acreage. BR and ECA each have <10% overall reserve upside from the play.043 2. primarily in Jack.487 1. has a relatively small acreage position (which is a concern given prior discussion).000 625 75 46.700 35 75 2.450 1. and 10% respectively).822 2.570 548 439 155.860 553.500 907 771 454 454 64 2 387 50% 776 DVN 535.000 836 143 119.637 39.194 88.795 47% 12.097 3.000 61 75 4.000 16.121 20.960 1.992 239 191 89.232 725 725 32 0 693 634% 109 DNR 20.000 490. Each calculation assumes $6/mcf gas and that the well is drilled today.113 854 683 60.224 290 35 899 7% 12.109 253 203 ECA 38.464 2. @ 80%) Total Net acres Net reserves (Bcf) 85% drillable acreage 50% drillable acreage Upside Reserve Potential Total Barnett potential (Bcf) Barnett proved reserves (Bcf)* Cumulative Barnett production (Bcf)* Upside reserves (Bcf) % of total proved reserves Total proved reserves (Bcfe) 72.865 6.031 2.975 2.462 1.522 62% 5.121 29.000 1. but it is more fragmented while KWK’s is more contiguous. 50%.007 CHK 48.645 2. PLLL. Erath.029 2.500 IFNY 0 0 143 0 0 0 60. @ 18%) Net reserves (Bcf. while all of IFNY’s acreage is located in Erath and Comanche counties.224 1. KWK appears to have the lowest risk acreage position as its acreage is concentrated in the eastern portion of Hood and Somervell counties. and Palo Pinto counties.881 1.0 million or ~$0. 36 P I CK E RI N G E N E R GY P A R T N E RS.000 3. 30%. This increases the risk associated with these assets as it is still unclear whether or not the western counties are truly in the gas window.401 1. DVN.075 3.487 1.661 136 3 3.900 139 75 10.Figure 27.000 113 143 16.429 1.483 1.000 75 143 10. XTO and CHK also have significant upside reserve potential from the Barnett (~50%.936 200% 968 PLLL 2. A Tier 2 horizontal well is worth $1. ~80% of EOG’s acreage is located in Tier 2.700 95 75 7.000 127.944 3.000 27 75 1.257 17.418 1.527 2.65/mcf.95/mcf. PLLL. Of these four companies.625 4. INC.000 EOG 90.100 60 143 8.500 105 143 15.467 3.000 1.000 4.902 CRZO 35.505 0 0 75 0 0 0 48. @ 80%) Tier 2 Net acres Sections Bcf/section Gas in place (Bcf) Recoverable gas (Bcf.772 18.631 815 652 22.223 8.000 141 143 20.493 1.428 411 329 65. DNR.250 1.972 36 0 1.828 4.661 8.4 million or ~$0.688 1.822 400.195 7.660 319 255 43. The tables below show the value of a Barnett well under different pricing and production scenarios. 25%.038 550 13 1. What’s an Mcf worth anyway? Looking back at our well economics calculations indicates that the typical core/Tier 1 horizontal well is worth about $2.3 million or ~$1.353 1. @ 12%) Net reserves (Bcf.647 Source: IHS Energy and Pickering Energy Partners *estimated Two of these companies have made a large bet on the western edge of the play. .081 1. however.116 162.20/mcf.750 56 143 7.448 2. A vertical well is only worth $0. Barnett Shale Upside Calculation BR Core/Tier 1 Net acres Sections Bcf/Section Gas in place (Bcf) Recoverable gas (Bcf.875 5.

