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Bonanzas Don't End Well

South of Wall Street's picture




 

www.southofwallstreet.com

Shale Gas is becoming the mother of all 'bonanzas'.  Leverage, Hope, Real Estate Speculation, and Commodity Prices. 

US Gas E&Ps have become increasingly capital intensive to remain going concerns.  When liquidity drys up and overstated reserves are you're only asset... the result is generally not good.  Crossing your fingers and hoping for credit markets to behave doesn't appear to be the best strategy in the current environment. This article was the tipping point for my first dark side wager. I was encouraged that Merril likes CHK and published on it yesterday with (of course) a Buy and target 60% above the current price despite 'complex financials' and a '12 funding gap. Nothing like a ML Buy rating. 

Statements such as the following indicate that CEO's in the industry (and those related) have their heads up their asses:

“It’s a phenomenal opportunity,” says Andrew Liveris, the chief executive of Dow Chemical, who is a vocal supporter of US manufacturing. “This is a gift that American entrepreneurs, the wildcatters, the oil and gas drillers, have given the country: 100 years of natural gas supply. There’s no country on the planet that wouldn’t love to get that, and then use it.”

What don't I like?

1. Leverage:  From CHK all the way down these guys make Lehman look like Fort Knox.  Both on and off balance sheet liabilities are the reason they continue to sell interests in their best assets to strategic investors.  I don't feel there are any earnings, rather a shell game to perpetuate interest from Wall Street (the enabler of this mess).  While the spot prices and reserve life continues to move against them, they have no choice but to borrow and raise more capital to keep showing additional proven reserves.  Read thru this.

2. Environmental Catastrophe:  To be candid, I have no interest in the environment... but contaminating ground water, flammable drinking water, killing ecosystems, and causing earthquakes is enough for me to throw on a hemp necklace too.  The trajectory of the environmental issues is going to be difficult for this industry to defend.

3. Cowboys : He's surely a bad representative for the group, but Aubrey McClendon has the potential to blow up the whole industry.  This guy almost blew up his own company once, and after he went broke he convinced his company (who was in deep) to buy his antique map collection for $12M.  I'm not kidding.  Keep this in mind when you hear about the 'visionaries' in this industry.

From Forbes:

The company paid another $12 million in cash to buy his personal collection of antique maps of the American Southwest. Most critically, he also got $75 million, over five years, toward an unusual perk that allows McClendon to invest his own capital (or in this case, the capital that the company gave him for this purpose) alongside Chesapeake for a 2.5% stake in every well the company drills.

-------

Since 2008 McClendon has raised more than $10 billion through asset sales and $6 billion in drilling carries via similar joint ventures with the likes of and Total. He's raised billions more issuing stock (expanding shares outstanding by an average 12% a year versus 2% for the industry). But it's still not enough, and the difference comes from borrowing--Chesapeake's debt-to-capital ratio of 40% is the highest in its peer group.

Links

  • Click the fracing link on the right side of the page.  This BS is the equivalent to convincing people smoking isn't harmful to your health  http://www.aboutnaturalgas.com/
  • The NYT has been all over the "Shale boom" link
  • Arthur Berman, Labyrinth Consulting says MIRAGE: 1  & 
  • The impact from these jobs is overstated according to Ohio State researchers:
    "On the local level with shale energy development, there's a sudden influx of money -- from lease payments, platform construction, that sort of thing," Partridge said. "It's a real gold-rush mentality. But what communities really want and need is long-term development. Typically, energy booms don't provide that kind of sustainable growth. These communities need to be aware that there's a boom/bust cycle, and they need to do what they can to plan for it."
  • Chew on this excellent analogy to the Gold Rush of '49:

 

 

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Fri, 01/06/2012 - 11:40 | 2039253 Flakmeister
Flakmeister's picture

The most relevant part of this post is the links to Arthur Berman's stuff... Dig there to see what the real story is...

The current low prices will shake out the overlevered players. Once wells have declined 80% and there is no CAPEX kitty left to drill more you will see the weak players disappear...Look at the cash flows, CAPEX vs depreciation on most of these small players...

Another thing is the the current wells are exploiting the best plays that tend to have more liquids (i.e. NGL). The amount of liquids determines whethere you can actually turn a profit... The boom will fade as the best prospects are exploited...

