Drilling & fracking operations site of EQT in Washington County in southwestern Penna.

From an Article by Peter Eavis, New York Times, March 31, 2020

CARMICHAELS, Pa. — The last time the global economy was in free fall, an economic savior showed up in southwestern Pennsylvania. Energy companies, which had discovered a way to get at the state’s vast natural-gas reserves, invested billions of dollars in the region, cushioning the blow of the Great Recession.

“There were just so many jobs,” Debbie Gideon, a retired community banker, recalls. “It was crazy.”

But 12 years later, as the region braces for the coronavirus recession, natural-gas companies are much more likely to weigh on the local economy than to rescue it. These natural-gas companies operating in Pennsylvania were looking shaky before the coronavirus hit. Local economies are now at risk.

Even before the latest shock, gas operators were reeling from self-inflicted wounds. They had taken on too much debt and drilled so many wells that they had flooded the market with gas, sending its price into a tailspin.

To conserve cash, the firms have been frantically slashing investments, cuts that will pummel local suppliers and contractors. “Every time one of these slowdowns occurs, they beat down every vendor they can,” said Steve Stuck, president of Jacobs Petroleum in Waynesburg, which supplies diesel to the natural-gas operators.

Pennsylvania, home to the United States’ first major oil wells and a large coal producer for decades, has a long history with the fossil fuel industry. That was a reason the state, unlike New York, allowed gas companies to use hydraulic fracturing — or fracking — to extract gas from the Marcellus Shale formation, estimated to be the largest gas field in the United States.

To many businesspeople and residents, the bet has paid off, not least by creating many well-paying jobs in struggling parts of the state. And though the industry, which Pennsylvania has allowed to operate through the coronavirus emergency, goes through ups and downs, they expect it to remain an important part of their economy for years to come.

“I don’t think we’ll ever get to the bust, because we have 40 to 60 years of gas,” says Mike Belding, a former Marine helicopter pilot and now a commissioner for Greene County. “That’s past our lifetimes.”

But there are strong signs that this natural-gas shakeout could grind on longer than others. And if it does turn into a rout that leads to large layoffs and business closures, Pennsylvania may have to reassess its great shale experiment.

“There is not a lot of knowledge of how fragile these companies are,” said Veronica Coptis, executive director of the Center for Coalfield Justice, which has often been critical of the coal and shale industries. “And when the companies start to struggle financially, the people who get hurt the most are the employees.”

Some energy giants have already lost faith in the region. Chevron in December took a multibillion-dollar write-down on its Appalachian shale assets, dominated by gas reserves in Pennsylvania, and said it might sell them. The stocks of two once mighty Marcellus Shale pioneers, Range Resources and EQT, have plummeted, and their bonds are trading at steep discounts, a sign that investors believe they could default on their debts.

The debts of those two companies and Southwestern Energy, another shale business focused on Pennsylvania, have increased by a combined $7 billion since 2008. Their operations generated far too little cash to pay for their investments. In fact, the three companies’ capital spending exceeded operating cash flows by $14 billion in that period.

The frackers now have fewer friends on Wall Street. “All they’ve done is destroy shareholder value,” said Ben Dell, managing partner at Kimmeridge, a private-equity firm that specializes in energy. “For the Marcellus guys, it will all stop with bankruptcy.”

Shale operators, pipeline companies and service companies together employed nearly 32,000 people in Pennsylvania as of June, according to an analysis of data from the Bureau of Labor Statistics, roughly the same as during a previous peak, and about as many as Pennsylvania State University. In the first half of last year, workers in the shale industry and related sectors on average earned $2,128 a week, almost twice the average for private-sector workers in the state.

Larry Allison Jr., a co-owner of a crane company in Williamsport, a town in the center of the state, said his natural-gas-related business was down 30 percent from its peak, but added that the industry still created high-paying jobs: Crane operators earn $35 to $40 an hour. “Everyone’s making $10 per hour more than they were before,” he said. Activity in the natural-gas industry slowed slightly after the coronavirus outbreak began, Mr. Allison added later.

And Mr. Stuck’s fuel business has ballooned in size over the past decade, an expansion that was in part financed by loans from Community Bank in Carmichaels. “We would never have been able to employ local people from local universities for good competitive-wage jobs,” he said, “It’s been unbelievable to see the impact. And we’ve been through three downturns.” He says natural-gas companies’ demand for his services has not yet dropped because of the coronavirus outbreak.

