Saturday, April 28, 2012

Chesapeake CEO on U.S. Industrial Renaissance

"Natural gas is a feedstock in basically every industrial process, and the price of gas in the U.S. is a fraction of what it is in Europe or Asia.  This country has an incredible advantage headed its way as Asian labor costs rise, as the cost to transport goods from Asia to the U.S. rises, as oil prices rise, as American labor costs have stagnated or gone down in the last 10 years. We have a really wonderful opportunity to kick off an industrial renaissance in the U.S." 

 ~Chesapeake Energy CEO Aubrey McClendon in today's WSJ

24 Comments:

At 4/28/2012 10:07 AM, Blogger Mark J. Perry said...

CEOs of major energy companies should probably consult with VangeV for a reality check before making statements like that. He's obviously got inside information about energy markets that the oil and gas companies are not aware of.

Likewise, the CEOs of Dow Chemical and Nucor Steel, etc. that are collectively planning on spending more then $200 billion on more than 60 major industrial investments in the U.S. because of low-price natural gas should consult with VangeV for his inside information before proceeding. Armed with VangeV's secret and superior knowledge of energy markets, they may cancel many of those planned investments.

 
At 4/28/2012 11:35 AM, Blogger Buddy R Pacifico said...

Low natural gas prices are a by-product of very valuable oil and natural gas liquids production.

"Natural-gas prices will remain low for the rest of the year because so much of the fuel is being produced in the quest for more-valuable crude oil and petroleum liquids, Pioneer Natural Resources Co. (PXD) Chief Executive Officer Scott Sheffield said."

Producers make money on oil and NGLs, with commercial and residential consumers benifiting from the natural gas by-product as a result.

 
At 4/28/2012 11:45 AM, Blogger Rufus II said...

Aubrey, baby, is just a classic "blue sueder," nothing more, nothing less.

Nat Gas prices are on the rise - Up about $0.30 since the bottom a couple of weeks ago. Look for a big overshoot.

That's not to say that we won't have cheaper nat gas than most of the rest of the world over the longer term, however; it just won't be $2.00 (or 3, or 4, or 5.)

If you look at the amount of nat gas coming out of Eagle Ford, Bakken, and the other "liquids" plays, it's less than negligible.

 
At 4/28/2012 12:07 PM, Blogger Larry G said...

given the (I think healthy) skepticism what explains all these CEOs including the power company CEOs not only talking big about natgas but taking actions like shutting down coal plants and firing up nat gas turbines?

not to say that CEOs have not been fooled before by following the herd.....

but one would also think that after enough drill sites played out that the investors would get out just as they would for oil.

I just tend to think that when a coal plant gets shut down, it's probably permanent... and that means that even if nat gas gets scarce and expensive that we're likely to not go back.

The enviro weenies should love this.

 
At 4/28/2012 1:29 PM, Blogger Rufus II said...

I think you're pretty much on track, Larry.

 
At 4/28/2012 5:08 PM, Blogger Jon Murphy said...

This natural gas thing is amazing. I read an article on Bloomberg, I think, that said unless natural gas drillers seal their wells and the demand for natgas rises dramatically, then our capacity to store natural gas will be overwhelmed by September. Just think about that. We will not be able to store our natgas. That is just mind-boggling.

 
At 4/28/2012 5:58 PM, Blogger Rufus II said...

Whoever wrote the Bloomberg article is dead wrong. We're putting nat gas in storage at a rate of a bit less than 50 Billion cu ft/wk. That's about half of normal for this time of year.

We'll come nowhere near full-capacity.

 
At 4/28/2012 6:00 PM, Blogger Rufus II said...

Chart for Nat Gas Storage - bottom of page

 
At 4/28/2012 6:05 PM, Blogger Jon Murphy said...

I understand that, Rufus, but the amount in storage is already 55.4% above the 5-year average and 52% above the year-ago level. Surely that's got to factor in.

By the way, I am trying to find the article to which I was referring.

 
At 4/28/2012 6:12 PM, Blogger Jon Murphy said...

Ah found it:

From the WSJ, with industry quotes.

It's also supported by Barron's

 
At 4/28/2012 7:02 PM, Blogger Rufus II said...

Jon, this quote from the third paragraph of Zweig's WSJ article

"Every day, the U.S. natural-gas market is flooded with an average of 3 billion cubic feet more than the nation consumes"

is not correct.

We're, currently, putting about half that much in storage (see my previous EIA link.)

If the author can't get something so basic correct his article must be considered worthless.

 
At 4/28/2012 7:14 PM, Blogger Jon Murphy said...

