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 [8] 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 [9].
2. Environmental Catastrophe: To be candid, I have no interest in the environment... but contaminating ground water, flammable drinking water [10], 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: [11]
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.
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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.
- 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/ [12]
- The NYT has been all over the "Shale boom" link [13]
- Arthur Berman, Labyrinth Consulting says MIRAGE: 1 [14] & 2 [14]
- The impact from these jobs is overstated according to Ohio State researchers [15]:
"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 [16]: