I was lucky enough to sell most of my position in CHK this afternoon on fears that the earnings would be a buy on the rumor sell on the news. Chesapeake was a little late to the game in deciding that they were going to cut production and how far they were going to cut it. They burned thru quite a bit of cash and are going to have to continue to monetize assets while prices are at very depressed levels. The headline number was very poor because they were forced to write down oil and gas properties that they acquired last year but are now worth considerably less at these natural gas levels. Thankfully their hedges are still working to their favor and they had a considerable gain on realized positions there. There is some risk going forward that their hedges are going to start to run out and they will be forced to sell their production at market levels. I am in the wait and see mode now for CHK, I am optimistic that by the time their hedges run out there will be enough production cuts across the industry that the supply and demand will be more in line with each other. The advantage that natural gas has is that the natural rate of decline for mature fields is something on the order to 10% vs. 4-5% for oil. This means that the industry is very able to quickly decrease production by just not drilling anymore wells. Of all the natural gas players CHK has the most aggressive hedges and still have assets to monetize to keep them afloat. But until the price of natural gas gets back into the $7-8 per million BTU no one makes money in the industry, some just lose it quicker than others. Disclaimer

by Forrest

Chesapeake Energy is one of the most widely reported on stocks in the market, but this still doesn’t mean that the media is getting the story right. I have been a CHK stock owner for some time now and all it has brought me is pain, but I fear not because I believe in the story management has to sell. I have bought CHK at $70, $55, $45, $30, and $15 so needless to say I have not exactly been right on the timing of the story, but none the less I keep buying the more and more as it goes down and now is as good an entry point as you are going to get. First, some information on the company, Chesapeake is the largest independent producer of natural gas in the country and has pretty much staked it future on natural gas locked up in shale rock formations in four different basins. The Barnett, Fayetteville, Marcellus, and Haynesville shale plays represent their growth in production going forward.

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I think it is fascinating to watch OPEC almost panic over such “low” prices for oil, they have already announced production cuts of about 4.2 million barrels a day and quite a few members are asking for more at their next meeting in Vienna. A cut of 4.2 million barrels a day brings their official quota down to 24.84 million b/d which is now less than a third of global oil production. OPEC does not like to talk about it officially but it is widely believed that they would like oil in the $75-$100 dollar a barrel range. It appears that they are willing to go to great lengths to achieve this which is absolutely great news for Exxon Mobile and the oil sector in general. It appears that OPEC is willing to decrease their influence on the oil markets just to increase the price; to me this is an obviously self defeating plan that is great for both America and America’s oil industry. I am perhaps over simplifying my next statement but I think the oil markets will go something like the following. OPEC is going to keep decreasing production to push the prices up allowing two things to happen; One, Exxon and the other Integrated Oils will invest to increase production in both oil and natural gas because it will immensely profitable for them, and two, the American economy will more rapidly move away from oil in all aspects. Primarily the American and world economies will move towards a natural gas and renewable energy based industry which will further decrease the influence of OPEC over the western world. The US has an ungodly amount of natural gas already proven and I think we have just begun to explore. There is one part of my theory that I am still not entirely sure about, and that is whether the American people will accept paying a bit more for oil supplied by American companies vs. importing it from the middle east. As I see it now the integrated oils and other American companies control the refining capacity in the US and can choose which oil is supplied to them. I would think Exxon would choose to supply their refineries with Exxon produced oil first and imported oil second, but there might be considerable pressure on this decision if the imported oil is considerably cheaper. The easiest and most likely solution to this part of the equation is from Washington D.C. Whether it is some sort of tariff put on oil from the Middle East or a gas tax here in the states so the price of oil is less of a factor in the price of gasoline, I think there is the political will to do something. There are obviously many holes in my belief of what is to come in the energy sector and I will address them in posts to come in the future, but please feel free to point out any and all issues you see and potential solutions. I guess if there is one take away for the stock market it is buy Exxon Mobile and never look back. They are the definition of American capitalism and have rarely let their shareholders down; they did not over invest at $147/barrel and are not under investing now at $43/barrel.

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