From the comments it seems that poor African American communities in the Barnett Shale aren’t the only ones getting drilled by Chesapeake Energy.
I found the article and it shows how well CHK is playing a shell game with the shale.
The final paragraph does not paint a happy picture for CHK stockholders or for residents living near shale drilling. In the shale gas shell game, operators must continue to poke holes to keep their production numbers up on their shiny stockholder reports. The drilling has more to do with keeping their stock prices up than it does with delivering so-called “clean energy.” Does anyone ever wonder why they keep drilling when gas prices are so low they can’t possibly make a profit? It’s like a crack addiction: they can’t stop even if they try.
Sooner or later reality will catch up to CHK. You can’t continue to create debt based on revenue from shale gas when the break even price for that gas is way above current prices. Then CHK will declare bankruptcy leaving stockholders with nothing and Como residents with an environmental disaster.
UPDATE FROM THE COMMENTS: This apples to apples comparison shows just had deeply CHK shareholders are getting drilled.
XTO: 2005 = $26 / 2010 = $47
DVN: 2005 = $46 / 2010 =
CHK: 2005 = $22 / 2010 = $20 LOOSER
About Sharon Wilson
Sharon Wilson is considered a leading citizen expert on the impacts of shale oil and gas extraction. She is the go-to person whether it’s top EPA officials from D.C., national and international news networks, or residents facing the shock of eminent domain and the devastating environmental effects of natural gas development in their backyards.
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Tell me – So what is your plan…just stop drilling. You also mention that the breakeven price for gas is way above current prices. Do you even know that CHK has hedging contracts for the sale of their gas at above a $6.00/mcf price, not the present average daily quoted price of about $4.50/mcf.
Is your best plan drilling 300' from poor people? Do you live 300' from a well?
There should be an investigation. This shale drilling sounds a lot like the mortgage scam. It's a bubble and all bubbles pop eventually. Stockholders should cut their losses now.
Drilling s/b highly regulated.
Assess taxes to fund renewable energy.
We must get off fossil fuel asap.
Even if CHK is hedged at $6, your still losing money. I admit that you have stemmed some of the bleeding but shale gas does not break even typically, and most especially in Barnett Shale, at $6. Game's up, boys!
Why do these people always go to extremes and say that drilling HAS to stop if any sort of protections are used? Are they really making so little money off this that they really can't protect us?
Anybody remember Chesapeake and the Austin Chalk play? Same BIG debt, same fraud.
I'm still waiting on US auto manufacturers or even foreign companies to mass produce vehicles that run on CNG and for CNG to be readily accessible at the gas stations. Maybe the Government and big O&G should have had that plan in place before drilling? What are they doing with all of this stored commodity and where is the demand for natural gas?
Tim Ruggiero says
I think there is plenty of evidence to show that most of the drilling is done these days has nothing to do with our energy needs, desire to rid ourselves of foreign oil or even jobs. I suppose drilling makes sense (from purely a financial standpoint) when gas prices are rising. If it typically costs a fixed rate to drill or total costs of drilling a well are known, getting the gas now to sell at an expected increase (such as if a cold fall and winter is expected) later makes sense.
But that's a lot of IF's and When's. The reality is, gas prices are relatively low, but yet drilling is increasing dramatically. As if CHK and everyone knows something we don't.
Do energy companies drill just to keep people employed? To meet lease obligations they signed months or years ago?
If energy companies really wanted to reduce or even eliminate 'our' dependence on foreign oil and create even MORE jobs, thereby putting MORE money into the tax base and local economies, they would be investing heavily in other sources of energy other than gas and oil. But they aren't. GM coming out in limited quanties and in select markets of a electric car (Volt) only the wealthy and credit stupid (buy now worry about how to pay for it later) can afford is not working in that direction, not investing in it.
The reality is, there are tens of millions of cars, trucks, motorcycles, RV's and other vehicles, as well as generators and other machinery that is oil based consumption. Until the modes of transportation are changed, we'll always be an oil-based society. I think there are too many Billions tied up in an oil-based economy to provide any incentive whatsoever to see any real change.
Costs of oil are going tohave to sky rocket out of control or pollution will have to be at Brown Out levels before any energy industry even thinks about truly investing in any alternatives. The alternatives we see now are nothing more than lip-service from companies like BP (remember all the recent TV commericals from BP 'exploring' and 'researching' alternative energy sources. Haven't seen any ads from BP at all, lately. I wonder why. Well, at least none that speak to alternative energy sources.
Tim Ruggiero says
Anon 1:36 hit the nail on the head. The Industry constantly cries about how heabily regulated and restricted they are, yet they rarely cite any actual regulation that is holding them back. They also scream about job loss, price increase and the world coming to a quick end if they get one more regulation.
Perry just yesterday screaming about job loss if the industrial plants have to reduce their emissions to meet an EPA standard from when…1997? I'm not connecting the dots as to how jobs are lost because industry has to tighten controls to reduce or elimnate emissions. Someone, please explain it to me.
Actually, if you include dividends, an investment in CHK would have generated a slightly positive return over the last 5 years. Not great, but not out of line with a broad market index like the S&P 500, which has also declined over the last 5 years (pre-dividends). If you look over the last 10 years, the price of CHK has more than doubled, which works out to a pretty decent annualized return.
