Questerre Energy Corp (Canada) T.QEC

WRE: Economics of play

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WHAT WE FOUND – DRILLING DEEPER INTO THE

MODEL

First determine if economic, then calculate value. By calculating NPV on a per

well basis we are able to determine economic cutoffs under a variety of assumptions.

After all, if a single well does not meet the hurdle rate of either NPV or payback, then

calculating value using acreage is meaningless. The land reverts back to its intrinsic

value as farmland. We suggest that development begins with a binary decision on a

per well basis, value is essentially zero if uneconomic, and something if economic.

This provides us with a framework with which to analyze future news on Utica well

performance. Under a variety of well cost and natural gas price assumptions, we

can determine at what base level the IP rate of a well reaches its economic hurdle

rate. Then we can extrapolate value by land, prospectivity, infill drilling potential from

expected reserves recovery, time to bring on all the wells, and finally incremental net

asset value (NAV) per fully diluted share to QEC.

If horizontal IP = 1,000 mcf/d, economic at US$8.00/mmbtu. Using our base

case assumptions of an average cost per well of $3.5 million, operating costs of

$1.50/mcf, a discount rate of 10% before tax for NPV and a 5 year payback cutoff, we

find that a 1.0 mmcf/d IP rate from a horizontal well will be economic with natural gas

prices at or above US$8.00/mmbtu.

If horizontal IP = 1,500 mcf/d, economic at US$5.50/mmbtu. Again using our

base case assumptions, we find that a 1.5 mmcf/d IP rate from a horizontal well will

be economic with natural gas prices at or above US$5.50/mmbtu. Now considering

that we believe a vertical IP rate should be at least 500 mcf/d from a typical Utica well

and a reasonable multiple of a horizontal over a vertical is between 2-3 times, we

expect to see rates between 1.0 – 1.5 mmcf/d or better.

If horizontal IP = 2,000 mcf/d or greater, economic at almost any price. Again

using our base case assumptions, we find at 1.9 mmcf/d wells are economic as low

as US$4.50/mmbtu. Now considering that this long term price level for natural gas is

well below market expectations by even the most bearish on the street, we conclude

that at IP rates of 2.0 mmcf/d or greater, wells are economic at almost any price.

Victor Rodberg, CFA

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