Fracking bubble?

[Th'Pusher]

I would be interested in what those in Oil and Gas industry think about this...Long article. Some interesting excerpts.


Read more: http://www.rollingstone.com/politics/news/the-big-fracking-bubble-the-scam-behind-the-gas-boom-20120301#ixzz1p30gIJXq


Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was about helping realize the dreams of middle-class homeowners. For Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil.



According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don't pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods. "This is an industry that is caught in the grip of magical thinking," Berman says. "In fact, when you look at the level of debt some of these companies are carrying, and the questionable value of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down."


In recent years, the company has also sold off the future proceeds it expects to receive from thousands of wells – a complex financing deal that enables it to borrow cash now without counting the debt it will owe when it has to drill the wells later. The very first deal, made with Deutsche Bank and a Swiss investment firm, brought Chesapeake more than $1 billion in return for 15 years of future production from 4,000 wells. "It's not illegal, but most gas and oil companies don't do it," says Bob Brackett, an analyst with Sanford C. Bernstein & Co. "Chesapeake's poor credit rating pushes them to turn to unconventional financing."


Chesapeake's board boosted McClendon's annual salary to $112 million, making him the highest paid CEO at any S&P 500 company at the time. The pay hike, which sparked a shareholder lawsuit, was scorned by Wall Street analysts. "McClendon clearly thinks of Chesapeake as his own personal piggy bank," says one. In the end, that piggy bank may prove to be empty: In February, Chesapeake announced that, because of low gas prices, its revenues will fall $3.5 billion short of its expenses this year.


McClendon played a leading role in creating the fracking bubble by hyping the promise of endless natural gas and sweet-talking Wall Street into funding a massive land grab. If the bubble bursts, Chesapeake's stockholders won't be the only ones who pay the price – the shock waves will be felt throughout the economy, from homeowners who rely on natural gas for heat to manufacturers who were betting on it to power their new factories. Thanks to McClendon's gambles, Chesapeake is struggling to cover $10 billion in long-term debt. In recent weeks, the company has announced it will sell off more land and shut down some production. McClendon also hopes to increase demand and boost gas prices by promoting cars and power plants that run on natural gas, and by cutting deals to export gas to Europe and Asia, where prices are five times higher than in the U.S.

[RandomGuy]

Last year, scientists at Duke University, McClendon's alma mater, published the first rigorous, peer-reviewed study of pollution at drilling and fracking operations. Examining 60 sites in New York and Pennsylvania, they found "systematic evidence for methane contamination" in household drinking water: Water wells half a mile from drilling operations were contaminated by methane at 17 times the rate of those farther from gas developments. Although methane in water has not been studied closely as a health hazard, it can seep into houses and build up to explosive levels.

The study caused a big stir, in part because it was the first clear evidence that fracking was contaminating drinking water, contrary to the industry's denials. Just weeks after the study was released, the Pennsylvania Department of Environmental Protection fined Chesapeake $1.1 million – the largest fine against an oil and gas operator in the agency's hisLuck_The_Fakers_tory – for contaminating 17 wells in Bradford County, including some that had been part of the Duke study.
Read more: http://www.rollingstone.com/politics/news/the-big-fracking-bubble-the-scam-behind-the-gas-boom-20120301#ixzz1p69WIj9m


THe companies go out of their way to say "if it is done correctly it is perfectly safe, trust us."

What I notice is the caveat at the front, "if it is done correctly".

[RandomGuy]

At the same time, scientists began to conclude that America's reserves of natural gas have been overhyped. In January, the Energy Department cut its estimate of the amount of gas available in the Marcellus Shale by nearly 70 percent, and a group affiliated with the Colorado School of Mines warns that there may be only 23 years' worth of economically recoverable gas left nationwide. Even worse, new studies suggest that because of fugitive emissions of methane from wellheads and pipelines, natural gas may actually be no better than coal when it comes to global warming. "I was an early optimist about natural gas," says Robert Kennedy Jr., who sits on a panel that's advising Gov. Andrew Cuomo on whether to allow drillers like McClendon to expand into New York. "But after looking into it, I now believe that, without tighter regulations and stricter oversight, the shale-gas boom could turn out to be an economic and environmental disaster."