2) $0.8 $5.1 $0.00 $9. PICKERING ENERGY PARTNERS.8 $3.4) ($0.5 $3.1) $0.00 $6.1 Source: IHS Energy and Pickering Energy Partners Average well = 650 mcf/d.5 $4.04 $3.00 $5.5) ($0.3 1300 $0.9 $1.0 $1.9 $1.3 $5. The NPV of the acreage position is highly sensitive to the number/location of wells drilled each year.00 $0.1 $0.1 $2.4 $2.3MM NPV @ $6/mcf Exhibit 30. The primary reason for this is time value of money.0 $2.7 $9.2 $0.9 $3.2 $1.00 950 ($0.5 $8.39 500 650 800 ($0.7 $1.00 $0.4 $0.4 $1.0 $7. 37 Gas Price ($/Mcf) .6 $8.1 $0.6 $1.9 $2.1) ($0.4 $3.1 $0.4 $3.5 $4.26 1000 1500 2000 ($0.3) $3.00 $0. even with these figures.7) ($0.1) $0.6 $0.5 $6.1 $0.3 $8.6 $6.00 ($0. $2.3 $3.6 $4.3 $0.0 $4. $0.6 $2.00 $4. so the analysis is clouded by assumptions of future rig counts.00 $0.7 $1.8 Gas Price ($/Mcf) Gas Price ($/Mcf) Source: IHS Energy and Pickering Energy Partners Average well = 1520 mcf/d.5 $1.7 $9.4MM NPV @ $6/mcf Exhibit 29.7 $6.2 $7.2 $2.4) ($0.5 $2.6) ($0.00 $8.3) ($0.0MM NPV @ $6/mcf However.1) $0.0 $2. type of well drilled (horizontal/vertical).7 $2.5 $5.6 $1. etc.00 ($0.4 $0.4 $2.00 $2.9 $6.Exhibit 28.4 $4.3 $1. $1.0 $4.6 $1.0 $1. Core Vertical Well Value ($MM) Peak Monthly Production (Mcf/d) 0.7 $1.6 $7.7 $1. Tier 2 Horizontal Well Value ($MM) 1.2 $3.00 $0.00 $1.00 $0.0 $0. it is not a simple extrapolation process to determine the value to an individual E&P company’s acreage position.00 Peak Monthly Production (Mcf/d) 700 900 1100 ($0.00 2500 $1.2) $0.5 $0.00 $7. Tier 1 Horizontal Well Value ($MM) Peak Monthly Production (Mcf/d) 2.00 $1.1 Source: IHS Energy and Pickering Energy Partners Average well = 900 mcf/d.2) $0. location of the rigs.00 ($0. INC.1 $1.

With the two rigs it’s currently using. Assuming 50% drillable acreage and just 100-acre spacing. Even if the company immediately accelerates to its targeted 6 rigs. INC. the NPV of the company’s Barnett assets would be different in a 40-year versus a 15-year drilling scenario. it would take >40 years to drill its entire acreage position (15 wells per rig-year). .285 locations in its inventory. The company has 230. KWK has ~1.000 acres in the Barnett play. it would still take KWK almost 15 years to fully drill its acreage. Clearly. 38 P I CK E RI N G E N E R GY P A R T N E RS.Let’s take KWK for instance.

50% higher rig count): Proved Reserve NAV $60 $27 $49 Barnett Potential $8 $7 $83 $24 $28 $3 NAV w/ Barnett Potential $68 $51 $77 Delta vs.12 $2. Current Price -$13 $1 $8 % of current stock price -16% 2% 12% PICKERING ENERGY PARTNERS.57 $0.44 $0.19 -$0.02 -$0.23 $1.03 $0.32 Base Case ($6/mcf gas. 85% drillable acreage.59 -$1.02 -$0.90 IFNY $8.27 DNR $50.41 $0.02 -$0.38 $0.08 $0.05 1% increase in initial decline -$0.00 $1.14 $5.Stock Price BR $81.99 $0. Source: Pickering Energy Partners $44 $13 $57 -$12 -17% $1 $24 $31 $14 $45 -$30 -40% $15 $19 $33 -$15 -30% $2 $27 $7 $35 -$11 -23% $44 $14 $57 -$11 -17% $1 $31 $11 $42 -$33 -43% $17 $15 $19 $33 -$15 -31% $2 $27 $8 $35 -$10 -22% $37 $28 $65 -$10 -13% $3.15 KWK $47.56 Upside Case 1 ($6/mcf gas.74 $0.14 -$0.38 $1. Current Price -$25 -$14 % of current stock price -31% -28% Upside Case 2 ($6/mcf gas.22 $1.64 ECA $58.83 $1.23 1% increase in recovery factor $0.19 -$0. 50% drillable acreage.10 $0.30 $0.29 -$0.06 $1.17 $0.05 10% increase in drilling costs -$0.25 CRZO $29.79 PLLL $13.99 XTO $45.31 EOG $74.12 -$0. Current Price -$26 -$18 % of current stock price -32% -36% $44 $10 $53 -$15 -22% $1 $17 $1 $31 $10 $41 -$33 -45% $15 $15 $30 -$18 -38% $27 $4 $32 -$14 -30% Exhibit 31.14 1 additional rig $0. 60-acre spacing): Proved Reserve NAV $53 $26 Barnett Potential $2 $2 $26 $6 NAV w/ Barnett Potential $55 $32 Delta vs.34 $0.30 $0.10 $0. Current Price -$25 -$14 % of current stock price -30% -27% Upside Case 3 ($7/mcf gas. Barnett Value Sensitivites (from Base Case): $1/Mcf change in gas price $0.18 -$0. Value of Barnett Upside Potential Company-specific Barnett upside Having highlighted the challenges of the analysis.08 -$0.53 $0.01 -$0.18 39 . INC.46 $0. 50% drillable acreage.39 $0.79 $0.04 -$0.98 $41 $18 $40 $58 $11 22% $7.05 $0.64 -$2.48 $1.33 -$0.05 $0.02 -$0. 30-acre spacing): Proved Reserve NAV $53 $26 Barnett Potential $4 $3 $39 $11 NAV w/ Barnett Potential $57 $37 Delta vs. 30-acre spacing.64 $0. let’s look at the results.07 $3.67 $0. 85% drillable acreage.44 DVN $68.09 -$0.12 $9.37 $4 $33 $18 $52 $6 14% $0.75 $0.96 $1.81 5% increase in drillable acreage $0. 60-acre spacing): Proved Reserve NAV $53 $26 Barnett Potential $4 $3 $37 $10 NAV w/ Barnett Potential $56 $36 Delta vs.32 CHK $38.51 $0.00 -$0.44 $0.67 -$2.73 $0.