What about the rest? The Barron's article? The quote from the CEO of Weeden? The fact that storage is up 52%?

 
At 4/28/2012 7:18 PM, Blogger Rufus II said...

I didn't read the rest. As for current storage - Exceedingly mild winter.

What the heck, Jon. The expert scribblers say one thing; the old, retired ins. agent, and interested observer says the other. We'll have a better picture on who's right in a couple of months.

 
At 4/28/2012 7:31 PM, Blogger Jon Murphy said...

What the heck, Jon. The expert scribblers say one thing; the old, retired ins. agent, and interested observer says the other. We'll have a better picture on who's right in a couple of months.

Very true. I suppose it doesn't really matter. Any number of things could occur that will change the landscape.

Just for the record, I do not think prices can go much lower. For all intents and purposes, NatGas is cheap-as-free now. Prices simply have to go up. Hopefully we'll have a hot summer and and cold fall.

 
At 4/28/2012 8:09 PM, Blogger Benjamin said...

U.S. Gas Export Limit of 10% Would Be ‘Smart,’ Dow CEO Says
By Jack Kaskey - Apr 26, 2012 11:29 AM PT
Facebook Share
LinkedIn
Google +1
1 COMMENT
Print
QUEUE
Q
Dow Chemical Co. (DOW) Chief Executive Officer Andrew Liveris said it would be “smart” for the U.S. to limit natural-gas exports to 10 percent of output because expansion plans in his industry are rooted in low gas prices.
Exporting more than 15 percent of the country’s gas production would tighten markets too much and lead to higher prices, Liveris said today in a telephone interview. Excessive exports of liquefied natural gas, or LNG, could “kill” chemical investments like the company’s $4 billion expansion in Texas and Louisiana, he said last week.
“We think 15 percent is about right,” Liveris, CEO of the largest U.S. chemical company by revenue, said in the interview. “Ten percent or less would probably be smart.”

 
At 4/28/2012 8:31 PM, Blogger Rufus II said...

Oops, that 3 Billion cuft/day figure Is correct. My mistake. However, 3 Billion cuft/day, at this time of year, is very low.

The slope is still not likely to take us anywhere near the 3.8 Trillion Plus that would be the top of the normal range.

 
At 4/28/2012 8:44 PM, Blogger Jon Murphy said...

Hypothetically, what would happen if we did reach that storage capacity? Would prices fall to $0?

 
At 4/29/2012 6:54 AM, Blogger VangelV said...

CEOs of major energy companies should probably consult with VangeV for a reality check before making statements like that. He's obviously got inside information about energy markets that the oil and gas companies are not aware of.

I think that you should do a bit more digging.

Aubrey McClendon is no amateur when it comes to shady personal transactions involving his company, nat gas giant Chesapeake: Back in October 2008, just after the financial crisis erupted, he was forced to sell more than 31 million Chesapeake shares for $569 million to cover margin calls generated from buying CHK stock just prior on margin. The company’s stock fell nearly 40 percent the week of McClendon’s share sales. McClendon issued an apology but the company’s credibility with many shareholders suffered significantly. It looks like the story is repeating itself, only this time the margined security is not company stock, but company loans. As Reuters reports in a must read special report [14]"Since he co-founded Chesapeake in 1989, McClendon has frequently borrowed money on a smaller scale by pledging his share of company wells as collateral. Records filed in Oklahoma in 1992 show a $2.9 million loan taken out by Chesapeake Investments, a company that McClendon runs. And in a statement, Chesapeake said McClendon’s securing of such loans has been “commonplace” during the past 20 years. But in the last three years, the terms and size of the loans have changed substantially. During that period, he has borrowed as much as $1.1 billion – an amount that coincidentally matches Forbes magazine’s estimate of McClendon’s net worth." Ah yes, net worth calculations, which always focus on the assets, but endlessly ignore the liabilities (as Donald Trump will be first to admit). But ignore that: what is more notable here is the circuitous way that McClendon basically lifted himself by his, or rather CHK's bootstraps: all the loans are collateralized by his 2.5% working interest in new CHK wells drilled every year. In essence a roundabout way of generating "cash" by hypothecation, and levering into an "upside" corporate case. Should CHK however incur asset impairments, and/or if the current price of gas stays at or $2.00, then not only will CHK be gutted but so will the asset quality securing the private loans to the CEO, which on top of everything have no covenants ("There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way," McClendon wrote in an email to Reuters.) and thus no stakeholder protections. Is it any wonder then that CHK is getting creamed as of right now as investors are once again reminded that CHK may not quite play by the rules?