Read more: http://www.rollingstone.com/politics/news/the-big-fracking-bubble-the-scam-behind-the-gas-boom-20120301#ixzz1p6AKmb8q

Start cutting estimates of reserves, and all the land the guy in the OP owns is suddenly worth a LOT less than it was.

Given the financial house of cards he seems to have built, that will prove fatal.

The guy was an accountant, so he knows how to game the system, but all the smoke and mirrors in the world won't make cash appear when someone shows up asking for a collateral call for their bond (i.e. cash).

Interesting. If the article is accurate this is the next big accounting scandal. I am going to add it to my subscribe and track it.

[RandomGuy]

An even larger threat is the flowback waste that is pumped out after a well is fracked. It's a salty brine, mildly radioactive, and laced not just with toxic chemicals but with natural hydrocarbons and heavy metals like barium and benzene, which are known carcinogens even in minute quantities. In fracking operations out West, the flowback is generally injected into underground sites that meet EPA standards. But in the Marcellus, there are virtually no injection sites. In the early days, gas producers did pretty much whatever they wanted with the billions of gallons of toxic water their operations produce.
Read more: http://www.rollingstone.com/politics/news/the-big-fracking-bubble-the-scam-behind-the-gas-boom-20120301#ixzz1p6C2PFTL

Erk.

This is beginning to sound like something that needs some solid government oversight.

Any freemarketeer want to tell us your solution?

[boutons_deux]

Anybody guessed, but now we know. why dickhead banned (Halliburton) fracking from inspection under, authority by the Clean Water Act. Go to hell, dickhead.

[RandomGuy]

Last year, scientists at Duke University, McClendon's alma mater, published the first rigorous, peer-reviewed study of pollution at drilling and fracking operations. Examining 60 sites in New York and Pennsylvania, they found "systematic evidence for methane contamination" in household drinking water: Water wells half a mile from drilling operations were contaminated by methane at 17 times the rate of those farther from gas developments. Although methane in water has not been studied closely as a health hazard, it can seep into houses and build up to explosive levels.

The study caused a big stir, in part because it was the first clear evidence that fracking was contaminating drinking water, contrary to the industry's denials. Just weeks after the study was released, the Pennsylvania Department of Environmental Protection fined Chesapeake $1.1 million – the largest fine against an oil and gas operator in the agency's hisLuck_The_Fakers_tory – for contaminating 17 wells in Bradford County, including some that had been part of the Duke study.

McClendon, a major benefactor to Duke, fired off a blistering letter to the university, which was printed in the alumni magazine and widely circulated online.
He didn't point out any errors by the scientists or question their methodology. Instead, he went after their character, dismissing the study as "more political science than physical science" and accusing them of having a bias against fossil fuels.
"These guys," he tells me, "have invested their lives in the view that climate change is occurring, that fossil fuels are bad, and that natural gas is a fossil fuel, and therefore it's bad."

When I ask Avner Vengosh, a geochemistry professor who served as a lead author of the study, about McClendon's letter, he laughs lightly. "I have no agenda," he says. "I am a scientist. I report what the evidence I find tells me to report." He and his colleagues visited Chesapeake's headquarters in Oklahoma a few weeks before the study was finished and shared their results with the company. They also offered to consider any data that Chesapeake might have that would challenge their results. "They offered us nothing," says one scientist who attended the meeting.

Where have I seen that game plan before?

"those biologists showing that evilution is a "fact" just have an agenda to persecute good Christians, they must be evil themselves."

among others...

[RandomGuy]

The article created a back and forth.

Chesapeake's response:
http://www.chk.com/News/Articles/Pages/release_20120302.aspx

The author's response to Chesapeake's response:
http://www.rollingstone.com/politics/blogs/national-affairs/rolling-stone-responds-to-chesapeake-energy-on-the-fracking-bubble-20120306

The main take I got out of it is that Chesapeake smells a hell of a lot like Enron.

[RandomGuy]

Our business strategy is to continue our reserves and production growth and transition to increased liquids production. As a result of this strategy, we plan to make capital expenditures in 2012 that will exceed our projected cash flow from operations. We plan to obtain funds for these capital expenditures from operating cash flow, supplemented by various asset monetization transactions, including joint ventures, volumetric production payments, financial transactions and other property and investment dispositions.

