Friday, October 10, 2008

The Haynesville Shale: Chesapeake in trouble

Chesapeake Energy, the big player in the Haynesville Shale, is in trouble. The Wall Street Journal reported today that
"Chesapeake Energy Corp. is scrambling to sell assets and cut costs as falling energy prices and tightening credit threaten to derail the company's dramatic growth.
The Oklahoma City company has spent aggressively and borrowed heavily to fuel its climb this year to become the largest U.S. natural-gas producer. Its efforts were supported by natural-gas prices that leaped to a high of $13.577 per million British thermal units in July before fears of a supply glut sent prices plunging. Natural gas settled at $6.825 Thursday on the New York Mercantile Exchange

Chesapeake issued a news release today announcing that Aubrey McClendon had to sell virtually all of this Chesapeake stock. The stock has fallen from almost $70 this summer to close at just under $17 today.
Chesapeake Energy Corporation (NYSE:CHK) today disclosed that its Chief Executive Officer, Aubrey K. McClendon, involuntarily sold substantially all of his shares of Chesapeake common stock over the past three days in order to meet margin loan calls.
Mr. McClendon commented, "I am very disappointed to have been required to sell substantially all of my shares of Chesapeake. These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis. In no way do these sales reflect my view of the company's financial position or my view of Chesapeake's future performance potential. I have been the company's largest individual shareholder for the past three years and frequently purchased additional shares of stock on margin as an expression of my complete confidence in the value of the company's strategy and assets. My confidence in Chesapeake remains undiminished, and I look forward to rebuilding my ownership position in the company in the months and years ahead."

Borrowing money to buy stock on margin loans can significantly increase your profit - and your losses. McClendon bought high and sold low, and in the process kissed hundreds of millions of dollars goodbye.

Although leasing is coming to a screeching halt in Northwest Louisiana this week, the good news is that the thing that created all of this excitement is still intact. The gas is still below us and the demand for it can only increase.
Not as much drilling will take place in the near future as expected, and leasing will be non-existent for a while. A guess would be that by next summer both will pick up again. Will we ever see the large sign-on bonuses we saw this year?
Only time will tell.

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