A decent return? Anon 6:21, you can reasonably expect share prices to double on blue chips about every five years. But shale gas stocks ought to be outperforming blue chips by a long shot if you believe the hype. Doubling your money in 10 years is a SORRY RETURN on a "growth stock" especially when you're relying on dividends to do it. But I liked your spin of "a slightly positive return" over the last five years. Glad my money wasn't in CHK. I prefer not eking out single digits on companies which are rated as high risk junk like CHK. Oh but I forgot, Fitch just upgraded CHK slightly in their junk status because they've been furiously selling off their assets. How nice of them to give us the "opportunity" to participate in their junk paper which is now supported by even fewer assets. But wait…they're primarily selling off Barnett shale assets. Gee, I wonder why? Do I get two guesses. I think it will only take me one.
Anon 8:10 – I'm not claiming that CHK represents an attractive investment opportunity at this time; I do not follow this stock. What I am saying is that over the last 5 years and over the last 10 years the S&P 500 has declined in value and relative to this benchmark CHK has not done any worse in the last 5 years and has significantly outperformed the index over the last 10 years.
I doubt that any reputable financial advisor would tell you that you can reasonably expect a "blue chip" stock to double every five years. That may have been the expectation in the go-go 1960's or in the 1990's, but it is certainly not reflective of the current economic environment. Economists at banks and brokerage firms that I am familiar with are assuming long=term average annual domestic equity returns in the high single digits. That is not to say that you can't find some stocks that will significantly outperform the market (just as CHK did over the last 10 years), but it will not be easy and you must be willing to assume the significant financial risk that comes with these investments. No such thing as a free lunch.
The historical average rate of return for equities for the past 130 years is about 8-10% per annum. As you state, economists are predicting returns in this range and yet CHK has not performed at this level. In fact, CHK has a negative return currently over the past 5 years.
The simple fact is that CHK's financial picture is precarious at best. They led the pack in asset sales and writedowns in 2009. They had to; they were at risk of debt breach. Net income fell 94% just in the 3rd qtr. of last year. All the while they are out there drilling and their production numbers aren't looking too good. Fracs went up 46 % in 2009 but the average IP rate only went up 10%. Very expensive and poor results. But how convenient. It was all done using somebody else's dollars. Sell a few assets and announce with great fanfare that you're going into "unconventional oil". It's the next BIG thing!!!!
Anon 3:27 – You are comparing apples with oranges. You state that the return expectation, based on 130 years of history, is 8-10% annually, then say that CHK has not performed at this level. CHK certainly did not perform at this level for the last 5 years, but neither did the very great majority of all other domesic equities. If you go back over 10 years, CHK significantly outperformed the market, generating average annual returns in your range while average market return was negative. You need to compare stock's performance with a benchmark index over an identical time period in order to judge the firm's performance for its shareholders relative to comparable investments.
Simple way to look at it: if you had purchased $1,000 of CHK and $1,000 of the Vanguard S&P 500 Index Fund 10 years ago, your investment in CHK today would be worth over $2,000 and your investment in the Vanguard fund would be worth less than $1,000.
Again, I'm not saying that CHK is an attractive investment today, but to be fair to their management the numbers do show that shareholders that bought 10 years ago and held the stock have done well.
O. K. Let's get down to brass tacks. You say I am not making fair comparisons. Then let's compare CHK with two of its biggest competitors …XTO and DVN. If you invested with XTO five years ago you would have paid about $26 in 2005 and at the time of XOM announcement in 2010 it was worth $47. If you bought DVN in 2005, you would have paid $46 and in 2010 it is now worth $64. But if you bought CHK in 2005 you would have paid about $22 and in 2010 it is now worth $20. That's comparing apples to apples. I don't think we need to say much more about this.
You say I need to be fair to CHK's management. O. K. Let's be fair. I noticed that you did not address the asset writedowns or poor performance of CHK wells or the fact that CHK was downgraded by Fitch last September as being at risk of debt breach. This is a management team that led a company to the point that its net income fell 94% in just one quarter (3rd, 2009). This a management team that increased frac stages by 46% for only a 10% increase in IP. That's a very expensive mistake . This is a management team that has obviously overstated production, understated costs and used a whole lot of spin to explain away all of this while at the same time taking impairments of 42% of asset value. Perhaps you would like to explain this sort of "management".
Enlightening conversation here!
Thank you for making this a simple apples to apples comparison. Those price comparisons tell it all. I'm updating the post to include those figures.
Correction: DVN has dropped to $61 since I checked last.
Tim Ruggiero says
Someone prove me wrong, but last I heard, CHK's Aubrey McClendon was the worst performing CEO of any industry across the U.S. Don't think so? Please let me know when was the last time CHK showed a profit?
McClendon was actually voted most OVERPAID executive in the industry based on performance.
Arlington has got a far purse in form of the Arlington Tomorrow Fund, all from drilling on city owned land. Some of this money needs to be used to protect us!!!
Anyone that know CHK, understands that they survive on Aubrey’s smooth talk..Apparently money people like that sort of thing.
Also, the only reason ANYONE is drilling gas wells and receiving today’s market price for their gas is MOST LIKELY because they signed a 3 year primary term lease & a continuous drilling clause with their mineral owners. If they don’t keep drilling until they have one location per statutory spacing unit, they lose the acreage they have paid to drill.