Translation: We are going to operate at a loss, and will finance that loss through sales of assets.

Their assets consist of leases and subsidiaries that are in the industry of drilling for natural gas.

Q: If you have to sell assets because natural gas prices are low, but the assets that you are selling have valuations that depend on the price of natural gas, will you get more, or less money for those assets on the free market?

[jack sommerset]

The White House can't complain too much about taking the blame for high gas prices. While campaigning for president in 2008, Obama castigated President George W. Bush over the same issue. "You're paying nearly $3.70 a gallon for gas—2 1/ 2 times what it cost when President Bush took office," he told a crowd in Ohio at the time.

A little blurb from a article I read this morning on yahoo. Reminds you how ridiculious the 2008 election was. Blame Bush for everything and this country for the most part bought into it. Obama will not win reelection in part because there are are so many of these truths that will come back and bite him. Plus Obama continues to blame others to this day.

"Count it all joy, my brothers, when you meet trials of various kinds, for you know that the testing of your faith produces steadfastness. And let steadfastness have its full effect, that you may be perfect and complete, lacking in nothing."

[RandomGuy]

. Finally, we plan to continue to seek monetizations of a portion of our midstream assets, our oilfield services assets and other miscellaneous investments. While we expect that the proceeds from these transactions will be sufficient to fund our planned capital expenditures, we do not have binding agreements for any of these transactions and our ability to consummate each of these transactions is subject to changes in market conditions and other factors. As a result, there can be no assurance that we will complete any of these transactions on a timely basis or at all. To the extent that proceeds from these potential transactions are inadequate to fund our planned spending, we would be required to modify our drilling program or monetize different or additional assets.

monetizing= selling

They do have a stated goal of paying down debt, so this isn't as bad as it might seem.

I do have to wonder that one of the ways they are planning to get out of their hole is to increase production.

If you are in trouble because the price of your product is falling, and your plan is to supply more of that to the market, what will that do to the price of your product?

[RandomGuy]

The White House can't complain too much about taking the blame for high gas prices. While campaigning for president in 2008, Obama castigated President George W. Bush over the same issue. "You're paying nearly $3.70 a gallon for gas—2 1/ 2 times what it cost when President Bush took office," he told a crowd in Ohio at the time.

A little blurb from a article I read this morning on yahoo. Reminds you how ridiculious the 2008 election was. Blame Bush for everything and this country for the most part bought into it. Obama will not win reelection in part because there are are so many of these truths that will come back and bite him. Plus Obama continues to blame others to this day.

"Count it all joy, my brothers, when you meet trials of various kinds, for you know that the testing of your faith produces steadfastness. And let steadfastness have its full effect, that you may be perfect and complete, lacking in nothing."

um, you do realize we are talking about natural gas (propane, etc) here, right? (which have fallen for the last few years)

[jack sommerset]

um, you do realize we are talking about natural gas (propane, etc) here, right? (which have fallen for the last few years)

I realize my post was replied to by someone who thinks the world will run out of gas by the time his kid is old enough to drive so I have determined its easy for you to be confused. God bless you.

[TeyshaBlue]

monetizing= selling

They do have a stated goal of paying down debt, so this isn't as bad as it might seem.

I do have to wonder that one of the ways they are planning to get out of their hole is to increase production.

If you are in trouble because the price of your product is falling, and your plan is to supply more of that to the market, what will that do to the price of your product?

It makes me wonder if they even factored in the glut and consequent freefall of natural gas pricing into their monetization model.

Or is this simply a hedged bet..monetize while values are low and pay off when values recover.

[boutons_deux]

I read an article last week where, I think it was?, Chesapeake realized they could make a lot more $Bs flipping land leases than actually fracking for gas.

[RandomGuy]

I realize my post was replied to by someone who thinks the world will run out of gas by the time his kid is old enough to drive so I have determined its easy for you to be confused. God bless you.


The White House can't complain too much about taking the blame for high gas prices.

http://geology.com/articles/natural-gas-prices/natural-gas-price-graph.gif

Were you talking about gasoline, or natural gas?

[RandomGuy]

It makes me wonder if they even factored in the glut and consequent freefall of natural gas pricing into their monetization model.

Or is this simply a hedged bet..monetize while values are low and pay off when values recover.

