Bloomberg Businessweek: "Chesapeake's 1% Tax Rate Shows Cost of Drilling Subsidy" 7/2/2012

"...Chesapeake paid $53 million over its 23-year history, or about 1 percent of the cumulative pretax profits during that period, data compiled by Bloomberg show. That's less than half of Chief Executive Officer Aubrey McClendon's compensation, for example, in 2008 alone..."

http://www.businessweek.com/news/2012-07-02/cheaspeake-s-1-percent-... ~ written by Zachary Mider, Bradley Olson, Jesse Drucker, and Todd White ~ July 2, 2012

WOW!  

"Defer Taxes Forever..."

And they're $20 Billion in debt????

IMO, These O&G Producers (probably many other O&G Producers besides CHK) double dip revenues to avoid the Tax Man...

Forever...

My "next" life I wish to be a U.S. O&G Producer...  LOL

DrWAVeSport Cd1 7/2/2012

 

 

Tags: chesapeake, drilling, rate, subsidy, tax

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"Chesapeake has paid out more than $5 billion in cash toward taxes over the past 12 years, a figure that includes taxes other than income taxes, said Michael Kehs, a company spokesman. The income tax rate for accounting purposes has varied from 36 percent to 40 percent since 2000 in years that the company turned a profit, he said."

That quote is from a little further down in the article.  I gather it does not rank as a "headline grabber" for Bloomberg Businessweek.

DW,

You are missing the bigger picture...Almost a 100% successful well drilling program...and, total write-offs, write-downs...forever?????  With CHK keeping 75-80 percent and more of Lessors' mineral moneys????  And CHK's deducts/expenses/charges anywhere from 30-50 percent from Lessor's royalty checks????  And CHK's payment to their Mineral Owners the lowest $/mcf????  Lower than any other Producer????

And, CHK still found a way to aquire $20 Billion in debt????

The BW "headline" states exactly what this article is about:  "...1% Tax Rate Shows Cost of Drilling Subsidy"

My CHK April 2011revenue check...50+ percent deducts...

IMO.  It's cheating consumers on a grand scale. 

 

DrWAVeSport Cd1 7/5/2012

 

 

 

 

They may be cheating you, that has nothing to do with tax incentives that are lawful and used to increase oil and gas activity. Not all wells are commercial as is the case with the Haynesville.  Keep obummer in there and you will not have write offs for your home mortgage or depreciation of large assets, or heath care costs.

TLA,

Come on...  My taxes now are outrageous.  Local/State/Fed... 

I don't mind subsidies to O&G, but in this environment, e.g., 100% success rate... and with CHK using "full cost" accounting vs "successful efforts"   give me a break.  

The IRS will get to the bottom of the books... 

Doc:

I'm not missing the big picture - it illustrates and underscores CHK's position as "lead dog" in an article that is meant to call attention to "effective tax rates" and how low these are compared to other companies.

 

The writeoffs and writedowns are also not "forever".  They are allowed (along with other E&P operators) to offset intangible drilling costs from their income.  When you stop drilling (in LA Haynesville, for instance, CHK is down to 3 rigs), the income from sales of product cannot be offset by new drilling.

 

Everything else that you state in your first paragraph above past "forever" is not in the article, and is IMO the reason that you keep chewing on this.  I don't mean to be harsh, but why weren't these practices not known to you prior to signing a lease?  Why is it that so many people didn't look past the briefcase full of cash to study all of the particulars over the life of the deal?

 

The reason that the company is in trouble is the same reason that they got in trouble 15 years ago: they are a highly leveraged drilling machine.  They initially use cash flow and leverage to lease.  Their PR machine goes into gear to tout the value of the leasehold assets which results in a raised valuation.  They borrow against reserves in place to secure drilling rigs and services to book production as fast as possible, which allows them to tout production and reserves, which allows them to borrow money against the reserves and production.  Lather, rinse, repeat.  Everything works as long as the commodities being leveraged against is price stong and/or on the upswing.  When the commodity trends lower, they must produce more in order to collateralize against their credit revolvers, which accelerates the lowering trend from the supply side.  The process can (and did) unwind quite quickly, resulting in enough debt to choke a horse.

 

On top of that, all of the capital outlays that had to be done to build out all of the extra required infrastructure has to be paid for, too, otherwise, creditors want to seize control of the very systems that bring the product to market.  This results in the gathering / marketing subsidiaries having to keep up charges even in the face of decreased volumes and revenues.  Ergo, uplift, treating and marketing costs increase as a matter of percentage compared to gross price realized at the sales point.  Truth is, virtually all of these percentages have gone up; CHK's have just appeared to been higher and/or gone up more comparatively, if Henry's research and data are to be believed.

 

In short, no one cared about this 1% effective tax rate, corporate executive largesse and drilling subsidy mess until it began to impact the shareholders and the royalty owners, and began to draw the attention of the greedmongers and muckrakers.  Now, the lambasting press can't write enough stories like this.  And actually, the consumers (end-point buyers) of all of this cheap natural gas are about the only ones that are actually gaining anything from this.  And the government: get ready for your 3.8% Medicare tax on royalties, compliments of the new healthcare law.

