Friday, June 08, 2012

Flaring Hubris

Most skip over a lot of the corporate business news, but the machinations within Chesapeake Energy have risen to a certain level of public consciousness of late.  Most likely because of the outsize role CHK plays in all things Marcellus.

The specifics of the issues at Chesapeake really are in the end pretty classic when it comes to resource booms.  Overconfidence and misunderstanding of economics always play a role.  For me, and a lot of others the biggest inexplicable factor is why so many people thought you could produce so much more natural gas and somehow invoke ceteris paribus and just blindly believe the price will stay the same. Supply? Demand? Someone took econ 101 out there. Even if Ceteris Paribus is a convenient fallacy in itself there was no rational reason to believe prices would not retreat in the face of a massive new supply coming online.  Yet that seemed to be the message.

Hold the thought that somehow there would be... still might be someday.. the big transformative shift in demand for Natural Gas in the US...  autos using NatGas... new international exports of NatGas.. etc.. etc.  I don't doubt any of that, but I am quite sure the time frame for any of that to happen is a lot longer than companies like Chesapeake were suggesting to their current or potential investors.

Let's talk about those investors.  You can summarize the problem just looking back at one of Chesapeake's quite extensive investor presentations from last year.  For context it might be worth noting that the price of front-month natural gas was dropping already and so was CHK's stock price.  The question as it always is for investors is what would the future hold?

Here is one page that pretty much encapsulates it all from CHK's October 2011 investor presentaion.  Note first their general prediction of possible prices for natural gas in the future.. Then quote at the bottom is remarkable.  They seem to be trying to say that right NOW is the time to really jump in. That the optimal investment point was just past and the public was on the verge of missing the boat so get ought to get in quick (my paraphrasing but if that was not the message what was?).  Everyone thinks they can time the market. So in this one slide they are trying to say that for both the short and long term it is the time to buy their stock. A no brainer. You can go and look up how the stock price of CHK has fared since October.

And don't forget.. we are now well into the period where producers have been cutting back production because prices have dropped so much.  As of yesterday it seems to not have dampened the growing oversupply of the market and new price drops. So NatGas has dropped in price back to where it was when the announcements of production cutbacks began.

In the longer term the price suppression may not go away quickly since everyone is saying there is all sorts of new supply shut in by lack of pipelines to get it to market.    Mark my words... September, this September for the record... let's not even think about September 2013,  will be interesting in the NatGas markets as supply potentially physically exceeds the capacity to store it in the US. 

But to be a bit gratuitous and go back to CHK's stock price.  They really were not shy.  From last October still they actually were predicting their stock price was going to triple.In reality the stock has been cut in half since a peak early last August.  August may seem like ancient history, but never fear; hubris is eternal.  Though they did include a question mark in the slide title..  A bit reluctantly I bet.


Anonymous MH said...

Over the past few years, I've gotten new windows, pitched a ton of fiberglass into the attic, and replaced the washer and dishwasher with He models requiring less hot water. This is all my fault.

Friday, June 08, 2012 11:51:00 AM  
Anonymous The Wiz said...

Hey....MH....its guys like you that are gonna kill my royalties!!

Friday, June 08, 2012 6:16:00 PM  
Blogger Bram Reichbaum said...

That's it. The site of the old TS&T pottery factory in Chester is going to turn into a *colossal-scale* natural gas storage facility. They'll service annual and semi-annual leases, and an "Express Lane" to the cracker at a premium.

And you know, sporting goods and apparel stores. And a steakhouse.

Friday, June 08, 2012 10:18:00 PM  

Post a Comment

Links to this post:

Create a Link

<< Home