Residents in gas-producing counties have received royalties for allowing shale operators to extract gas from and run pipelines across their land. “A lot of people made money,” said Ms. Gideon, the former banker. “I was happy for them; they had scraped by for years.” And the copiously flowing gas has lowered utility bills.

But now the shale-gas operators are trying to adapt to a harsher environment. They have cut the cost of drilling and fracking, which involves forcing liquids into the ground at extreme pressures to release gas by fracturing rock formations. Moving vast quantities of sand, used to prop open the fractures, has become more efficient, and operators are saving money by sharing water.

There is one big hope for some of the Pennsylvania gas companies. It’s the giant plastics plant that Shell, with the help of large tax breaks, is building in Beaver County in the southwestern part of the state. The plant takes ethane, a natural-gas byproduct, and breaks apart its molecules, which are then used to make plastic. The plant is expected to consume large amounts of gas from local wells, but Shell has not said exactly when it will come on line.

The Pennsylvania gas operators were also hoping that new pipelines would open up big markets. Some capacity has been added, but last month the companies behind the Constitution Pipeline, which would have transported gas to New York and New England, canceled the project, saying it was no longer economical.

One option the operators can try is cutting production to support prices. Pennsylvania’s rig count, a yardstick for new well drilling, is 24, half what it was a year ago, according to Baker Hughes. And natural-gas prices could benefit from the sharp drop in oil prices. That’s because the scaling back of drilling by American shale-oil operators will also reduce the amount of “associated” natural gas that those wells produce along with oil. But the economic downturn is expected to depress demand for the gas overall.

If the gas companies go into a long downturn, many in the community worry that it might become harder to get them to pay for legal settlements, cleanup costs, and wear and tear on local infrastructure.

In clearing ground for a road down to drilling site in 2018, EQT cut down some old Osage orange trees on land owned by Rose Friend. The company was building a road on her land because it had acquired a lease from another energy company.

Ms. Friend, 82, a former teacher who sings in a church group, said she didn’t want the road access to be directly opposite her farmhouse in Marianna, Pa., which has been in her family for 101 years, and tried to stop the company. The access was eventually moved 50 yards down the hill, and Ms. Friend’s daughter, Karen LeBlanc, is still negotiating with EQT over a payment to replace the trees.

“They just came in and took over,” Ms. Friend said. “I don’t do things that way.” The company did not respond to requests for comment.

Some of the oldest roads in the United States are in Washington County, where the gas industry is particularly active. Some residents say that the heavy trucks that cart water and sand cause them to crack and crumble and that the gas companies take too long to fix them. The industry defended its record of paying for road repairs and construction.

One way the companies help cover the costs of infrastructure improvements is through a state impact fee that is distributed to local governments. The fee peaked at $252 million in 2018, but the revenue for 2019, not yet paid out, is expected to decline by 21 percent to $198 million.

Counties and municipalities that have come to rely on the revenue are getting ready to cut or forgo projects. “It is not a crisis,” said Mr. Belding, the Greene County commissioner, “but it is concerning.”

Atlantic Sunrise Pipeline runs south thru Lancaster County, PA

From an Article by Ad Crable, Lancaster Online, October 30, 2018

The main contractor on the Atlantic Sunrise and Mariner East 2 gas pipelines that run through Lancaster County has declared bankruptcy.

Ohio-based Welded Construction LP was sued in Oklahoma by Atlantic Sunrise owner Williams Partners. Williams alleges Welded overcharged the company and had accounting failures and other contract breaches.

Williams has withheld $23 million from the company. The nearly 300-mile, $3 billion Atlantic Sunrise natural gas project — which goes through 37 miles of Lancaster County — began moving gas on October 6th.

Sunoco, owner of the 300-mile Mariner East 2 natural gas liquids pipeline, terminated its contract with Welded, alleging the company failed to comply with environmental requirements.

The pipeline, which goes through 8 miles of northeastern Lancaster County, has been beset with spills and fines that have delayed the project.

After the legal actions by the two pipeline builders, Welded filed for Chapter 11 bankruptcy.

No effect on local pipelines

Williams spokesman Christopher Stockton said the company’s legal action against Welded on the Atlantic Sunrise has been strictly a billing dispute and that the company’s departure does not affect final restoration work ongoing in Lancaster County.