I do like EXXI because of their conventional NG plays and am long on the common and am trying to initiate a position in the very thinly traded preferreds....

Fri, 01/06/2012 - 09:05 | 2038681 LongPAU
LongPAU's picture

On the issue of burning water:

In those areas where the water coming from taps contains so much dissolved methane that it will ignite, this has nothing to do with shale drilling. In those areas, this is a natural, periodic (and usually temporary) phenomenon. Hence mysterious place names like "Burning Creek" which were named back in the 1700's.

There's natural gas in the ground in these places. It migrates, almost like a gas. Who knew?

I'm all-for good reporting, but be careful of sensationalism from sources with an agenda.

Fri, 01/06/2012 - 07:40 | 2038593 ebworthen
ebworthen's picture

The idea of fracking seem inherently dangerous to aquifers and water supplies.  Underground water moves sideways, not up and down.

Natural gas at $7 or more will hurt disposable incomes in a big way; especially in cold weather states.

The talk about it, the hype over fracking, does have the "gold rush" feel to it.

Fri, 01/06/2012 - 09:21 | 2038718 LongPAU
LongPAU's picture

Shallow well frac'ing *might* cause problems if done improperly. Nobody much pays any attention to this common practice though. It's monitored by the EPA, but I'm not convinced that the EPA is on the environment's side.

Shale frac'ing - what all the hullaballoo is about - is done at such extreme depths that it may as well be on the moon. No contamination (from shale frac'ing) is even remotely possible. Your deepest aquifer is at much greater risk from that junked car's broken battery, five miles away, or from the leaking pile of discarded Ni-Cad batteries in a burn pile over in the next county.

Fri, 01/06/2012 - 09:13 | 2038694 LongPAU
LongPAU's picture

The rush is caused by O/G lease laws: if an O/G company owns a lease on a property with shale gas potential, they either have to hurry up and put it into production or lose the lease rights to a competitor.

It's a legality and greed fueled feedback loop that results in what you're seeing. Poor rights owners imagine the royalties from 1M cubic feet a day, and they start imagining all the really fine WalMart "bling" that money will buy, so they pressure O/G companies to produce or turn over the lease to another company.

O/G companies would much rather sit back and wait for $7 NG.

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Fri, 01/06/2012 - 07:15 | 2038586 OldPhart
OldPhart's picture

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Fri, 01/06/2012 - 03:49 | 2038332 goldsansstandard
goldsansstandard's picture

It is a bonanza. Got link from Doug Casey a few months back

http://www.thegwpf.org/images/stories/gwpf-reports/Shale-Gas_4_May_11.pdf

Fri, 01/06/2012 - 03:43 | 2038327 goldsansstandard
goldsansstandard's picture

Here is the scoop on Shale Gas.

Sometimes Bonanzas happen, otherwise we would have run out of stuff a long time ago.
http://www.thegwpf.org/images/stories/gwpf-reports/Shale-Gas_4_May_11.pdf

Fri, 01/06/2012 - 02:44 | 2038275 ddtuttle
ddtuttle's picture

Sheesh, this is total crap.  You have fallen for evironmental propaganda. They take one place on earth with methane in the water and try to shutdown an entire industry.  An industry that BTW produce the cleanest, cheapest most envrionmentally sound energy on the planet. There have been aquifers with methane in them long before the first human ever lit a fart.  These idiots write stupid nonsense while they heat their houses and cook their food with natural gas.  Total F'ing hypocrits.

First, fracing has been going on over 100 years.  Many oil wells don't produce without it.  At first it was done with nitro glycerine, but that killed too many of the frac'ers.  Today its done high pressure water, some chemcials and sand to hold open the new cracks.  Its been done tens of thousands of times without ANYBODY'S bathtub catching on fire.  Clearly their have been a few morons doing this without knowing what thery are doing.  But basic geology and following best practices can prevent all of these problems.  

On the other hand this is mother nature, and she will bite you in the ass to to make sure you're awake.

Shale gas has plenty of other problems without the frac'ing fracas.  It probably doesn't make money until gas is over $7.00.  Its at $3.00 right now.  Once you drill a well, you just sell the gas for whatever you can get.  In the end you may loose money, but you keep it selling no matter what.  This whole industry is being funded by selling interest in these marginal wells to foreigners who want to learn the technology.  They're going to run out of suckers long before they run out of gas.