DW,

I am not leased with CHK.  I read CHK's lease... It stunk to high heaven...

I am UMO in a CHK HS unit. 

Try putting on the other shale "shoe" for a few minutes...  You have read GHS per CHK and GHS mineral owners frustrations, to put it mildly.

Become one of the CHK stakeholders/ "consumers" for a moment who is at the mercy of  CHK's accountings per their mineral estate.  It looks much different from this side of the fence.

I still stand where I stand.  CHK is ripping off their Lessors/UMOs right and left.

They are not "transparent" in their accountings to their mineral owners and their "full cost" accounting method is ripe with rip off.   

Example of CHK's incompetence.  I was told by a "Nikki" who works @ the CHK Customer Information Center that the CHK 1st Quarter ending March 2011 Well Payout Statements & Accountings were mailed out June 24, 2012. 

This is July 5, 2012.  Still no Reports. 

Three individuals living next to me have not received these either.  So it's not the USPS.

I called back today...  No one knows anything about when or if these registered-mail, CHK Quarterly Reports have been mailed out... or exactly what "kind of reports" I am speaking of...(Geez!) ~  that are required...by LA State Statute...to be sent to JBs/UMOs at the end of each Financial quarter reporting period.  One would think by now CHK reps would at least have heard of such a thing...

I spoke with a PXP insider the other day... All the other HS Producers know what CHK is doing...

"briefcase full of cash..."  LOL  What "briefcase full of cash?" 

Maybe you are confusing the "briefcase full of cash" CHK got from their stakeholders with the "empty" one CHK stakeholders got left holding...

Respecfully, We agree to disagree.

DrWAVeSport Cd1 2012  

  

 

 

 

Doc:

We don't disagree as much as you might think.  The "briefcase full of cash" refers to the comparatively high bonuses and overbidding that occurred during the first three quarters of 2008, while the lease-up was going on, which in many situations where competitive leasing was ongoing, CHK was consistently the high bidder.  Very few people that were beneficiaries of lease bonuses that were inflated during CHK's spending spree were complaining with its cumulative effects.  Some even on this forum kept preaching $30K/30% or bust if you remember, and were more than ready to ride the wells down if they didn't get it.

 

Also shareholders that benefitted from CHK's stock runup from the low teens in 2004 (for that matter, the single digits just a few years before that) on their way well north of 60 weren't very much concerned, until the indicators and ticker began to move significantly south.  Many of these folks can be quick to point out that CHK's stock price made it to $74, but apparently very few actually made a move to lock in gains at those valuations, and are plagued by thoughts of "what might have been".

 

I am sorry that you are mired in what appears to be shaping up as an administrative / regulatory dispute re: unit production and well accounting.  All that I can advise you is to follow up with remedies under the statutes that allow for you to establish the "known or should have known" and "dates of demand" and adequately establish a firm paper trail to be able to recoup any penalties that may be due to you - phone calls and letters delivered "regular mail" are usually insufficient to do so.

 

But honestly, what their effective tax rate is does little more than heap more fuel on the fire on what appears to be a very personal dispute for you against this company.  And honestly, if using every break allowed under the current tax code were to make them more responsive and effective in dealing with you with your issue(s), and you found out that they weren't deferring the income as allowed (for "honor" or whatever reason), which would mean that they did not have the means to deal with you on your issue, would be so incensed about their use of the current provisions under the tax code?

 

And as to shareholders and prospective purchasers of stock: if a publicly traded corporation were to announce that they were voluntarily foregoing any available tax breaks available to them as related to intangible drilling costs, depletion, or any credits for operations of stripper wells, horizontal drilling credits, or ultradeep production credits, the impact of which would be to make the company anywhere between half and a two-thirds less profitable per measure of revenue, would there be a rush to break through the line in the race to buy it first, or a rush to proclaim the stupidity of the corporate management on their way to buying the stock of the company with the most profitability and shareholder value?

Oil and Gas producers do not get one single tax break that any other corporation is not entitled to.

Checkmateking,

Respectfully.  I disagree.

Can you point out the tax code which specifically mentions energy companies, it doesn't exist. It all falls under the manufacturing code. The overall economic good done by energy companies dwarfs whatever is missed by taxes, it would just be more money for the government to waste anyway. 

Checkmateking,

I'm using the "tax code" to deduct the same tangible/intangible costs per HS well that CHK is using.   It goes on into infinity per costs of these horizontal wells.  I will be able to deduct these costs and depletion allowances until far beyond my death. 

And so will CHK.

I, however, am getting slammed by CHK's cap ex costs, and I have no recourse per their accounting "methods" for same except to file suit.

No.  It would not "just be more money for the government to waste anyway."   It could be used to build out on U.S. Nat Gas Energy business. 

Summer 2011 is when investigation of CHK began.  The SEC and IRS had enough info way back then...  It is just now hitting the proverbial "fan." 

Listen to CHK's 2011 3rd Quarter Conference call...  Clues all over...  

As I have stated prior, CHK stakeholders aren't hiring high priced SEC attorneys... 

 

 

Believe me Doc, I am not defending Chesapeake, I think they really stink. 

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