Did I mention they have unrealized losses in price derivatives of $1.6Bn?


--------------------

Hmm.

Looking at three year results.

Production is up.

This has the good effect of decreasing debt per unit of gas sold.

Unfortunately, their other costs per unit of gas produced went UP in 2011.

The thing I would watch is their depreciation cost per unit of gas.

If it is going UP as the price is going DOWN, that is not sustainable.

"Joint Ventures. In February 2011, we entered into a joint venture with a wholly owned subsidiary of CNOOC Limited (CNOOC) to sell a 33.3% undivided interest in approximately 800,000 net acres of leasehold overlaying the Niobrara Shale, Codell Sand and various other formations in the Powder River and DJ basins in northeast Colorado and southeast Wyoming. Under the terms of the joint venture, we received $570 million in cash at closing, and CNOOC has agreed to fund 66.7% of our share of drilling and completion costs until an additional $697 million has been paid, which we expect to occur by year-end 2014."

CNOOC = Chinese state oil and gas.

7.625% senior notes due 2013 $ 464
9.5% senior notes due 2015 1,265

These two represent 17/89 or 20% of their long term debt. "long term" = over one year.

They have three years to find the cash to meet the maturity. They can roll it over, i.e. re-issue the debt at the time.

The table below summarizes our contractual cash obligations for both recorded obligations and certain off-balance sheet arrangements and commitments as of December 31, 2011:


Total due in less than 5 years: $14.2bn
Total of all years: $32.6Bn

Percentage due within 5 years: 44%

Estimated fair value of their oil and gas derivatives:
($1.6Bn) (that is a negative number, they would owe it if they got called on it, which they will eventually)

[TeyshaBlue]

I read an article last week where, I think it was?, Chesapeake realized they could make a lot more $Bs flipping land leases than actually fracking for gas.

They might actually make a conventional, realized return from that...but the article from the OP, sure makes it look like they aren't doing anything that conventional.
I'm with RG...it smells kinda like Enron.

[TeyshaBlue]

Percentage due within 5 years: 44%

Yikes.

[RandomGuy]

I realize my post was replied to by someone who thinks the world will run out of gas by the time his kid is old enough to drive so I have determined its easy for you to be confused. God bless you.

We will have oil, and therefore gasoline for another century or so. Find any post of mine where I say otherwise.

I triple dog dare you.

Other forms of energy for cars will overtake gasoline, long before we really run out of oil. We will stop using it because it will be too expensive. You can have all the cars that run by burning gold you want, but when I come along with a car that burns copper, you are toast.

[RandomGuy]

Percentage due within 5 years: 44%

Yikes.

"certain off-balance sheet arrangements"

That phrase should make anyone nervous.



THey don't say how much the "off balance sheet arrangements" contribute to the total.

Translation:
You can't make a good decision based on their balance sheet.

[jack sommerset]

God loves us all equally. If you say you didn't say that I will let sleeping dogs Lie. God bless you.

[RandomGuy]

Chief Executive Officer
As of December 31, 2011 and 2010, we had accrued accounts receivable from our Chief Executive Officer, Aubrey K. McClendon, of $45 million and $30 million, respectively, representing joint interest billings from December 2011 and 2010. These amounts were invoiced and timely paid in the following month. Since Chesapeake was founded in 1989, Mr. McClendon has acquired working interests in virtually all of our natural gas and oil properties by participating in our drilling activities under the terms of the Founder Well Participation Program (FWPP) and predecessor participation arrangements provided for in Mr. McClendon's employment agreements. Under the FWPP, approved by our shareholders in June 2005, Mr. McClendon may elect to participate in all or none of the wells drilled by or on behalf of Chesapeake during a calendar year, but he is not allowed to participate only in selected wells. A participation election is required to be received by the Compensation Committee of Chesapeake's Board of Directors not less than 30 days prior to the start of each calendar year. His participation is permitted only under the terms outlined in the FWPP, which, among other things, limits his individual participation to a maximum working interest of 2.5% in a well and prohibits participation in situations where Chesapeake's working interest would be reduced below 12.5% as a result of his participation. In addition, the Company is reimbursed for costs associated with leasehold acquired by Mr. McClendon as a result of his well participation. From time to time, Mr. McClendon has sold his

