Chinook Energy Inc. Common CNKEF

RE:NG price, hedge selling and its effects on CKE in 2018

[bouquets]

There's not much that I can disagree with in your analysis, Peter.  Generally, I'm pessimistic about ng prices. But, frankly, station 2 pricing, which makes up three-quarters of CKE's sales, cannot get any lower, and once some bottlenecks are worked out, station 2 pricing should begin to track aeco more closely.  That should be good for Chinook: or, rather, less bad.  The last quarter was pretty rough and the one just ending now probably will be too.  

On the Martin Creek pivot, it looks like they do indeed plan to at least test out what is up there.  I see in the map on slide 8 of their November presentation that they have a pad surveyed and permitted up near the Martin Creek gas plant.  I'm not sure I completely understand the thinking here: their most recent four wells are their best so far, and it seems to me that the smarter play would be to drill more there.

PeterM1 wrote:

2018 could be an interesting year for natural gas. Despite the fact that US stocks are below the five year average and the nation is generally in a state of frozen butt - natural gas prices are down. A plausible explains for this is that NG producers are being forced right now to hedge their 2018 production to satisfy their existing or required bank loans. Traders, always quick to befriend a trend, have joined in the rout. Hedge selling should taper off end December - then - particularly if is is confirmed that La Nina will stay  in place for early 2018 - we could see traders covering their positions.  NG prices could take off. It would not surprise me to see April up 30%.

 

Will CKE benefit form this price reversal?  Not a likely in my view. CKE faces two fundamental problems. First a lack of share market liquidity - the float - that makes the share unattractive and secondly a lack of disclosure by management of what in my view is some important if not material information . 

 

Right now the critical issue for CKE  is only indirectly connected to the price of NG. It is the ability to ship  the product out. While other Montney producers have kept their shareholders well informed on this issue - CKE has not. Net result we don’t know if CKE will end the year  above or below the negative $2 million forecast - but more particularly the extent to which they have been required to hedge 2018 production at current low prices to draw cash on their bank loan. Pipeline constraints expected to remain in place for the first quarter of 2018 so the same  concerns would apply.

 

The amount that CKE has to borrow from the bank will of course have an impact on 2018 drilling plans. One assumes that CKE will have to drill at least one well to satisfy their flow through share placement. The increase in the bank loan suggests that CKE had greater ambitions. Seems to me that CKE might switch to the Martin Creek area for their next wells as the Montney formation to the North East seems to have the highest Gas / Condensate ratio. This would account for the recent activity on the CKE pipeline connecting Martin Creek to  the Aitken Creek hub. How many they can drill there will of course depend on how much is left on the bank loan - and that we cant even guess at -  being ill informed as to what if any shipping arrangements CKE has been able to secure for end 2017 and 2018. 

 

Absent this information the share will remain a gamble.