Stockton said cleanup work, which includes restoring rights of way to original contours, is about 80 percent complete in Lancaster County. Restoration work, which includes final grading and topsoil replacement, is about 70 percent complete.

County residents over the weekend wondered about new plastic orange fencing being placed at road crossings along the pipeline. That is necessary so that Williams can retain permits for a rocky entrance to rights of way in case properties have to be entered with equipment for final restoration next spring, Stockton said.

In the weeks ahead, Stockton said, residents may notice sections of pipeline being excavated. That is to validate the pipe’s protective coating applied by an electrical current.

“This is a normal post-in-service process and typically takes place a couple months after the pipeline has been placed into service,” he said.

Fracking for oil and natural gas is expensive

From Allied News, Grove City, PA, June 28, 2018

On Saturday, June 2, Marcellus Outreach Butler hosted a presentation by John Detwiler titled “The Financial Threat to Fracking” at the Butler Library.

John, a registered professional engineer, has worked as a business executive and strategic consultant for the natural gas and electric utility industries, and is a former faculty member of Carnegie Mellon University.

His presentation focused on how the fracking industry is slowly driving itself out of business with its reckless habits and exorbitant spending. Using actual data taken from the websites of Range Resources, EQT, and other drilling companies, John laid out the precarious situation that the fracking industry is in, and how its collapse could leave us worse off.

John’s program came in the wake of a hot topic in Butler County: Rex Energy’s recent filing for Chapter 11 bankruptcy.

Many in the area are wondering what will happen if Rex ultimately folds, and if their situation is unique, or emblematic of the entire fracking industry. During the program, it seemed increasingly clear that Rex is not a unique case.

The fracking industry as a whole is in a very precarious financial situation. Driven by an insatiable need for capital investment, these companies keep soliciting loans from lenders, driving themselves deeper into debt.

The process of constructing a well pad and drilling the wells costs several million dollars, and most of that money is acquired from lenders and investors.

Now that the initial gas boom of 2008-2012 flooded the market with a glut of natural gas and drove down prices, many companies are struggling to make sufficient money off new wells to pay back their investors.

Not only has the price of natural gas declined, but production has as well. Unlike other formations, production levels in the Marcellus Shale decline rapidly after the well is drilled.

According to John, the production of an average Marcellus well declines by 50 percent in only four months, and can drop to as low as ten percent of initial production in as little as two years. Due to this downturn, the national active drilling rig count has declined from 1,600 in January 2009 to less than 200 in January 2018, and now much of the gas and its liquid by-products like butane and ethane extracted in our area are destined for export to Europe and Asia.

Are the gas industry’s financial hardships good news for those fighting it? Not necessarily. Like a wild animal, when backed into a corner, the fracking industry also lashes out in desperation. Pittsburgh-based driller EQT, as well as Encana Energy, are in the process of developing half-mile-long “super well pads” that can house up to 60 wells in a single location, tapping multiple formations in every direction. These types of pads may soon be coming to western Pennsylvania, which sits atop not only the Marcellus, but also the Utica and Upper Devonian shales. And if companies do begin to fold, who will be responsible for cleaning up their messes and maintaining their existing infrastructure?

We don’t yet know what the future holds for Rex Energy or other smaller operators in our area, but John Detwiler painted an uneasy picture. In its Oil Patch Bankruptcy report issued on March 31, 2018, Haynes and Boone, LLP, listed 144 North American oil and gas companies that have declared bankruptcy since 2015, resulting in $90.2 billion of secured and unsecured debt, and Rex has just joined their number. It seems that what started out as a boom is, like always, quickly going bust.

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See also: “Millions Own Gas And Oil Under Their Land. Here’s Why Only Some Strike It Rich” : NPR, March 15, 2018

Aubrey McClendon (56) died in auto crash

COMMENTARY on Chesapeake Energy Corporation

From an Article by Andres Rueda, Seeking Alpha News, February 29, 2016

……. Summary

Chesapeake Energy’s management is engaged in muscular efforts to turn around the company, but the challenges ahead appear too great. The company announced $500 million in net asset sales and will slash capital expenditures 57% to conserve cash.

The recently released 4Q report was grim, as the company continues to bleed rivers of cash. Chesapeake Energy desperately needs the continuing good graces of its bankers, as its liquidity is ultimately dependent on a credit line.

