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Article Excerpt
MICHAEL SCHMITZ, ANALYST, BANK OF AMERICA: We appreciate everybody getting up early this morning. We have got a good lineup kicking off with Equitable Resources, the dominant player in Appalachia. With us today we have Murry Gerber, Chairman and CEO, and also Pat Kane, Head of Investor Relations.
Before we start I just have to read -- as you are aware we are required to make a number of conflict of interest and related disclosures in connection with our participation in this conference and the companies that we may discuss. If you would like to review these important disclosures, please pick up the package containing the public appearance disclosure at the back of this room. PDF copies can be accessed by those of you viewing these presentations via the webcast.
And with that, I will turn it over to Murry.
MURRY GERBER, CHAIRMAN & CEO, EQUITABLE RESOURCES: Thanks. Mike, really appreciate the intro. I can't thank you all for coming at this very early part of the morning. We heard there was a caravan at South Beach; we didn't expect to see anybody this morning.
Anyhow, we are Equitable Resources and as Mike said, we are the largest player in the Appalachian basin. We have got about 3.3 million acres in that basin. Over the past few years, particularly, we have been in the position to either [enhance] or advance, I guess, is a good way to say advance some technology that certainly has had a dramatic impact in that basin in the extraction of gas from shales, Marcellus Shale, Huron Shale, etc., etc. I will try to go in to some of the details of that with you.
The Company has been around a long time. It has been producing in the Appalachian basin since the 1880s and had become mostly a utility company over the years as the original gas from the Appalachian basin sort of waned and it became a brill supplier to this fuel business.
But over the last 10 years, particularly, oddly enough with an acquisition from Statoil in the year 2000 where we bought from them acreage at reserve-to-value at about $0.20 an Mcf for a large acreage position in Appalachia, we were able to double our reserves at that moment in time and double our acreage at that moment in time.
But of course, since then the technology has really expanded our view of how valuable that acreage is. It's sort of interesting that they are now getting back into the Appalachian basin at a much higher price.
This is supposed -- does this switch -- Mike, I'm sorry maybe I just have too hit to this space bar. Okay, here we go.
So these are our three businesses. We have a production and a Midstream, very important Midstream business and Distribution. You can see how the revenues are distributed here. The earnings are distributed, so it's 90% Production and Midstream. Importantly, most of the Midstream is really not necessarily Midstream that you would associate with companies like El Paso or Williams, et cetera.
The vast majority and the vast majority of the investment here in Midstream is really gathering. So high upstream or well upstream portion of that business connected to the production. So really, although we call it a separate business, we run it separately for a lot of different reasons. A lot of this investment is really attached to the production per se.
As we said, we are the largest E&P company in the basin. We have a very good, well-integrated Midstream business. We think that is absolutely a key to the success that we have had and the key to the future success in this basin, as well as others I might add. Then the gas distribution business really centers around Pittsburgh, Pennsylvania.
These are the basic tenants. We are a pure play. We have no other assets outside the Appalachian basin. We think we have got plenty to do in this basin for a decade or longer just organically. Lots of assets; low risk.
Our FND costs are -- it's not the leading in the country, probably among the top two or three leading depending on how you frame that metric. But clearly, extremely low and very resilient to gas prices; significantly lower than those today. Equitable will break even at $2.50 natural gas IRR, so it's a very, very resilient constructure.
The big thing that we have done, I think, uniquely has to do with the low-pressure shales. You have heard a lot about the high-pressure shales, Barnett, Fayetteville, etc., throughout the West. The Devonian shales in Appalachia, even the Marcellus are relatively low pressure. That is to say hydrostatic pressure; slightly above in the Marcellus.
But importantly, in most of the areas where we have our acreage down in Kentucky, West Virginia, and Virginia the pressures are less than hydrostatic. Therefore, the technology barrier that had to be crossed in order to exploit those to their maximum advantage had to do with the use of air. We had drilled low pressure Devonian shales in the Appalachian basin for years and years with vertical wells.
We had over 4,700 wells of our total 13,000. So a good percentage of our wells had been drilled with air vertically, but the key -- because the pressures are so low, we had to have a technology that didn't put fluid in the hole. Because putting too much water in the whole -- putting any water in the...
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