Minority Owner Natural Gas Giveaway

By Toby Shute
www.fool.com
February 17, 2009 | Comments (1)
Last week, Parallel Petroleum (Nasdaq: PLLL) did just that, in agreeing to transfer half of its 35% interest in a Texas natural gas field to Chesapeake Energy (NYSE: CHK).

Chesapeake owns the majority interest in the field and calls the shots when it comes to the drilling decisions. Parallel participates by footing its proper share of the costs.

In other words, the small company doesn't control its own destiny with regards to the timing of capital spending, at least in this particular play. In today's environment, that's a tenuous situation. Parallel has thus chosen to dilute its interest in the field to get out from under a potentially crippling cash outlay in the upcoming year.

For this to be called a fire sale, I think there would have to be some number on the price tag. This is more like a game of duck, duck drill costs.

We've already seen drilling commitments sink one offshore explorer. In that case, the company was on the hook with contractors Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO). This latest move by Parallel shows that onshore players are overstretched as well.

So how can you verify that the exploration and production company you've invested in controls its own destiny? One key element is the amount of leasehold that's held by production (HBP). This status gives the company lots of leeway on the timing of its drilling program, without "use it or lose it"-type concerns.

Occidental Petroleum (NYSE: OXY), for example, has 5 million acres of leasehold in the U.S., with 70% of that HBP and another 10% on long-term leases with many years to run. Newfield Exploration (NYSE: NFX), a smaller shop, has 90% of its Woodford shale acreage HBP. The company rightfully described this as "a huge advantage in today's market" on a recent conference call.

As with Parallel, you also have to look at the company's commitments to third parties. The annual report on Form 10-K is a good place to start, but you also need to look at the major changes succeeding that handy document's publication