83

Table of Contents
FWPP interests in conjunction with sales by the Company of its interests in the same properties, and the proceeds related to those sales have been allocated between Mr. McClendon and the Company based on their respective ownership interests and on the same terms as those that applied to the Company's properties included in the sale.
On December 31, 2008, we entered into a new five-year employment agreement with Mr. McClendon that contained a one-time well cost incentive award to him. The total cost of the award to Chesapeake was $75 million plus employment taxes in the amount of approximately $1 million. The incentive award is subject to a clawback equal to any unvested portion of the award if during the initial five-year term of the employment agreement, Mr. McClendon resigns from the Company or is terminated for cause by the Company. We are recognizing the incentive award as general and administrative expense over the five-year vesting period for the clawback resulting in an expense of approximately $15 million per year beginning in 2009. The net incentive award after deduction of applicable withholding and employment taxes of approximately $44 million was fully applied against costs attributable to interests in Company wells acquired by Mr. McClendon or his affiliates under the FWPP.
In 2011, Chesapeake entered into a license and naming rights agreement with The Professional Basketball Club, LLC (PBC) for the arena in downtown Oklahoma City. The PBC is the owner of the Oklahoma City Thunder basketball team, a National Basketball Association franchise and the arena's primary tenant. Mr. McClendon has a 19.2% equity interest in PBC. Under the terms of the agreement, Chesapeake has committed to pay fees ranging from $3 million to $4 million per year through 2023 for the arena naming rights and other associated benefits. The naming rights provide Chesapeake with an enhanced public awareness and recognition both locally and nationally. Since 2008, Chesapeake has been a founding sponsor of the Oklahoma City Thunder under successive one-year contracts. In 2011, it entered into a 12-year sponsorship agreement, committing to pay an average annual fee of $3 million for advertising, use of an arena suite and other benefits. In 2011, the Company also agreed to purchase Oklahoma City Thunder game tickets for the 2011-2012 regular season home games for approximately $3 million and committed to purchase tickets for any 2012 home playoff games.

Pursuant to a court-approved litigation settlement with certain plaintiff shareholders under Litigation in Item 3 of this report, the sale of an antique map collection that occurred in December 2008 between Mr. McClendon and the Company will be rescinded. Mr. McClendon will pay the Company approximately $12 million plus interest, and the Company will reconvey the map collection to Mr. McClendon. The transaction is scheduled to be completed not later than 30 days after entry of a final non-appealable judgment.

Translation:

"The CEO views the company as a piggy bank."

The fact that the company counts among its assets 50M in interest receivable from its CEO does NOT instill confidence in me.

[TeyshaBlue]

The ownership of production interest by a founder is fairly standard in this business.

[TeyshaBlue]

Another consequence of the fracking bubble/gas glut:
"With natural gas prices nearing $2.50 per million British Thermal Units, financiers are bearish on generators in the deregulated market. Nobody but the public utilities is building anything."

http://blogs.dallasobserver.com/unfairpark/2012/03/to_keep_lights_on_texas_utilit.php

[RandomGuy]

Here are the yearly prices of oil that the company believes will be in existence, starting in 2013

94.74
96.61
100.57
104.71
83.50

These are the prices which they have guaranteed the buyers of their oil that they will sell certain amounts of their production at, and form the negative value of the derivatives of $1.6Bn they havent realized yet.

If prices move higher, their losses will go up.

For 2012, they have committed to selling 16mbbl at 93.03 dollars per barrel. They produced 31mbbl in 2011.

For 2013 their commitments are to sell 19mbbl at 94.74 per barrel.

Current price of oil tops $100 per barrel, $106 as of a few seconds ago.
http://finance.yahoo.com/q?s=CLJ12.NYM

(edit)
It seems almost certain that these losses will not only be realized, but probably larger than they are currently projecting.

(edit to the edit)
2012 losses from this will be on the order of $150M as of Dec 31st, 2011.

Not entirely unsustainable, even if it doubles, which it won't. Bad decision to be sure, but to be fair, not material to the company.

[RandomGuy]

The ownership of production interest by a founder is fairly standard in this business.

Standard yes, but the "tone" is very indicative of other things.

I think of it as a symptom with varying underlying causes. Autocratic CEOs have baaaaad track records. Any whiff of that and my skeptical radar gets a few extra watts...

