Clouds on the horizon for fracking companies?

Posted on February 24, 2014

1


Chesapeake

Today, the Oil & Gas Journal has published an article with the headline, “Chesapeake mulls spinoff, sale of oil field services division“. The article is especially interesting since Chesapeake is one of the largest companies in fracking. On Chesapeake Energy Corporation’s website one can read that they are the second largest producer of natural gas and the eleventh largest company for production of oil and NGL. Further, one can read that, “The company’s operations are focused on discovering and developing its large and geographically diverse resource base of unconventional natural gas and oil assets onshore in the U.S. The company also owns substantial marketing, compression and oilfield services businesses.” On 11 February 2014 the company submitted an “Investor presentation” and they explained that they were required to make such “forward-looking statements” by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Then came the real blow:

“Factors that could cause actual results to differ materially from expected results are described under “Risk Factors” in Item 1A of our 2012 annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 1, 2013. These risk factors include the volatility of natural gas, oil and NGL prices; the limitations our level of indebtedness may have on our financial flexibility; declines in the prices of natural gas and oil potentially resulting in a write-down of our asset carrying values; the availability of capital on an economic basis to fund reserve replacement costs; our ability to replace reserves and sustain production; uncertainties inherent in estimating quantities of natural gas, oil and NGL reserves and projecting future rates of production and the amount and timing of development expenditures; our ability to generate profits or achieve targeted results in drilling and well operations; leasehold terms expiring before production can be established; hedging activities resulting in lower prices realized on natural gas, oil and NGL sales; the need to secure hedging liabilities and the inability of hedging counterparties to satisfy their obligations; drilling and operating risks, including potential environmental liabilities; legislative and regulatory changes adversely affecting our industry and our business, including initiatives related to hydraulic fracturing, air emissions and endangered species; oilfield services shortages, gathering system and transportation capacity constraints and various transportation interruptions that could adversely affect our revenues and cash flow; losses possible from pending or future litigation and regulatory investigations; and cyber attacks adversely impacting our operations.”

“Although we believe the expectations and forecasts reflected in forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate or changed assumptions or by known or unknown risks and uncertainties. We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this presentation or as otherwise indicated, and we undertake no obligation to update this information, except as required by applicable law.”

The fact that they are now planning to sell a large part of their business and that they have earlier sold off parts of their activity indicates that their foremost problem is “cash flow”.

That one of the largest companies in fracking is giving such signals indicates that the market in not so rosy – rather they are heading into red ink. The largest problem is that the price of natural gas is too low for the companies producing it to thrive. This can be an indication that the cheap energy for the future industrial activity of the USA will not always be so cheap. If I had a few million to invest then it would not be in a company engaged in fracking. As you can see the service divisions of such companies are profitable but the question is what will happen when that profitability declines in future. Here is the article in the Oil & Gas Journal:

Chesapeake mulls spinoff, sale of oil field services division

HOUSTON, Feb. 24, by OGJ editors

Chesapeake Energy Corp. reported it is considering a potential spin-off to Chesapeake shareholders or an outright sale of Chesapeake Oilfield Services (COS).

COS in 2013 reported revenues of $2.2 billion, offering services that include drilling, hydraulic fracturing, oil field rentals, rig relocation, and fluid handling and disposal.

COS’s operations are currently conducted through Chesapeake Oilfield Operating LLC, a wholly owned Chesapeake subsidiary.

Jerry Winchester, currently COS chief executive officer, previously served in the same position at publicly traded oil field services company Boots & Coots Inc.

As of Dec. 31, 2013, COS owned or leased 115 land drilling rigs. It also owned 9 hydraulic fracturing fleets with an aggregate of 360,000 horsepower; a diversified oil field rentals business; an oil field trucking fleet consisting of 260 rig relocation trucks; 67 cranes and forklifts used to move drilling rigs and other heavy equipment; and 246 fluid hauling trucks.

In addition to services performed for Chesapeake, 35% of COS’s marketable drilling rigs are currently working for third-party operators and COS intends to grow its third-party customer base as an independent provider of oil field services.

Doug Lawler, Chesapeake chief executive officer, commented on COS: “It has provided, and will continue to provide, superior service to Chesapeake’s upstream business, and we look forward to maintaining our close and valuable relationship with Jerry and his team as they pursue COS’s ventures outside of Chesapeake. A separation of COS is aligned with our strategies of financial discipline and profitable and efficient growth from captured resources.”

Chesapeake in 2012 made multiple agreements to sell most of its Permian properties, all of its midstream assets, and certain noncore leasehold for total net proceeds of $6.9 billion as it intended to pay down debt (OGJ Online, Sept. 17, 2012).

The following year, the company reported the sale of 50% stake in its Mississippi Lime oil and natural gas acreage in northern Oklahoma to Sinopec International Petroleum Exploration & Production Corp. for $1.02 billion (OGJ Online, Feb. 25, 2013).

Posted in: Uncategorized