It’s a Fracking Ponzi Scheme
Hydraulic Fracking can recover otherwise unrevcoveable natural gas but it’s expensive. With natural gas around $2.00 there is simply no way there is any money to be made leading some to refer to it as a ponzi scheme. Chesapeake Energy is a big player in the fracking business and the chickens may be coming home to roost.
To plug what’s been estimated as a $9.2 billion gap between Chesapeake Energy’s (CHK, Fortune 500) 2012 capital expenditures and its cash flow, CEO Aubrey McClendon needs to sell assets fast.
Record low natural gas prices have the potential to bankrupt a highly indebted company that was built on $4 natural gas. As natural gas prices hit 10-year lows in recent months, that’s put Chesapeake on thin ice.
McClendon has said that Chesapeake plans to sell up to $17 billion in assets by the end of 2013 to fill that gap, but analysts and M&A advisors question whether Chesapeake’s assets are worth as much as McClendon claims.
While Chesapeake has valuable assets, it’s unlikely to be a takeover target because it also has a heavy debt burden of roughly $10 billion, say analysts.
This has put Chesapeake’s CEO Aubrey McClendon in the sites of investors and his 1.1 billion dollar loan from the company didn’t help.
We believe the best thing for investors would be to replace the board and/or CEO,” Phil Weiss, an analyst at Argus Research, wrote in a research note. Weiss cited not only McClendon’s personal loans as reasons for shareholders to push him out, but Chesapeake’s “use of financial engineering” and “the relatively low quality of its financial data.”
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“Since 2001, their capital expenditures have always exceeded their cash flows,” said Weiss.
So how do you spell ponzi?
Overall, investors remain a bit befuddled by how Chesapeake accounts for interest expenses and where profits come from.
“They’re spending a lot of money and the money they’re making seems to be coming from raising more money,” said Daniel Yu, a private investor who has been studying the company but does own any shares or short positions on Chesapeake.
Like many of its competitors, Chesapeake must wrestle with a new world of $2 and under natural gas prices. “If gas stays at $2, there’s not a single company out there that’s prepared for it,” said Chandra.
Cross posted at Newshoggers
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…Well quite. The thing is though, natural gas will be at $5.00 as soon as all the consumers, power utilities, etc have been conned into switching to it and built capital intensive infrastructure which locks them in for decades.
In the meantime the low prices are keeping the lid on solar until the next big-energy friendly administration can strangle it and obviate the threat of too many individuals and businesses declaring energy- Independence.
There’s nothing new about this BTW. The UK in the 80′s built dozens of gas-fired power plants based on the promise of cheap & plentiful North Sea gas… Weirdly enough it turned out to be expensive and plentiful as soon as there was no alternative but to use it.
“In the meantime the low prices are keeping the lid on solar until the next big-energy friendly administration can strangle it and obviate the threat of too many individuals and businesses declaring energy-Independence.”
So how far back in the dust is the USA going to be left when it comes to greener energy technologies? We should be diving into it headfirst research and development wise, not dragging our heels.