[RandomGuy]

God bless you.

um, thanks?

God bless you too.

FWIW.

[CosmicCowboy]

Good article. Thanks for the link. I've been wondering if this boom was real. Some guys paid a friend of mine $3000 an acre just for the RIGHT to drill on his place and will give him 25% of production after they drill/produce the wells. Some HUGE money changing hands down there...

[RandomGuy]

Good article. Thanks for the link. I've been wondering if this boom was real. Some guys paid a friend of mine $3000 an acre just for the RIGHT to drill on his place and will give him 25% of production after they drill/produce the wells. Some HUGE money changing hands down there...


The landman offered Vargson $100 per acre, plus 12 percent in royalties. He told her there was no way to predict how big the royalties would be, but emphasized that she stood to make "a lot of money" over the 30-year life expectancy of the well. Vargson accepted the deal. "We thought we were taken care of," she says.

Drilling, which began the next year, was an immediate nightmare. One morning, Vargson woke up at 6 a.m. to find 18 trucks idling in her driveway. The hillside behind her house was leveled for a drill pad, and the rig went up 500 feet from her back door. Once the fracking began, water trucks made hundreds of trips up and down her driveway, while air compressors roared all day and night. When the gas was flared off before production began, the flame was so bright in the night sky that she could see it glowing red on the horizon 12 miles away.

Vargson noticed not long after production began in 2009 that water in the trough out back stopped freezing on cold nights. Inside the house, the faucet began to sputter and spit. Her husband seemed to have a lot of headaches, and Vargson felt nauseous if she stayed in the shower for more than a few minutes. Acting on a tip from a friend, she had her water tested. It was loaded with methane.

"I discovered I could light my water on fire," she says. "And I still can." To demonstrate, she walks over to the faucet in her kitchen, lights a match and turns on the faucet. Whoosh! A flame shoots out like a blowtorch.

Vargson stopped drinking the water after she discovered the methane – but tests showed that her water also contained elevated levels of toxic chemicals like radium, manganese and strontium. Chesapeake agreed to supply Vargson with fresh drinking water, delivered to her door in five-gallon jugs once a month, but it denies any responsibility for the elevated methane levels. Tom Darrah, a Duke geologist who has examined Vargson's well for a new study, finds that difficult to square with the facts. "Anyone who has seen the data I have and thinks this much methane in her well is from natural sources has their head in the sand," he says

Smells like a real estate bubble.

I hope your friend got some solid contract provisions in for protection of water and other environmental mitigation.

[CosmicCowboy]

NEW YORK | Wed Mar 14, 2012 12:33pm EDT
(Reuters) - U.S. natural gas futures fell 1 percent on Wednesday, hovering just above Tuesday's 10-year spot chart low as mild weather and swelling inventories weighed on prices.

Despite some short covering late on Tuesday which pushed prices higher, the market fundamentals remain bearish as record high production continues to outrun demand.

Front-month April natural gas futures on the New York Mercantile Exchange were at $2.269 per million British thermal units at 12.08 p.m. EDT, down 3 cents.

On Tuesday the contract slid early to $2.204, the lowest price for a front month since February 2002, before ending the day up about 1 percent.

"The fundamentals are bearish," said Tom Saal, analyst at INTL Hencorp Futures in Miami. "But, it is maintaining its strength above yesterday's floor."

Gas in store is more than 40 percent above the norm after one of the mildest winters on record reduced demand nationwide, while prolific production from shale plays continues to swamp the market.

Mild weather is set to add pressure on prices on the coming days, forecasts show.

In the cash market, gas bound for the NYMEX delivery point Henry Hub in Louisiana was heard late near $2.13, down 2 cents from Tuesday's average of $2.15 and at its lowest mark since September 2009.

Early Hub cash deals also eased to about 15 cents under the front month contract, from deals done late Tuesday at about a 9-cent discount.

Gas on the Transco pipeline at the New York City gate was heard early near $2.22, down 4 cents from Tuesday's $2.26 average and also at its lowest price since September 2009.

STORAGE OVERHANG A PROBLEM FOR PRICES

Inventories are expected to show a withdrawal of 57 billion cubic feet when weekly data is released early Thursday, a Reuters poll of industry traders and analysts showed on Wednesday. This week last year, stocks fell by 60 bcf and the five year average decline for the period is 79 bcf.

