"Chesapeake Energy's New Plan: Desperate Measures For Desperate Times" by Christopher Helman/Forbes/2/13/2012

Tags: 2012, aubrey, chesapeake, christopher, desperate, financial, forbes, helman, mcclendon, measures, More…new, plan

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Sounds grim for Ches! And ng in general for the next 18 months or so. NG at $2.00  this year.  


Hey, Doc.  Just wondering.  To put your brouhaha with CHK in perspective, i.e., per you're going UMI -- what was their last offer on bonus and royalty back when all of this first started with 'em?  And if you wanna give a rough idea on the acreage for context, that would help paint the picture, too.  Assume ya'll never did talk clauses.

And, y'know.  Thanks again for being the go-to guy on CHK.  Much appreciated per all your heroic effort on GHS over these several years.


CHK never offered a dime, as I never was contacted by CHK for leases.  CHK picked up leases around my property 6 months after well was PRODUCING.  Sounds strange that CHK would do that, but they did because a LARGE Leased Landowner's OLD lease (in two contingent sections) was almost up with JPD... So that is why the need for speed in getting sections drilled.  Many signed for $8K/acre.  However, that was in Dec./Nov. 2010... After Aubrey lost all his stock in Sept. 2010 crash.   JPD did the initial leasing for CHK early on, but I was not contacted by them either.

In Summer of 2008, highest offer given to me was $18K/acre.  Looking back.... ?  Well, can't look back.  I had no idea the whole Financial World was going to plummet into madness.  I guess Mr. Chesapeake didn't see that one coming either. 

So, Here we are today.  I am giving CHK until March 1st to get their act together per my UMO interests.  I have all "things" ready to go ASAP if CHK does not.  And, I have "others" paying close attention to how CHK is handling things per same.   It has been quite interesting to say the least and extremely educational.   Profitable (?) however, not so much!  (LOL)  CHK has broken even per well in my section and is still producing it.  But, at $2+/mcf, CHK has a looooooong road ahead before even CHK sees a good profit.   I suspect the CHK well in my section is pretty typical of other CHK HS wells. So I am concerned with the steep CHK HS well decline rates, low prices, and CHK's need for cash.  If my section's well is "typical" or "average," then the "cash flows" from these wells will continue to decline (even more so at $2+/mcf) rapidly.   It's too bad such a good thing is being killed off by its own success. 

Fortunately for my neighbors and me, CHK is still producing my well with 72 mmcf/month at Nov. 2011.  And, per CHK, well paid out Sept. 2011.  I don't see any "alternate" wells in CHK's future for my section, CHK cannot afford it and doesn't need one...Unless CHK cannot meet a VPP or two, or three, or four, or five, etc.  (Remember, VPPs are "pre-payments" of cash for Company's future accounts receivables.  (Nat Gas distribution Companies did this in the 80's and 90's and got burned badly, in a need for immediate cash flow.)  However, the VPP receivers, make big bank just for the loan alone.
It's the MLPs that will be gobbling up the "cash."  Those "unit" holders are making bank too...At the sad expense of "share" holders.  IMO.

With all that being said, and Contrary to popular belief (LOL), I do hope CHK can and will survive this moment of "desperation."  They have done so before, and Mr. Chesapeake always rises again like a phoenix sun. 

I just EXPECT a climate of "fairplay," in their business transactions, and I EXPECT no less than Mr. Chesapeake would EXPECT if the roles were reversed.  Mr. McClendon wouldn't stand a minute for his Nat Gas revenues, mineral estates, properties, leases, or any of his moneys, being kept/obfuscated/held hostage...by any Corporation... Once HIS portion of the bill had been PAID, IN FULL... And, PRE-PAID, IN FULL...no less.  Can't you just see a CHK UMO/Royalty Owner/WI Owner holding moneys OWED to him????  Of course, you nor I have a Board of Directors willing and able, who wish to hand over $100 million if we go bankrupt.  LOL 

I read on "seekingalpha" site that CHK also sent their "service" providers recently a lovely "note," stating (paraphrasing here) that if "providers'" charges for services didn't "drop," CHK would be saying "goodbye," to doing business with them.  Again, this was reported on "seekingalpha" site, so don't quote me as having first-hand knowledge of same.  (I guess I'm lucky I didn't get one.  LOL)

GoshDdarn... Here's hoping March 1, 2012, will be a good day for me and for Chesapeake!  As we have been "partners" for quite a while now. 