Having said that, if the energy in natural gas cost the same as energy in gasoline, 1000 cubic feet of gas would cost $30 instead of $3.  Like I said its cheap. So eventually the price will rise, and shale gas will become profitable. Even then there probably aren't 100 years of supply but maybe 10.  If we're lucky 20.

 

Fri, 01/06/2012 - 09:23 | 2038726 LongPAU
LongPAU's picture

Well said.

(Pun intended)

Fri, 01/06/2012 - 02:13 | 2038245 Clowns on Acid
Clowns on Acid's picture

Well yeh..agreed on ost of the authors points....but if they outlaw farcking...doesn't the price of Nat gas go back to $5?

And if it does...doesn't CHK stand to make substantial revenues..?

Am I missing something...?

Fri, 01/06/2012 - 00:22 | 2038053 TheMerryPrankster
TheMerryPrankster's picture

Hardly seems a fair trade to swap a 100 years of nat gas for a lifetime of water. In a hundred years we'll be out of natural gas and clean potable drinking water.

Likely less than a 100 years as the increase in drilling will eventually bring a decrease in gas yields and demand ever more fracking involving ever more water.

This can't end well.

 

 

Thu, 01/05/2012 - 23:31 | 2037958 patb
patb's picture

I have heard that these fracked gass wells are being booked with a production life of 20 years but typical times between refracking is running 9-18 months.

 

if so, the book looks real good for a year or so, then cash starts running out the door while assets still seem great.

 

that's the classic formula for accounting swindles.

Fri, 01/06/2012 - 09:31 | 2038745 LongPAU
LongPAU's picture

Those numbers are correct.

We typically see 15-24 months of production, but it breaks down in a logarithmic curve, as you'd expect from a gas rising from 10,000 foot depths.

For the envirofools: the ground under your feet is full of poisons. That's where most poisonous materials come from. Scuff your foot in your yard and you're probably contaminating something.

I say we ban the use of this entire planet and move somewhere safer. California, maybe. Vermont is nice too.

Fri, 01/06/2012 - 00:10 | 2038035 Lux Fiat
Lux Fiat's picture

Ran across an article a year or two back from someone in the industry saying that many of the exploration and production companies where applying traditional well depletion rates to shale wells when recording to determine reserves, but that the depletion rates were much quicker.  Puts the whole 100 year supply of natgas, as well as company valuations, in a different light - although I would think that it is getting factored in at this rate....?

Thu, 01/05/2012 - 23:31 | 2037957 patb
patb's picture

I have heard that these fracked gass wells are being booked with a production life of 20 years but typical times between refracking is running 9-18 months.

 

if so, the book looks real good for a year or so, then cash starts running out the door while assets still seem great.

 

that's the classic formula for accounting swindles.

Thu, 01/05/2012 - 23:26 | 2037944 williambanzai7
williambanzai7's picture

Fract

Image by Al Kyder

Thu, 01/05/2012 - 23:18 | 2037930 Judge Arrow
Judge Arrow's picture

They may be fools, but you are a bigger one. Your enviro stuff shut off the argument for me - that is just so much crap and sourcing the NYT for facts is like referencing Krugman on debt. The is agitprop, not a financial discussion. Go back to the basement and torch up the pipe, watch some Road Runner and masturbate for distance. Another round for everyone....

Thu, 01/05/2012 - 22:24 | 2037784 HungrySeagull
HungrySeagull's picture

I don't know.

 

Arkansas went from nothing to Nat Gas a few years ago. It seemed to me everyone who had any kind of money (Asset? Debt Capacity or Loans even selling to investors) went straight into the industry. After a period the really big players moved in.

Some handle fracking, others hauled water something and some trained workers on practice rigs. Still more moved loads up to 200,000 pounds or so on our little roads which require more money in permits, escorts etc etc etc.

Everywhere I look is money being spent. And they built a hell of a Gas main going to Memphis I believe. There are about 2000 wells or less each week working. The number flutcuates.

One trucking company hauled food. When the gas rigs came, they quit hauling food, sold the reefers and bought pressure bulk tankers for hauling powdered chemcials.

Sill more get into making pipe, moving pipe, structural and this and that and whatever. The whole section where I am is just Gas World. Choking on Nat Gas similar to the way PA Must have looked with a Oil rig made of wood every 10 yards.