Withdrawal estimates for this week's EIA report range from 45 bcf to 73.


With no extreme cold on the horizon, stocks are likely to end winter at an all-time high of 2.2 tcf, well above the previous record of 2.148 tcf set in 1983.

The cushion could also spell trouble for prices late in the summer stock-building season if storage caverns fill to capacity and force more supply into the market.

OUTAGES, CUTS COULD HELP TIGHTEN MARKET

Nuclear plant outages were running at about 19,600 megawatts, or 20 percent, on Wednesday, up from 15,800 MW out a year ago and a five-year outage rate of about 15,200 MW.

Traders said the outages could add more than 1 bcf to daily gas demand.

And planned output cuts by producers could trim 1 bcf per day or more from flowing supply.

Relatively cheap gas has also drawn more industrial use and prompted additional utility fuel switching away from more expensive coal.

But with production still running at or near all-time highs, few traders expect much upside in prices in the near term.

MORE FUNDAMENTALS

The National Weather Service six to 10-day outlook issued on Tuesday again called for above or much-above-normal readings for about the eastern two-thirds of the nation and below-normal readings only in the West.

Baker Hughes drilling data last week showed the gas-directed rig count fell for a ninth straight week to a 32-month low of 670.

The steady drop in gas-directed drilling has stirred talk that low prices might finally slow output.

Analysts agree it can take months for a slowdown in drilling to translate into lower production, noting the producer shift in spending to higher-value oil and gas liquids plays still produces plenty of associated gas that partly offsets any reductions in dry gas output.

A recent Bernstein report said the gas-directed rig count would have to drop to about 600 before it would be comfortable forecasting flat to falling production.

Most analysts, noting it will be difficult to balance the gas market without serious production cuts, do not expect any major slowdown in gas output until late this year.

[CosmicCowboy]

Another excellent read for you guys that are interested:

http://www.nationalreview.com/articles/293086/truth-about-fracking-kevin-d-williamson

[vy65]

The main take I got out of it is that Chesapeake smells a hell of a lot like Enron.

Wow

[vy65]

Translation:

"The CEO views the company as a piggy bank."

The fact that the company counts among its assets 50M in interest receivable from its CEO does NOT instill confidence in me.

How do you get that?

[vy65]

Standard yes, but the "tone" is very indicative of other things.

I think of it as a symptom with varying underlying causes. Autocratic CEOs have baaaaad track records. Any whiff of that and my skeptical radar gets a few extra watts...

He's a working interest owner. He has to contribute a respective share of the expenses accrued by every well he's participating in. I don't see what fails your smell test?

[RandomGuy]

How do you get that?

The sports sponsorships, the box seats, etc. the map sale that was forcibly reversed etc.

I guess one can make a fair argument that sponsorships and naming rights to stadiums are "good advertising", but it smacks to me of an ego play.

On the other hand, such things do enable "wheeling and dealing" that is the lifeblood of large businessness.

I have seen first-hand the results of CEOs being a bit generous with company money, so I tend to be a bit sensitive to such things. It is VERY easy to get into "It's good to be the king" mode, if one is not careful.

[RandomGuy]

Wow

Variable.

Interest.

Entities.

[RandomGuy]

He's a working interest owner. He has to contribute a respective share of the expenses accrued by every well he's participating in. I don't see what fails your smell test?

Fair disclosure:

I have never read through a gas company financials.

Maybe this kind of transaction is par for the course. I think it provides a bit too much opportunity for some less-than-arms-length transactions.

The rather lengthy sections on partnerships and debt and so forth also raise the specter of a potential shell game.

I would not go out on a limb and say it is definitely rife with fraud and smoke and mirrors. The complexity of the company should worry investors and creditors. As a common stock holder, I would be leery of a company that issues too much preferred stock, as this one has had to do.

Hell, their empahsis on production, and the fact that they have a readily tradable commodity is a good thing that might save their bacon.

If the LNG export terminals can come on line before their big debts come due, US gas producers can find a ready-made export market in Europe, who would LOVE to be able to tell the Russians to fuck off.

That would definitely raise demand for US gas, as would Chinese/Indian demand.

I don't think prices will stay low forever.