To all appearances, gas and oil fracking giant Chesapeake Energy Corporation is a prime candidate for a bankruptcy restructuring. Its capital structure is wobbly, profoundly unsound. The losses are large and they flow with frustrating consistency each quarter. The cash pile keeps getting thinner. And yet, management appears determined to avoid a bankruptcy filing.

On February 8, 2016, the company’s common shares plunged approximately 40%, triggering a circuit breaker halt, on reports that the company had engaged a restructuring counsel. The company was forced to issue a clarifying press release that, while it had in fact engaged such counsel, it had no current plans to file for bankruptcy.

This in fact seems to be the case. Although a filing would be the easy way out, and bankruptcies are in fact often structured as insider-friendly affairs, the company’s management appears determined to avoid that outcome, even if the company has to cling from its fingernails through 2016 and into the next year. The management has a plan, which has been well-communicated to the market, and management has in fact had some success in its implementation.

Management insists that Chesapeake Energy has the liquidity to repay its near-term obligations, cut costs, sell off assets, dramatically decrease capital expenditures while more or less maintaining production, and thereby avoid a filing as the company rides out the downward cycle in the oil and gas extraction industry.

The common shareholders have taken up the faith. The market price of the common shares remains well above zero, closing at USD$2.70 per share on February 26, 2016. And yet, the challenges that the company faces are almost vertically steep. Absent a perfect execution, cooperation from its bankers and other creditors, and a long and uninterrupted streak of good luck, management may yet have to throw in the towel.

……. Conclusions

The management of Chesapeake Energy is engaged in a muscular effort to turn around the company in the context of a brutal industry environment. Its success in doing so largely depends on patience, considerable risk-taking, and other forms of cooperation from its creditors, and in particular the bank sponsoring its credit line, Wells Fargo.

The recently announced USD$500 million in net asset sales will give the company some breathing room. However, relief is likely to be brief. The company has a gigantic debt load balancing on a thin or nonexistent sliver of equity, and it is unfortunately not generating enough net operating cash to pay the bills. Under current conditions, and despite its hedge book, the company’s oil and gas fields are either uneconomical or marginally economical.

The company will be slashing capital expenditures. Even if production remains more or less the same despite this cut, net operating cash well into 2016 is likely to decrease as a result of relatively low realized prices. And so, the rivers of negative cashflow are likely to continue. Under the current environment, the company cannot turn to its business as a source of much needed cash. It will need to rely on asset sales and its USD$4 billion credit line.

Despite the recently announced divestiture, it remains to be seen whether management will be able to live up to its guidance of USD$500 million to USD$1 billion in additional deals for 2016. The company’s fields are currently uneconomical or marginally economical. If sold, they will be sold cheaply. This will hurt investors in the long run, if oil and gas prices recover. However, the company right now is in survival mode and this is unfortunately unavoidable.

Although the company likely will meet all major bond repayments due in 2016, unless oil and gas prices significantly improve over the year the company is likely to burn prodigious amounts of cash and eat well into its credit line, with seemingly no other realistic source of cash. It will then just be a matter of time before Wells Fargo and other creditors pull the plug on the company and push it into bankruptcy.

It should also be kept in mind that the company faces a borrowing base redetermination in April 2016. If Chesapeake Energy loses the support of Wells Fargo, management’s efforts will hit a brick wall and the company will simply have to file for bankruptcy.

The market however remains cautiously optimistic on Chesapeake Energy. Management appears committed to avoiding bankruptcy, and has not cut a separate deal to the detriment of the company’s much besieged common shareholders. This institutional support is all-important in the present context.

The challenges faced are however in my opinion too large. I do not believe that in the end management will pull its carefully orchestrated ballet. Too many things could go wrong. My target price for the common shares is consistent with their current book value: USD$0.

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Federal grand jury indicts former Chesapeake Energy CEO

From an Article by Robert Mclean, CNN-Money News, March 2, 2016

A federal grand jury has indicted the former CEO of Chesapeake Energy for allegedly conspiring to rig the price of oil and natural gas leases in Oklahoma. The Department of Justice believes that Aubrey McClendon, who served as Chesapeake’s CEO for nearly 25 years, orchestrated a conspiracy between two large oil and gas companies between December 2007 and March 2012.

McClendon said that the charges against him are “wrong and unprecedented.”