we assigned value to all of a company’s acreage position. We should highlight two of our assumptions. We doubt the Barnett will be productive in Comanche County (an opinion we view to be validated by IFNY’s announcement that it will develop this acreage with vertical wells to test the Marble Falls as well). the company would still need a significant amount of NAV growth outside of the Barnett to warrant its current stock price. it is highly probable that many of the Barnett operators will continue to expand their rig count in subsequent years. and you might not need to know much about its other assets. An investor has to use aggressive assumptions about the play (not to mention higher commodity prices) to justify buying most of these names on Barnett upside alone.) 40 P I CK E RI N G E N E R GY P A R T N E RS. Our primary takeaway from this analysis is that Barnett upside is already priced into most of these stocks (with some priced to perfection). etc. even overvalued. being concentrated in Erath County. For instance. At current levels. even if it we viewed it as low probability. and thus a more prudent way to look at IFNY might be to cut the numbers in the prior table in half. EOG’s Barnett position appears fully valued and. While it appears that IFNY has significant upside potential from the Barnett as well. For example. Some companies (such as KWK) have corporate tax shields which will allow them to pay a lower percentage of cash taxes over the next few years. Its remaining acreage position is not without risk either.The previous table shows the NAV impact of the Barnett in four scenarios. The stock whose valuation concerns us the most is EOG (we exclude BR as it is not really a Barnett story). Even in our most aggressive scenario. The four scenarios we provide obviously don’t cover all the possible or even likely scenarios. We view our base case as the most likely. DNR has a large delta in our base case. but provide three more aggressive scenarios for perspective (and to account for companies like CHK and CRZO arguing that 85% drillable is more likely on their acreage). For the purpose of this analysis. as well as the assumptions that would be required to justify the current stock price. we have included sensitivities to many of the key variables used in the analysis. we caution that it has the riskiest acreage position among the companies listed (100% Tier 2. Also. INC. (Note – the analysis assumes EOG operates 9 rigs in 2005 and 16 rigs thereafter. The sensitivities are calculated from the upside Barnett potential in our base case scenario. perhaps. The delta relative to the current stock price represents the per share value that must come from future growth outside the Barnett Shale to justify the current stock price. We use a 25% cash tax rate in the analysis. For number of wells drilled per year. each rig is assumed to drill 15 wells per year. The following table breaks down a fair value for EOG given our Barnett calculations. The stock which looks the most interesting as a Barnett play at current stock prices is CRZO (not on our official coverage list). . not far below its current stock price. ~50% in Comanche County). As a result. Make some more aggressive assumptions about drillable acreage. we use companies’ expected rig count over the next 12 months and assume each rig can drill 15 Barnett wells per year. but it is straightforward to identify additional value in the company’s tertiary recovery potential. EOG – a closer look That EOG was still ~$10/share shy of its current price even in our aggressive upside case has made us take a closer look at its valuation. CRZO’s upside Barnett value in our base case is $26/share. IFNY has a lot of upside potential if its acreage works but at this point that’s a big if.