What they don't see is when they decide that there is no money in the hole (No product) the workers are told to go home.

To go from making big bucks to making nothing and a uncertian future... Some have temper issues and what have you.

it is 24.7

 

Already we had seen communities get the Gas companies to stop fracking because of quakes and when they did finally stop at two locations, the USGS map showed a impressive decrease in the quakes. I also made the mistake of drinking local tap water in the NW part of the state once. (My water is piped out of a major lake with cooperation of many Counties as well as underground which is somewhat dry now within a few years. By then the pipe to fresh water will be at full capacity to replace the aquifier)

To this day I don't rightly know if all that money sunk into the State dried up our water. Cancer and other issues are everywhere.

And billboards hawking to purchase your land mineral rights are everywhere too. They can reach a pipe under your home to get at the product if they need to. The problem is if you own mineral rights as I do, (Pittance..) they pay a check each month.

 

The one thing Gas works did do is make everyone something to do in our area. I think it's been good, but it has also exacted a price as well.

If we lose Memphis in the quake with the loss of the North south pipe which we will lose it is my hope that the Arkansas West to east pipe will keep the nation going in Gas. And this will not be in vain.

 

A very long time ago when I was a baby, a major city used to import Nat Gas from Iran for cooking. That came off the Ship into very large storage tanks that rose and fell according to what the city was doing that day. It will rise in the morning when everyone goes to work (Oil heat) and then fall during the dinner hours while gas cooking was done.

 

Eventually a pipeline reached these tanks and finally abestoes or something (Or expense and upkeep) doomed them and they were demo'ed.

In the mean time we continue to rely on gas mains that are either just freshly installed to support new development, new individual customers  (I have seen this first hand) or older pipe mains that are 100+ years old.

In my area after last winter and electric heat (And electric everything) which saw some pretty big cold and snow in over a decade, houses up and down the streets started calling the gas company to come and hook em up.

Shortly over a season last year dozens of fresh covered dirt trenches to the main under our road to these electric only homes are testimoney to the demand for nat gas. Cheaper than electric.

I use both. And they complement one another. However at some point in the future, I am going to have to think about running the home off the sun or something else.

It cannot last forever. I am a Coal man (Antricite steam and metal coal) and we have the coal, but the EPA and tree huggers dont want to use any of it.

 

And finally while the medicine in my system persists, I will wander a bit and say that yes the Union Pacific hauls in about... 44 trains a week of Power Company coal there are several gas pipelines that transport across the nation (Mid contentnial?) and some others that we benefit from.

The railroad is having a facility in Illinois built tank cars. Chem and Gas tank cars. That part of the work is evident in the general freight that rolls through several times a day in the form of fresh new tank cars that carry gas or chemicals of some kind. Like the old boom in Boxcars back in the 70's and 80's when everyone got into it.

Thu, 01/05/2012 - 23:29 | 2037951 Dirtt
Dirtt's picture

I've got plenty of clean water.  Instead of bitching about the water let's swap.  I need your gas.  You need my water.

This country needs jobs.  And I need a marketplace to sell water.

Thu, 01/05/2012 - 23:00 | 2037889 tempo
tempo's picture

Fracking is a great story that made many billionaires. Many small domestic E&P companies were going bust, holding millions of leased acres at $10 to $15/acre in the 1990s as gas wildcating became too risky and oil prospects died out. Then the shale boom hit and acreage prices jumped to $10,000 per acre. Entire service industries boomed and now you see the smart money selling out to the elite rich families just as the boom peaks. In 2013, The EPA will put fracking under the Clean Water Act and thousands will be unemployed and boom towns will again be return to the their rusted abandoned condition. Just like the gold boom, the service companies and those that sold out early made all the money.

Thu, 01/05/2012 - 21:59 | 2037752 lindaamick
lindaamick's picture

Gasland.  Watch the movie.

Thu, 01/05/2012 - 21:52 | 2037742 Diamond Jim
Diamond Jim's picture

Water futures contracts anyone ????

Fri, 01/06/2012 - 07:06 | 2038581 OldPhart
OldPhart's picture

I've been stock-piling dehydrated water for years.  I store it near my 'water rock' in the front yard.  My wife has been mystified by the dampness associated with this rock, day after day, here in the Mojave Desert.  My step-mother has even manually moved it from time to time to check it's effectiveness.  It always produces.