“I have been singled out as the only person in the oil and gas industry in over 110 years since the Sherman Act became law to have been accused of this crime in relation to joint bidding on leasehold,” he said in a statement. “Anyone who knows me, my business record and the industry in which I have worked for 35 years knows that I could not be guilty of violating any antitrust laws.”

The indictment alleges that two large energy firms would decide ahead of time who would be the top bidder on leases in northwest Oklahoma. The winner would then allocate an interest in the lease to the other company.

The Justice Department said McClendon “instructed his subordinates to execute the conspiratorial agreement,” which kept prices low and “put company profits ahead of the interests of leaseholders.”

Chesapeake spokesman Gordon Pennoyer said the company “has been actively cooperating for some time” with the Justice Department and “does not expect to face criminal prosecution or fines relating to this matter.”

McClendon left Chesapeake in 2013 after Reuters reported that he had taken out more than $1 billion in loans against his personal stakes in the company’s wells. Chesapeake subsequently revealed that it was the subject of an inquiry from the Securities and Exchange Commission, and announced that the program through which McClendon acquired his stakes would be terminated.

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Energy pioneer McClendon dies in Oklahoma car crash a day after indictment

From an Article by Heidi Brandes, Reuters News Service, March 3, 2016

Aubrey McClendon, a brash risk-taker who led Chesapeake Energy Corp to become one of the world’s biggest natural gas producers, died in a single-car crash on Wednesday, a day after being charged with breaking federal antitrust laws, police said. He was 56.

The U.S. Department of Justice on Tuesday announced that McClendon had been indicted for allegedly colluding to rig bids for oil and gas acreage while he was at Chesapeake, a central player in the U.S. fracking revolution of the past decade. He denied the charges.

Police said they were investigating the cause of the crash, which occurred when McClendon was driving his 2013 Chevy Tahoe on a sparsely populated, two-lane road. The crash occurred about 8 miles (13 km) from American Energy Partners, which McClendon had founded and where he was the chairman and chief executive. He was not wearing a seat belt.

McClendon, who was revered in oil and gas circles as a visionary, resigned from Chesapeake in 2013 after a corporate governance crisis and investor concerns over his heavy spending. After leaving Chesapeake, McClendon went on to start American Energy Partners and, with the help of private equity funds, made billions of dollars in bets on vast tracts of oil and gas land around the United States and Australia.

Tuesday’s indictment followed a nearly four-year federal antitrust probe that began after a 2012 Reuters investigation found that Chesapeake had discussed with a rival how to suppress land lease prices in Michigan during a shale-drilling boom. Although the Michigan case was subsequently closed, investigators uncovered evidence of alleged bid-rigging in Oklahoma. (reut.rs/1TPxUVy)

A native of Oklahoma, McClendon attended Duke University before starting Chesapeake with his friend Tom Ward, who went on to lead SandRidge Energy Inc for a time.

“Aubrey’s tremendous leadership, vision and passion for the energy industry had an impact on the community, the country and the world,” American Energy Partners said in a statement.

McClendon was known for his high tolerance for risk and debt and for his lavish lifestyle, which included the purchase of high-end homes, antique boats and an extensive wine cellar. (reut.rs/1QUfnHp) On his watch, Chesapeake leased a fleet of planes that shuttled executives to oil and gas fields – and the McClendon family to far-off holiday destinations.

Closer to home, McClendon pursued other passions, including the Oklahoma City Thunder, the National Basketball Association franchise in which he had a minority stake. “I think in situations like this the best thing you can do is just pray, pray for the family and pray for the people involved,” Thunder coach Billy Donovan told reporters at a game on Wednesday in Los Angeles.

McClendon was one of the foremost leaders of a U.S. energy boom that lifted output to the highest levels in years, reduced reliance on foreign oil and mobilized new pools of investment capital for wildcat drillers.

“I’ve known Aubrey McClendon for nearly 25 years. He was a major player in leading the stunning energy renaissance in America,” Texas energy investor T. Boone Pickens said in a statement. “He was charismatic and a true American entrepreneur,” he said.

Chesapeake, which had recently sued McClendon’s AEP on accusations of stealing trade secrets, offered condolences. “Chesapeake is deeply saddened by the news that we have heard today and our thoughts and prayers are with the McClendon family,” the company said in a statement. McClendon is survived by his wife, Katie, and their three children, Jack, Callie and Will.