we need to increase our benchmark gas price assumption to $7/mcf (in line with what peers are currently discounting). ~40% below the current stock price. buying EOG at current levels still makes sense. The impact of this cost structure on the above analysis would be to increase the Barnett upside value in our base case to $12 per share from $10.4 million from $1. we believe 1.3 million and the NPV of a Tier 2 well to $1.6 million from $2. 41 .1 million for its Tier 2 acreage (vs. EOG Value Calculation EOG ($74. our assumptions of $2. or $6 higher than with the Pickering Energy cost assumptions. We also have to assume that 30-acre spacing works on all of its Johnson acreage. However. PICKERING ENERGY PARTNERS.6 million for its Johnson County acreage (Tier 1) and $1. Adding this to our base case $10 per share value for EOG’s unbooked Barnett potential yields $45 per share. INC. resulting in a base case stock value of $47.0 million. With EOG currently trading at $75.Exhibit 32. This multiple generates a per share value for EOG of $35 excluding Barnett upside. and that the recovery factor in the Tier 2 non-core can be increased to 18%.1x $35 $10 $45 Required Assumptions to justify current stock price: Proved Reserve NAV @ $7/mcf and $50/bbl $38 Appropriate NAV Multiple 1. and below the average well cost we are using in our model.1x Stock Value of Proved Reserves $42 Barnett Upside Value @ $7/mcf gas $14 30-acre Spacing in Johnson (26% recovery) +$1 85% Barnett acreage drillable +$4 150% higher rigcount than base case +$11 18% Recovery factor for Tier 2 +$3 Stock Value $75 Source: Pickering Energy Partners As EOG is a well-run company. In order to justify the current stock price. that EOG more than doubles its rig count from our forecast 2006 level (to 40 rigs from 16). we have to make a number of aggressive assumptions. Could we be wrong? Of course.1x is a fair multiple to place on its proved reserve NAV to account for its going concern value. EOG is assuming a well cost of $1. We should note that EOG’s well cost assumptions are at the low end of the industry range.5 million). If investors are willing to make more aggressive assumptions than those in the table above (or assume a higher commodity price deck). we still think it wiser to buy one of the cheaper Barnett players which could offer significantly higher upside potential in such a scenario. as our analysis is based on imperfect data and a number of assumptions. the lower cost structure would result in a stock value of $81.90) Proved Reserve NAV @ $6 and $45/bbl Appropriate NAV Multiple Stock Value of Proved Reserves Barnett Upside Value @ Base Case Base Case EOG Stock Value $31 1. that 85% of the company’s acreage is productive. First. even if one was willing to make those assumptions. it certainly feels to us that even the most aggressive EOG assumptions are already priced into the stock. Using the EOG well cost assumptions would increase the NPV of a Tier 1 well to $2.0 million and $1. In the second case.