Strangely, my dehydrated water around the water rock has a strong beer odor.

 

Fri, 01/06/2012 - 02:59 | 2038287 Oracle of Kypseli
Oracle of Kypseli's picture

Water is scarce and already expensive. Designer water (Colored water) is 1.25 per bottle. More than gas. The cheapest you can find is 1.15 a gallon at Walmart.

The problem is that water diversion to the highest bidders by governmental agencies creates winners and losers. Again follow the money and you either get to Wall street or corrupt politicians.

Bring the guillotines.

Thu, 01/05/2012 - 21:31 | 2037694 Seer
Seer's picture

And, the NUMBER ONE reason this guy has his head up his ass: “This is a gift that American entrepreneurs, the wildcatters, the oil and gas drillers, have given the country: 100 years of natural gas supply. There’s no country on the planet that wouldn’t love to get that, and then use it.”

This single sentence contradicts EVERYTHING.  Using "it" means greater rates of extraction.  It is totally in defiance of logic to state that you have a quantity of something that will last X amount of time and then say that it'll STILL last X amount of time no matter HOW MUCH MORE you use it up!

Anyone making such absurd statements (w/o meaningful qualifiers) needs to be disbarred from holding ANY position of authority/leadership, if not outright shot between the eyes.  When it ends up that they don't get 100 years out of it then we get to line up and shoot all of his offspring!  Let's sign that contract NOW!

Thu, 01/05/2012 - 21:42 | 2037721 Freddie
Freddie's picture

The guy is an idiot because he references the NY Times to back up his flimsy rant.  The NY TImes is a joke.  All media, especially TV, is a joke.  They are all puppets for the elites.

Fri, 01/06/2012 - 00:39 | 2038086 Seer
Seer's picture

So, rather than inform people of what to look for we just tell them that they shouldn't listen to ANYONE?

I get it that the NYT sucks.  I was, however, referring to something that someone OUTSIDE of the NYT and the "media" (especially TV) was quoted as saying.

I think that it's quite appropriate to air this shitty logic out there for everyone to see/read, whether it comes from the NYT or not.

The best way to help people overcome ignorance is to provide information that allows them to parse out facts for themselves.  Even if people suspected that which you claim (again, I don't dispute what you're saying), it gives them no ammo for countering what these fuckers say (they can just as readily turn around, and they have lots of $$s for propaganda campaigns, and say that YOU are a puppet and or an idiot).  Running around name-calling looks just like what it is- childish.

 

Thu, 01/05/2012 - 21:03 | 2037640 Yossarian
Yossarian's picture

No form of energy- solar included (rare earths)- is cost or accident free: http://reason.com/archives/2011/05/17/a-better-way-to-frack

Natural gas is a cleaner fuel than most and it's abunance can enable us to ignore oil fights throughout the world.  Where my reservation lie is in the use of water, an increasingly scarce resource in many parts of this country (but not around Marcellus Shale).  Water should be priced like any scarce resource (citizens get X amount for free); but even doing so (and eliminated others such as the egregiously wasteful solar subsidies) would likely render natural gas our most attractive marginal energy option at the moment. But I'm no expert...

Thu, 01/05/2012 - 22:00 | 2037738 Freddie
Freddie's picture

Depending on the geology of the rock/shale/sand - they can also use nitrogen gas under pressure to break down the rock.  Nitrogen is safe as our atmosphere is 78.09% nitrogen.  Essentially just compressed air.

Thu, 01/05/2012 - 22:20 | 2037790 DumFarmer
DumFarmer's picture

They're not using methane, that's what they are extracting. The article attached stated no fracking fluid was in wells. It doesn't matter what you use to frac, doing so releases the desired product into the groundwater. Just buy adjacent homes and problem solved. Anything is possible for a price

Thu, 01/05/2012 - 22:02 | 2037759 HungrySeagull
HungrySeagull's picture

And it is the Oxygen that burns inside our bodies to metabolize.

Fri, 01/06/2012 - 00:17 | 2038043 TheMerryPrankster
TheMerryPrankster's picture

It actually doesn't burn. That would imply a flame. Oxygen binds  to other compounds easily which makes oxides. Oxidation is the process occurring inside your body.

Metabolization involves much more than oxygen.

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