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Page added on February 25, 2014

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Clouds on the horizon for fracking companies?

Business

The Oil & Gas Journal has published an article with the headline, “Chesapeake mulls spinoff, sale of oil field services division“. The article is especially interesting since Chesapeake is one of the largest companies in fracking. On Chesapeake Energy Corporation’s website one can read that they are the second largest producer of natural gas and the eleventh largest company for production of oil and NGL in the USA. Further, one can read that, “The company’s operations are focused on discovering and developing its large and geographically diverse resource base of unconventional natural gas and oil assets onshore in the U.S. The company also owns substantial marketing, compression and oilfield services businesses.” On 11 February 2014 the company submitted an “Investor presentation” and they explained that they were required to make such “forward-looking statements” by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Then came the real blow:

“Factors that could cause actual results to differ materially from expected results are described under “Risk Factors” in Item 1A of our 2012 annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 1, 2013. These risk factors include the volatility of natural gas, oil and NGL prices; the limitations our level of indebtedness may have on our financial flexibility; declines in the prices of natural gas and oil potentially resulting in a write-down of our asset carrying values; the availability of capital on an economic basis to fund reserve replacement costs; our ability to replace reserves and sustain production; uncertainties inherent in estimating quantities of natural gas, oil and NGL reserves and projecting future rates of production and the amount and timing of development expenditures; our ability to generate profits or achieve targeted results in drilling and well operations; leasehold terms expiring before production can be established; hedging activities resulting in lower prices realized on natural gas, oil and NGL sales; the need to secure hedging liabilities and the inability of hedging counterparties to satisfy their obligations; drilling and operating risks, including potential environmental liabilities; legislative and regulatory changes adversely affecting our industry and our business, including initiatives related to hydraulic fracturing, air emissions and endangered species; oilfield services shortages, gathering system and transportation capacity constraints and various transportation interruptions that could adversely affect our revenues and cash flow; losses possible from pending or future litigation and regulatory investigations; and cyber attacks adversely impacting our operations.”

“Although we believe the expectations and forecasts reflected in forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate or changed assumptions or by known or unknown risks and uncertainties. We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this presentation or as otherwise indicated, and we undertake no obligation to update this information, except as required by applicable law.”

The fact that they are now planning to sell a large part of their business and that they have earlier sold off parts of their activity indicates that their foremost problem is “cash flow”.

That one of the largest companies in fracking is giving such signals indicates that the market in not so rosy – rather they are heading into red ink. The largest problem is that the price of natural gas is too low for the companies producing it to thrive. This can be an indication that the cheap energy for the future industrial activity of the USA will not always be so cheap. If I had a few million to invest then it would not be in a company engaged in fracking. As you can see the service divisions of such companies are profitable but the question is what will happen when that profitability declines in future. Here is the article in the Oil & Gas Journal:

Chesapeake mulls spinoff, sale of oil field services division

HOUSTON, Feb. 24, by OGJ editors
Chesapeake Energy Corp. reported it is considering a potential spin-off to Chesapeake shareholders or an outright sale of Chesapeake Oilfield Services (COS).

COS in 2013 reported revenues of $2.2 billion, offering services that include drilling, hydraulic fracturing, oil field rentals, rig relocation, and fluid handling and disposal.

COS’s operations are currently conducted through Chesapeake Oilfield Operating LLC, a wholly owned Chesapeake subsidiary.

Jerry Winchester, currently COS chief executive officer, previously served in the same position at publicly traded oil field services company Boots & Coots Inc.

As of Dec. 31, 2013, COS owned or leased 115 land drilling rigs. It also owned 9 hydraulic fracturing fleets with an aggregate of 360,000 horsepower; a diversified oil field rentals business; an oil field trucking fleet consisting of 260 rig relocation trucks; 67 cranes and forklifts used to move drilling rigs and other heavy equipment; and 246 fluid hauling trucks.

In addition to services performed for Chesapeake, 35% of COS’s marketable drilling rigs are currently working for third-party operators and COS intends to grow its third-party customer base as an independent provider of oil field services.

Doug Lawler, Chesapeake chief executive officer, commented on COS: “It has provided, and will continue to provide, superior service to Chesapeake’s upstream business, and we look forward to maintaining our close and valuable relationship with Jerry and his team as they pursue COS’s ventures outside of Chesapeake. A separation of COS is aligned with our strategies of financial discipline and profitable and efficient growth from captured resources.”

Chesapeake in 2012 made multiple agreements to sell most of its Permian properties, all of its midstream assets, and certain noncore leasehold for total net proceeds of $6.9 billion as it intended to pay down debt (OGJ Online, Sept. 17, 2012).

The following year, the company reported the sale of 50% stake in its Mississippi Lime oil and natural gas acreage in northern Oklahoma to Sinopec International Petroleum Exploration & Production Corp. for $1.02 billion (OGJ Online, Feb. 25, 2013).

ASPO



10 Comments on "Clouds on the horizon for fracking companies?"

  1. Northwest Resident on Tue, 25th Feb 2014 9:52 pm 

    That “Factors that could cause actual results to differ materially from expected results…” paragraph reminds me of the pharmaceutical commercials I see on TV that claim “X” drug will make your particular “Y” symptoms go away, but that you may also experience rashes, fevers, headaches, stomach aches, vision impairment, hearing loss, nausea, chills, mental deterioration, stroke, heart attack and/or death.

  2. Nony on Tue, 25th Feb 2014 11:20 pm 

    1. Those caveats in the 10K are completely normal. I have been reading SEC filings of different companies for years (related to M&A). In chemicals, ceramics, aerospace, etc. I actually like those risk sections because they contain a lot of insight about the industry factors. But when you all write that up as if it is something new, you just look ignorant. Really.