and retrograde reservoir. Basically. Possibility of retrograde condensate reservoir. . where oil and gas could both be present in the reservoir. We will not try to discuss all of these. 42 P I CK E RI N G E N E R GY P A R T N E RS. it won’t be easy. only to have future production decline more rapidly than expected (resulting in lower than anticipated reserves) as the free gas is exhausted. oil will not flow very well (if at all) in the ultra-tight Barnett. not the case with downspacing) beyond what our analysis suggests. especially in the non-core area.The Unknowns Although the industry has been developing the Barnett shale for quite some time now. This means that liquids drop out of the gas stream while still in the reservoir. production curve looks the same. as the oil molecules will not flow as easily. The returns figures also assume that all the lost production comes at the end (ie. Currently. improvements in technology. Where it gets trickier is in the “transition zone”. the well would yield 25% lower than expected reserves and lower returns (breakeven production level would jump to 735mcf/d from 670mcf/d in $6/mcf gas scenario). but this does pose a potential problem down the road. As the industry shoots more seismic over the area and gets more well control. The first two topics were discussed earlier. Is the rich gas stream in the non-core Barnett a blessing or a curse? Companies currently benefit from the increased heat content created by the liquids in the gas stream. Wells fully in the oil window are easy to identify. oil/gas window. but will highlight five issues that will have an impact on the play economics and reserve potential: drillable acreage. if drillable acreage is indeed closer to 85%. but we caution that this is still a very rough estimate. Palo Pinto). it will be able to refine its rough estimate of drillable acreage. It’s too early to know one way or the other. That said. This means that any gas trapped behind the liquids will not flow either. This could pose a problem similar to the oil/gas window as it could reduce eventual recovery. The well may initially look like a gas well. which is probably not a conservative enough assumption. Erath. as early production will be mostly oil. Recovery improvements could boost both upside reserve potential and drilling returns (if the per well recovery is improved. Why do we care about oil vs. Recovery factory could also continue to improve over time. but it is something that investors should keep an eye on. Conventional wisdom in the industry indicated that the gas window did not extend into the western counties (Jack. As the earlier table shows. INC. rather than once they reach the surface. recovery factor. Currently. etc. This does not necessarily mean that the well is in the gas window. we are materially underestimating the upside reserve potential of the play (and Barnett valuations look more palatable). gas? Simple… Given the larger size of its molecules. a number of question still remain. decline rates. Further increases are possible due to downspacing. For now. Early production from a well in the transition zone will be mostly gas. companies such as EOG and IFNY are trying to prove the viability of these counties. that’s just what it is…a rough estimate. New data from E&P companies implies the recovery factor may be closer to 18% (well up from the 12% estimate we were using when we started writing this report). assuming the above free gas/adsorbed gas ratio is correct. adsorbed gas is estimated to be ~25% of the gas in place. Oil/gas window. A key question that has yet to be fully answered is where the gas window ends. Some industry experts postulate that portions of the Barnett “transition zone” are a retrograde condensate reservoir. then drops to zero after free gas is produced).

but these will most likely change as the industry gets more production data. it may have a significant impact on economics. We touched on this earlier in the report with the KWK example. 43 . PICKERING ENERGY PARTNERS. We have estimates at this point. Only time will tell if current expectations of the “typical” Barnett decline curve prove to be too conservative or too aggressive. INC. The decline rates that will be seen in the non-core area of the play are not precisely known at this time.Decline rates. While a changing shape of the decline curve might not impact the reserves in the play (as in the KWK example).

On average. This “resource play” takes a continuous technical feedback loop to maintain optimal well performance. . INC. nor what the decline rates or recovery factor will be. However the statistical nature of the Barnett suggests that. Not all acreage is created equally (part 2).Summary/Conclusions Not all acreage is created equally. For this type of a statistical play (highly variable) to work. Barnett stock picks – CRZO (not officially covered) looks interesting while EOG looks riskiest. Each of these items will meaningfully impact the play’s ultimate potential. The Barnett Shale does appear to have sweet spots that will be far more productive than the average acreage position. Unknowns remain. especially in the non-core area. More aggressive assumptions (higher gas prices. The industry still does not have definitive proof of where the gas window ends. good well more than offset bad wells. Barnett upside potential appears to be fully reflected in stock prices. etc) are needed to find significant upside from current levels. higher recovery factor. Early mover advantage. On average. more drillable acreage. Not all wells are economic. 44 P I CK E RI N G E N E R GY P A R T N E RS. the companies that were early entrants into the play got the best acreage and have the best results. in aggregate. Size matters. Significant variability of results exists even within concentrated areas. Operators shouldn’t let the drilling program “get ahead” of well performance. a large enough acreage position is required for the law of large numbers to take effect.

