The Street: "The Catch-22s Keeping Nat Gas Stocks in the ICU" by Eric Rosenbaum 1/12/12

Good Read about the Nat Gas Race to Produce no matter what the price...

@ $2...Is the Haynesville Shale play Up For Sale?

DrWAVeSport Cd1 1/19/2012 


Tags: cabot, catch-22, chesapeake, devon, energy, eric, gas, icu, natural, rosenbaum, More…southwestern, stocks, street, the

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good article.  thanks for posting

The "widow-maker," indeed.

not altogether accurate - CHK has the option to "cash out" its hedge gains WITHOUT having to actually drill and/or backup it's hedges with physical production - financial swaps are a pure exchange of NYMEX and Basis values that settle "financially" on a monthly basis.  Unless CHK and/or these other companies actually take their product to delivery (i.e. the Henry Hub), which rarely happens, then it's purely financial - if the "hedge/swap" value is "in the money", then CHK gets some revenue from the differential in hedge vs. settlement price.  It doesn't completely make up for lost cash flow from the sale of the product, but CHK does have the option (if they can withstand the cash flow loss) to shut-in/slowdown drilling/etc. - no requirement to match physical volume with financial hedges - the opposite IS true when hedges are "underwater" inasmuch as CHK is effectively writing a check for the differential when current market prices outstrip the hedge value, thus bleeding cash and production cash flow IF they don't have production to back it up.  CHK still realizes the market value of its flowing gas, but only nets out the value of its hedge - not really a loss, but a "cap" on what they receive for the product.......aside from "margin calls" on these hedges, the other culprit from rising NG prices is the uptick in drilling/completion costs (i.e. "cost creep") for which there is no solid "hedge" mechanism to mitigate outside of executing a long-term agreement with service companies at "fixed costs" in a rising market, which is hard to negotiate in an inflationary market.  We're not in that situation now, and in fact, the opposite.......last thoughts......once the last bull becomes a bear, we'll see the market flip.....agree that there's not enough producer dicipline right now to balance things out - aside from the whole supply/demand equation, the producers with "oily" plays will continue to find ways to hang on to their "dry gas" shale plays as long as NGL's keep their lofty values - that's providing the cash flow to keep them alive.....if/when the NGL values start to deflate, which they may not, then new NG drilling will start the real slow-down, and allow for a true "bottom" to be found in this bloated NG marketplace.....will still likely be a slow recovery even then.




CHK sells ALL its nat gas to CEMI...  CHK owns the whole ballpark, from property to product, every step of the way.   CHK regulates its own "fixed costs."     Just ask CHK royalty owners. 

CHK is leverage financed out the #$%%^&**** for more years than I can count ahead.

Selling off Future receivables (VPPs) is debt, not on the balance sheet.   When Arkla Gas began that kind of activity, it sunk the ship with debt at higher and higher interest rates with sinking nat gas prices.  Remind you of any scenario going on Today (?)

CHK has to keep drilling no matter what the cost or losses.  Way toooooo many financials with their hands out and CHK has to deliver the goods/$$$ on time, every time, and per SEC filed contractual VPP. 

And, CHK has no cash flow except that which it has aquired from OTHER Corps.  JVs.

Read CHK's 3rd Qtr. 2011 call transcript.  Listen to JP Morgan's Joe Allman's questions per CHK's D&C costs.  It's a hoot. 

CHK and others who are debt ridden, have to keep producing.  No matter the cost. They OWE TO MUCH going into this nat gas price crash...   Ergo:  Catch-22.

How much "hedging" is CHK doing in 2012, 2013...  If none, or very little... Moot point now.

CHK "dances" on both sides of the balance sheet.  Higher D&C costs = Higher depreciation/amortized costs, ergo CHK needs higher D&C costs.  Lower D&C costs = Increased profits, Higher stock price, ergo CHK needs lower D&C costs.   High deductions on royalty checks, Low prices per mcf on royalty checks, Higher margins at CEMI and CHKM.  Inflated Reserves, Higher net worth.  Actual Reserves.....(?) Don't get the balance sheet "done."  CHK and Others have to "dance" that one around or their balance sheets break down again.  Banking/Institutional Investor Presentation Power Points showing $5/$6 nat gas...  Imaginary.   All to prop up the balance sheet. 

This article is right on point, IMO.

Nat gas @ 2.337....  
You do the math...


DrWAVeSport Cd1 1/20/2012

Too Bad CHK (and Others) can't "regulate" or "manufacture" for themselves the settling price of Nat Gas.  It would probably be around $10/mcf right now...  LOL   Again, helping themselves on the balance sheet again.



Thanks, Mattie.  Clear and well defined.  A strong educational POV on hedging (in general).

I just saw a dismal natgas report on CNBC.  Boone Pickens says it could go under $2 and a stock picker says that CHK is too highly leveraged (in debt).  It's part of the CNBC show Street Signs. There is a lot more, but you get the idea.

PS:  there are some really good posts in this thread - thanks Mattie & DrWave!

buy chk in the teens and hold it for 10-20 years, or until someone buys them out, imo :p


(i am not a lawyer, or geologist, or financial advisor, invest at  your own risk)


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