    2. Chesapeake is not a good example of the industry as a whole. They went on a natural gas acquisition binge and got killed when the price dropped. They’re an example of the OPPOSITE of peak gas! If we had $15 gas, they would be rolling in money.

    3. I wish the services division well. Probably do better outside of Cheseapeake and its bloated campus and overhead.

  3. rockman on Wed, 26th Feb 2014 3:05 am 

    An explanation of the dynamics. When CHK jumped into the play equipment was extremely short. So CHK bought up everything they could. So what ever portion of the $2 billion/month being spent by CHK a fair chunk was being paid to their own sub. And here’s the kicker: CHK wasn’t paying 100% of the costs…they had partners on most if not all of their wells. So an amount of the service companies was coming from partners that had no say in the matter.

    But it’s a different game these days. Lots of infrastructure sitting idle so the sub can’t charge the arm and leg they used to. And maintaining the equipment/personnel isn’t cheap. Infrastructure has to be utilized X% of the time or become money sinks. Between cutting the number of wells CHK drills and the rates they charge the sub isn’t the cash cow it once was. It’s like owning a stock: you can make a good return if you sell at the right time. Get greedy or have the market swing the other way unexpectedly and you’ll realize you hung on too long.

    I’m not sure what the timing looks like now. It might be that seperating the sub from CHK might even make it a better acquisition for someone. There may also be a big tax angle involved.

  4. Nony on Wed, 26th Feb 2014 4:32 am 

    CHK is being hurt by cheap gas. They invested in land (and in drilling it) with an assumption that gas price would rise and stay high. Now that gas is down (probably long term, see futures market), they are cash crunched.

    Their troubles are good news for consumers. It’s the total opposite of what ASPO is pushing (that CHK’s troubles show gas is peaking). We are in a gas glut.

  5. Northwest Resident on Wed, 26th Feb 2014 5:58 am 

    Nony — I re-read the article and couldn’t find where ASPO “is pushing that CHK’s troubles show gas is peaking.” How did you come to that conclusion?

    Actually, the article points out that CHK’s troubles are due to lack of cash flow and low NG price.

    “The fact that they are now planning to sell a large part of their business and that they have earlier sold off parts of their activity indicates that their foremost problem is “cash flow”.”

    “The largest problem is that the price of natural gas is too low for the companies producing it to thrive.”

    There WAS an NG gas glut, but as of now, there is no NG gas glut: Read why here.

    http://www.zerohedge.com/contributed/2014-01-26/glut-whiff-panic-natural-gas-soars

    Low NG prices might be good for consumers short term. But long term, not so good. Low NG prices lead to less production — then demand spikes, and there isn’t enough NG to supply demand because the price was too low — good for the consumer?

    Bottom line is that the economy and excessive up front expenses are killing NG development.

    Not that NG will be much use when we begin to hit oil shortfalls anyway.

    This article just goes to show another oil company running into physical and economic realities — realities that are only going to grow harsher as time progresses, and over a rather short timeframe it seems to me.

  6. GregT on Wed, 26th Feb 2014 6:16 am 

    “over a rather short timeframe it seems to me.”

    I didn’t expect many of the dynamics playing out right now to happen for at least another decade. I really hope we have longer than two years. I could still use some more time.

  7. rockman on Wed, 26th Feb 2014 1:00 pm 

    Just a side note about how CHK has managed to survive this long. While many NG producers, like Devon, were crushed when prices collapsed CHK wasn’t hurt nearly as bad. I forget the actual numbers but they had hedged a significant volume of the production at a price above $10/mcf. So while they may have suffered a significant drop in their revenue from NG sales they were making a bundle on their futures contracts. But they were still stuck with crippling debt. But then they later took another futures bet that NG prices would rise quickly and lost $BILLIONS on that gamble. These asset sales aren’t new…been ongoing for several years. I stopped counting a year or so ago when the number got over $25 BILLION.

  8. Davy, Hermann, MO on Wed, 26th Feb 2014 1:09 pm 

    @GregT – amen to that. Give me a minimum of 3 more years to prepare for a possible drop to a much lower standard of living. I am prepared short term for 3 to 6 months. I still need a few years to grow my grass fed cattle operation in a sustainable and resilient way post fossil fuel and grid plenty. What I am trying to do is prepare for an unstable fuel supply and grid activity. I also need time to more collect items for what could be used in a 19th century style society. I am talking hand tools, knowledge, animal power, and more renewables. I would like to have more renewables as a bridge to a lower standard of living. I also would like to do a little more with my pre-collapse bucket list while they can still be done. I want to sail the Bahamian Islands in a small simple sailboat as well as other modern enjoyments that will soon be gone. I say soon but we may get lucky and have another 9 years are so. If collapse comes, my long term effort may be useless but I am enjoying the activity of preparing. Anyway Amen GregT Amen!

  9. Makati1 on Wed, 26th Feb 2014 2:23 pm 

    Davy, it sounds like you are well on your way. I too am hoping for more years to get ready, if that is possible. We have been planting a large variety of trees on the farm as they take the longest to fruit. I don’t want to give up coffee and chocolate if I don’t have to. ^_^

  10. Nony on Thu, 27th Feb 2014 7:23 am 

    The point is that CHK is not a sign of running out of gas, but a sign of not running out of gas. They bet tight supply…we have loose supply.

    @Rock: thanks for the added info. I just read that Zuckerman book and CHK, Aubrey and Ward come off like a bunch of lying land men with a gold plated corporate campus.

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