PICKERING ENERGY PARTNERS. For comparison. reservoir permeability (flow capacity) is often low and commercial production of gas from organic shales often requires the presence of natural fractures and/or completions with large hydraulic fracture treatments. a tight formation in East Texas has permeability of 0. Permeability – Measurement of a rock's ability. and the Barnett Shale <0. such as shales and siltstones. Low permeability formations. tend to have smaller or less interconnected pores.9% in the western area.Appendix A – Gas Shale Terminology Gas Shales – Natural gas is generated and stored in a shale in two forms 1) free gas which occupies the pore space (similar to conventional gas reservoirs) and 2) adsorbed gas which is stored on the organic matter.0% have a tendency to be oil productive and >1. Due to the low matrix permeability. recovery factors from organic shales can be very low…sometimes <10% of the original gas in place. Formations that transmit fluids readily are described as highly permeable and tend to have many large. RO values <1. wellconnected pores. typically measured in millidarcies. Barnett Shale RO values vary widely from >1. 45 .000 md.6% RO (marginal) to 0. Thermal Maturity – Measured in the lab (core samples required) using a technique called vitrinite reflectance. Gas shales are often the source rock for oil and gas in adjacent strata in many basins in the US…including the Fort Worth Basin. INC. A high percentage of TOC implies significant material (generally) available for hydrocarbon generation. fine-grained sedimentary rocks containing a minimum Total Organic Carbon (TOC) of 0. The flow capacity of a typical GOM reservoir is ten million times higher than an organic shale. to transmit fluids.01 md. with typical values ranging from 0% RO to 2% RO.0% RO (mature). TOC in the Barnett Shale is ~4. Definitions: TOC – Total Organic Carbon is measured in the lab using a technique called pyrolysis. In shales. Because the rock matrix is composed of fine-grained rocks.6 to 2.5%. thus core samples of the shales must be available. The measurement is given in units of reflectance.0% are thought to be gas productive.0001 md. some of the natural gas is adsorbed onto the surface of the shale. % RO. Adsorption – The property of some solids to attract a liquid or a gas to their surfaces. Gas shales are organic-rich. a typical Gulf of Mexico formation may have a permeability of 1.4-0.5% in the core area to <0. Shales may have varying degrees of thermal maturity ranging from 0. Generally.5% with varying degrees of thermal maturity as measured by vitrinite reflectance RO. It is a measurement of the maturity of organic matter with respect to whether it has generated hydrocarbons or could be an effective source rock. TOC is the amount of material available to convert into hydrocarbons.

7 4.7 2 2. % Total Porosity.500-6.233 58% Units: mmcf/day Source: GTI and Pickering Energy Partners 46 P I CK E RI N G E N E R GY P A R T N E RS.000-4.9 0.200 160 70-120 75 1-20 9 4 4 1-5. psi/ft Water Production.5 1-3.0-5. ft Net Thickness.000 300-1. Bwpd Well Spacing.35 5-500 40-160 20-60 6-15 200-1.5 1.000-6. . % Water Filled Porosity.000-5. psi Pressure Gradient. % Gas Filled Porosity. MMcf Barnett 6.200 New Albany 500-2.900 200-300 130-170 0.5-3.kh.15-0. % Flow Capacity .000 500-1.500 150-700 100-600 200 4.000 0.25 0 80-320 5-15 8-50 600-2.000 0.20-0.000 Fayetteville 1. ºF TOC. Acres Recovery Factors.500-8. % Gas-In-Place.43 5-500 80 10-20 7-10 150-600 Lewis 3. md-ft Gas Content.0-9.40 0 40-160 10-20 5-10 150-600 Antrim 600-2. Bcf/Section Reserves.5 2-8 60-220 50-70 600-2.500 0.43 0 60-160 10-20 50-150 500-4.5 1-2 6-400 15-45 60-85 1.5 4-5 2.45-2.Appendix B – Comparison of Organic Shales in the US Comparison of Organic Shale Properties Depth.0 0.000-1.500 50-325 20-200 4.0-4.15-50 60-100 50 500-2. % Reservoir Pressure.01-2 300-350 25 3. INC.000 40-100 70 400 0. ft Gross Thickness.5 3.000 180 50-100 80-105 1-25 10-14 5 4-8 40-80 40-60 300-600 0. ft Bottomhole Temp.000 Ohio 2.000 30-100 100 0.000 25-60 Source: GTI and Pickering Energy Partners 2005 Estimated Gas Production from US Shales Appalachia/Ohio: 438 21% SanJuan: 55 3% Antrim: 384 18% Barnett: 1. scf/ton Adsorbed Gas.