Your CEO is using special entity vehicles because his company cannot generate enough cash flow. The more I dig the more that Aubrey looks like Ken Lay. Since as an optimist I never play the short side of the markets there is little incentive for me to do a Jim Chanos and shout about the blatant fraud from the roof tops. I simply limit my comments to offsetting hype coming from charlatans and the optimistic fools who choose to ignore reality and believe the hype.

 
At 4/29/2012 7:02 AM, Blogger VangelV said...

Nat Gas prices are on the rise - Up about $0.30 since the bottom a couple of weeks ago. Look for a big overshoot.

When gas was at $11 and looked to be heading higher Aubrey told us that he needed $7.50 to break even. New drilling in older formations like the Bakken takes place in areas that are not as productive as those that used to be drilled off earlier. Lower well productivity and rising costs does not paint a good picture for the producers, particularly those that were as reckless and as broke as Chesapeake.

 
At 4/29/2012 7:03 AM, Blogger VangelV said...

given the (I think healthy) skepticism what explains all these CEOs including the power company CEOs not only talking big about natgas but taking actions like shutting down coal plants and firing up nat gas turbines?

The EPA rules demand that the older coal plants be shut down. Permits for new coal and nuclear plants are not being approved. That leaves natural gas.

 
At 4/29/2012 7:18 AM, Blogger VangelV said...

CEOs of major energy companies should probably consult with VangeV for a reality check before making statements like that. He's obviously got inside information about energy markets that the oil and gas companies are not aware of.

I guess my first post never made it through. Instead of restating the comments I bring your attention to this report from Reuters.

Likewise, the CEOs of Dow Chemical and Nucor Steel, etc. that are collectively planning on spending more then $200 billion on more than 60 major industrial investments in the U.S. because of low-price natural gas should consult with VangeV for his inside information before proceeding. Armed with VangeV's secret and superior knowledge of energy markets, they may cancel many of those planned investments.

No, what they should do is sign a few long term agreements with companies willing to supply them natural gas at low prices. And use the markets to hedge themselves against counterparty failure.

In case you are missing it Mark, you are doing the same thing that you did during the housing bubble. You bought into much of the hype and understated the risks. How did that end up?

 
At 4/29/2012 7:53 AM, Blogger VangelV said...

One more time:

Aubrey McClendon is no amateur when it comes to shady personal transactions involving his company, nat gas giant Chesapeake: Back in October 2008, just after the financial crisis erupted, he was forced to sell more than 31 million Chesapeake shares for $569 million to cover margin calls generated from buying CHK stock just prior on margin. The company’s stock fell nearly 40 percent the week of McClendon’s share sales. McClendon issued an apology but the company’s credibility with many shareholders suffered significantly. It looks like the story is repeating itself, only this time the margined security is not company stock, but company loans. As Reuters reports in a must read special report [14]"Since he co-founded Chesapeake in 1989, McClendon has frequently borrowed money on a smaller scale by pledging his share of company wells as collateral. Records filed in Oklahoma in 1992 show a $2.9 million loan taken out by Chesapeake Investments, a company that McClendon runs. And in a statement, Chesapeake said McClendon’s securing of such loans has been “commonplace” during the past 20 years. But in the last three years, the terms and size of the loans have changed substantially. During that period, he has borrowed as much as $1.1 billion – an amount that coincidentally matches Forbes magazine’s estimate of McClendon’s net worth." Ah yes, net worth calculations, which always focus on the assets, but endlessly ignore the liabilities (as Donald Trump will be first to admit). But ignore that: what is more notable here is the circuitous way that McClendon basically lifted himself by his, or rather CHK's bootstraps: all the loans are collateralized by his 2.5% working interest in new CHK wells drilled every year. In essence a roundabout way of generating "cash" by hypothecation, and levering into an "upside" corporate case. Should CHK however incur asset impairments, and/or if the current price of gas stays at or $2.00, then not only will CHK be gutted but so will the asset quality securing the private loans to the CEO, which on top of everything have no covenants ("There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way," McClendon wrote in an email to Reuters.) and thus no stakeholder protections. Is it any wonder then that CHK is getting creamed as of right now as investors are once again reminded that CHK may not quite play by the rules?

 
At 4/29/2012 3:05 PM, Blogger Ron H. said...

Jon M: "Hopefully we'll have a hot summer and and cold fall."

Are you hoping my utility bills will be higher?

 
At 4/29/2012 4:04 PM, Blogger Jon Murphy said...

Are you hoping my utility bills will be higher?

Depends. Do you use natural gas? :-P

 

Post a Comment

Links to this post:

Create a Link

<< Home