Southwestern Energy paid $5 billion for Marcellus & Utica holdings from Chesapeake Energy in December of 2014

Times are tough financially for frackers (and not very good for the rest of us either).

Essay by S. Tom Bond, Retired Chemistry Professor & Resident Farmer, Lewis County, WV

Seeking Alpha, an investment newsletter, carried an article called “Natural Gas: Death By One Thousand Paper Cuts… Then A Huge Axe Wound.” That author was thinking about the problems of investors who speculate on natural gas, trying to buy low and sell high. For them it has been coming out the other way around, buying high and selling low, all last year, but especially in the fall. The article was written at the end of October, when gas was at $2.281 per mmbtu. It had been $3 in May. Marcellus Gas.org gives November cloud sourced prices to royalty owners of $1.73/Mcf. (The Mcf in this case having slightly more energy than the mmbtu unit.)

The real hit though is being felt by the over-extended companies that find and produce natural gas. The case of Chesapeake is familiar, the flamboyant Aubry McClendon, who started the company got it seriously in trouble and they eventually kicked him out. The new CEO has said more than half of the deals Chesapeake had when he arrived were clear losers. They are still in trouble. Chesapeake stock lost 22% in 2014 and the CEO compensation was $14.7 million, earning it the position of 25th in Yahoo finance list of worse-performing CEO’s for that year.

That list is interesting. Looking further at it, Nabors, a company that actually does the drilling, made it at 24th; Weatherford at 19th, Kosmos 17th; Continental Resources, 14th; Southwestern (which bought Chesapeake’s old office in Jane Lew, my Post Office town), 13th at a 30% price decrease; Range Resources, 10th, with a loss of 35% in stock value; WPX, a big fracker at 8th; Whiting Petroleum Corporation, 6th; Cobalt International Energy, 4th, Ensco PLC (an offshore company), 3rd with a 47% loss; and in first place, Linn Energy, with a drop of 67% in 2014. Then an 80 % drop in 2015. Linn CEO compensation was $10 million in 2014!

“Energy companies” were the worst performing sector of the S&P. Real Money, an investment site, recently had an article “Balance Sheet Worries Spell Doom for These 4 Energy Names.”

The first on the Real Money list was – Chesapeake! It was the worst performing stock in the S&P 500 in 2015. (List above was for 2014.) As of the third quarter, Chesapeake Energy has $3.6 billion in current assets but it has $4.6 billion in current liabilities.

Second on the list was Southwestern, also mentioned above. The article says, “This Texas-based company proved that one company’s trash is another company’s, well, trash. Late in 2014, Southwestern Energy acquired Chesapeake Energy’s wells in the Marcellus and Utica shales.” The stock fell 74% in 2015. “As of third-quarter earnings, the company has $570 million in current assets to cover $782 million in near-term liabilities. While the company does not have any debt coming due in 2016, it does have a hefty debt load coming due in 2018, which includes two notes that total $950 million and a term loan the company announced in November for $750 million.

Ultra Petroleum is third, its shares fell 82% in 2015.

Fourth is Consol Energy. It bought the exploration and production business of Dominion Resources in 2010 (including drilling rights under the Lost Creek Storage Field, where my surface lies). The article states, “Fortunately, the company does not have any significant debt obligations coming due until 2022. However, Consol Energy has $970 million in current assets to cover $1.9 billion in short-term liabilities, as of the third quarter. Shares of the company were down 77% in 2015.”

As I mentioned in a previous article, somewhere in the high 30′s of exploration and production companies (out of a total of somewhere in the 50′s ) have taken out Chapter 11 bankruptcy. This allows reorganization. Chapter 7  (liquidation) bankruptcy causes the company to disperse its holdings to creditors and that  is the end of it.

Public opinion is slowly coming around, too. According to Leslie Stahl in 60 minutes, “Taking short cuts and human error are endemic to this industry.” “Natural gas has been the ugly step child of the national energy debate, never getting the political muscle of coal or oil.” Except in West Virginia, of course.

The fracking industry doesn’t want federal regulation. You’d think dealing with one set of rules for all states would make it far easier for them. But the federal government is capable of research and is somewhat less subject to direct political influence. It is easy to get the puff pieces that influence people who never see fracking from legislators and their support for favorable legislation. Some of it is pretty obvious. Recently a legislator published a favorable article, and subsequently a permit was published for a well on his property.

Another problem for frackers is the regular appearance of new research that contradicts their pretense that “fracking never hurt anyone.” Research on health hazards, property value declines, public water contamination, and other nuisances has been coming out for years.

Some recent health research titles are: “Fracking plays active role in generating toxic metal wastewater, study finds,” “Fracking’ Linked to Low Birth Weight Babies,” and “New study connects fracking with lower sperm count.” Some are quite ominous: “Malignant human cell transformation of Marcellus Shale gas drilling flow back water.”

The recent connection between fracking and earthquakes is very bad publicity, since these people have a clear claim to monetary damages. The huge waste of gas by the fracking industry is under attack. The Porter Ranch leak going on for months in California is bad news for the industry. It is comparable to the Deepwater Horizon spill in the Gulf of Mexico. The article “Why are Range Resources executives selling their stock?” created considerable interest. “Texas Fracking Zone Emits 90% More Methane Then EPA Estimated” ties government complicity to corporate interest, as did the Public Herald’s report finding that the Pennsylvania DEP fracking complaint investigations are “Cooked & Shredded.” All the articles about divestment of oil and gas stocks by large owners must have hurt also.

Times are tough, fellows. When your costs for removing fracked oil and gas are $20 to $40 more per barrel or barrel-of-oil-energy-equivalent, you face serious competition from the Saudis, Russians (who have five and a half times as much gas, all conventional gas. compared to all the U. S. reserves, including fracked gas) and others overseas. That $20 to $40 difference doesn’t count the damage you do in the fracking fields, either. When the general public catches on to this, it is going to be worse, too. With the cost of wind energy decreasing by 60% in the last six or seven years and the unlimited sun power being captured with greater and greater efficiency, it’s going to be real tough. Fellows, your political activities are not enough to overcome your cost disadvantages now in the near term.  So what will the future hold?