And, heres hoping all's "well" that ends "well."  I hate cliche's.  LOL

Thanks for all your years of help and GHS input. 

Will update per seeing any $$$$, when the Chesapeake Pony Express next runs...  

DrWAVeSport Cd1 2/14/2012

Edit & Rewind,

"After Aubrey lost all his stock in Sept. 2008."  DWS. 

Thanks for the backstory, Doc.  Seems to be sorta in the horror genre, i.e., THE SHALE-EYED NIGHTMARE ON THE RED RIVER.

Yeah, well -- maybe some sharp Wall Street Quant will dream up a VPP UMI credit-swap derivative for unsigned landowners to mitigate such pain. 


You have an excellent idea there! LOL   Maybe I can introduce it at CHK's upcoming Annual Stockholders Meeting, with your permission, of course.  

Of course, I and several others maybe introducing "something else" at CHK's Annual Stockholders Meeting, e.g. documents that need to be personally signed for...  Hopefully it won't come to that...But, CHK doesn't "Play" fair. IMHO

It's going to be interesting... 

DrWAVeSport Cd1 2/15/2012


Sure, Doc.  Take it and run with it.

And it seems to me if you have the camera crew of a documentary filmmaker with you, filming your effort that day -- you might be taken a bit more seriously.  As you know, it never hurts to document stuff on camera.

Best of luck with it. 

Ah...The Media can be quite a persuasive animal...

So let me get this VPP thing straight...  Someone is going to pay CHK something like $1B now, for CHK's promise to pay them in the future with oil/gas that they drill.  What if CHK goes belly up in that time?  Gee, this sounds too risky for me.

Meanwhile XOM keeps drilling gas, driving down prices.  I wonder how many of these companies will be bought out by the big guys over the next few years.

This is not the first VVP that CHK has contracted.  It's one in a string.  The first VVP seemed to come about because of the lack of market interest in a standard Joint Venture agreement.  It is less desirable for CHK because it is considered debt as opposed to a sale of interest in an asset.  It's of wider interest as it is basically a commodity futures contract.  Buy cheap now, hope to sell in the future for a profit.  JV's usually appeal to parties in the Industry.  VVP's are speculative investments that are more widely attractive to parties with the requisite financial wherewithal.  I suspect the future production is contractually guaranteed regardless of the fate of CHK.


One of the other articles our suggested CHK would be done to 24 rigs by the end of the year.  I think the most interesting news is that regarding the Permian and Mississippi Lime.  They really need to develop the liquids side to come out OK in 5 years - JVing it I can see, but possible divestiture of the Permian properties?  

It should make for interesting times ahead.  

Henry, regarding XOM - relative to the capital they could bring to bear, I call their drilling measured and rational.  I think you'll find a their rig count slowly declines in the HA, and increases in more liquids rich plays.  

There are protections for the lenders.  VPP's are nothing more than a sale of hydrocarbons in the ground.  The transaction involves CHK transferring title to a portion of the hydrocarbons in the ground, and then CHK "delivers" these hydrocarbons to the VPP holder as they are produced.  Should CHK go belly up (very very highly unlikely IMHO), then the VPP holders would own title to the hydrocarbons in the ground.  Similar to your home and your mortgage holder.  If you go belly up, the bank owns a portion of your home and you couldn't sell your home without paying off the mortgage holder.

I've worked on several VPP's from both sides of the transaction for other companies.  They really aren't that big a deal.  CHK has sold reserves and promise to operate/produce them and deliver them to the mortgage holder.  There is usually a second agreement whereby CHK agrees to buy the reserves from the bank after they are produced.  And the VPP holder also goes out and hedges the price of the gas so that they have "locked" in their price.  Most of CHK's VPP have the banks that own them hedged with gas above $5.  But that doesn't usually hit CHK, that will hit whomever sold the hedges.  Genereally utilility companies.


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