0 250 128 Year 9 0 15 0 2.0 31 26 Year 4 9 15 135 2.3 306 230 7 15 105 1.0 250 97 Year 12 0 15 0 2. EOG Barnett Shale NPV model Total Core/Tier 1 # Rigs Wells/rig-yr # Wells Value/well ($MM) Value ($MM) NPV ($MM) # Rigs Wells/rig-yr # Wells Value/well ($MM) Value ($MM) NPV ($MM) Value FD Shares $/share Year 1 8 15 120 2.07 Total Source: Pickering Energy Partners PICKERING ENERGY PARTNERS.0 250 155 Year 7 0 15 0 2.0 250 171 Year 6 0 15 0 2.0 250 106 Year 11 0 15 0 2.3 0 0 16 15 240 1.0 163 57 1326 Tier 2 2016 1125 2451 243.3 0 0 16 15 240 1.3 272 272 1 15 15 1. 47 .0 250 117 Year 10 0 15 0 2.3 475 432 2 15 30 1.0 31 28 Year 3 14 15 210 2. INC.4 $10.3 475 393 2 15 30 1. The discount rate used in the analysis is 10%.Appendix C – Example of Barnett NPV Model Below we show an example of our Barnett Shale NPV model.0 110 82 Year 5 0 15 0 2.0 16 16 675 Year 2 14 15 210 2.0 250 141 Year 8 0 15 0 2.3 0 0 16 15 240 1.3 0 0 16 15 240 1.3 0 0 16 15 240 1.3 0 0 16 15 240 1.3 0 0 16 15 156 1. The model assumes that the companies focus their drilling efforts on Core/Tier 1 acreage (higher value) until they run out of locations. then move the rigs to their Tier 2 acreage.3 0 0 16 15 240 1.

INC.Appendix D – Generalized Company Acreage Maps BR CRZO CHK DNR 48 P I CK E RI N G E N E R GY P A R T N E RS. .

indicated by upper shading) PICKERING ENERGY PARTNERS. 49 .DVN EOG ECA IFNY *Note – ECA has acreage in Montague and Cooke counties (North of Wise and Denton. INC.

KWK XTO PLLL 50 P I CK E RI N G E N E R GY P A R T N E RS. INC. .

T = trim. A = accumulate. This communication is based on information which Pickering Energy Partners. These viewpoints and opinions may be subject to change without notice and Pickering Energy Partners. as of the date of this report. does not represent or warrant its accuracy. Inc. S = sell. ______________________________________________________________________________________ Important Disclosures: The analysts involved in creating or supervising the content of this message (or members of their households) do not own the securities mentioned. the views and opinions in this research report accurately reflect my personal views about the company and its securities. Inc. please visit our disclosure website at www. This communication is confidential and may not be reproduced in whole or in part without prior written permission from Pickering Energy Partners. INC.Analyst Certification: I. will not be responsible for any consequences associated with reliance on any statement or opinion contained in this communication.asp.pickeringenergy. NR = not rated PICKERING ENERGY PARTNERS. I have not nor will not receive direct or indirect compensation in return for expressing specific recommendations or viewpoints in this report. H = hold. Inc. believes is reliable. Jeff Hayden and Dave Pursell. 51 . Inc. Pickering Energy Partners. to the best of my knowledge. do hereby certify that. However.com/disclosure. ______________________________________________________________________________________ Ratings: B = buy. For detailed rating information. Inc. The viewpoints and opinions expressed in this communication represent the views of Pickering Energy Partners.

com 713-333-2969 Lori Yentzen lyentzen@pickeringenergy. Colorado ⎟ Suite 3400 ⎟ Denver.com 303-300-1902 Jon Mellberg jmellberg@pickeringenergy. Paige DiMaggio pdimaggio@pickeringenergy.333.pickeringenergy.1900 Phone ⎟ 303.2965 Fax⎟ 1800 West Loop South ⎟ Suite 300 ⎟ Houston. Texas Research Department 713 333-2960 Institutional Sales Houston C.300.www.com 303-300-1960 Trading Desk 800-507-2400 Michael du Vigneaud mduvigneaud@pickeringenergy. 713. Texas 77027 303.com 303-300-1995 Jason Foxen jfoxen@pickeringenergy.com Institutional Research Houston.com 713-333-2977 Josh Martin jmartin@pickeringenergy.com 713-333-2982 Email: info@pickeringenergy. Colorado 80222 .com 713-333-2974 Denver Chuck Howell chowell@pickeringenergy.1901 Fax⎟ 2000 S.com 713-333-2976 Matthew Pham mpham@pickeringenergy. Inc.2960 Phone ⎟ 713. Stearns & Co.300.333.com Clearing through Bear.

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