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Natural Gas Drillers are headed for a lot more pain - Part 2



February 18, 2009 – Comments (7) | RELATED TICKERS: CHK


This post is a follow-up to the two bearish articles that I wrote about natural gas and drillers in January (North American Drillers are headed for a lot more pain and Natural Gas Stinks)

Natural gas producer Chesapeake published its quarterly results today. The results weren't as bad as the headline numbers indicate because most of the loss was a result writedowns caused by a U.S. rule that requires producers to value their reserves at the end-of-year energy price. Excluding the writedowns, Chesapeke's earnings for the quarter came within one penny of the $0.74 that analysts were looking for.

Chesapeke is a producer, not a driller.  The reason why I mentioned Chesapeke's results is a statement by the company's CEO, Aubrey McClendon. He stated that he believes the number of U.S. rigs drilling for natural gas will fall by 50% to 70% from the "levels seen in 2008." By that, I suspect that he means the peak levels.

The last time that I checked in late January, the U.S. natural gas rig count had dropped to 1,185 from a peak of 1,606. That's a drop of just over 25%.  If McClendon is right, rig counts still have a long way to fall. That is very bad news for drillers, especially ones with huge debt loads.  I have always preferred and continue to prefer natural gas producers to drillers.

The people who are buying natural gas drillers at this level are correct when they say that they certainly offer the potential for significant returns from this level if the companies survive. However, some of the ones that have high debt levels might not. 

Everything hinges upon a rebound in the price of natural gas and the chart is pretty darn ugly right now. Recessions are generally bad for energy demand. The longer this financial mess continues, the longer prices are going to remain depressed. I am extremely bearish on the state of the U.S. economy at the moment. I personally don't expect things to bottom until 2010 with close to double digit unemployment. I don't expect any rapid recovery either, but rather an "L" shape.

I take it as a particularly bearish signal that this winter has been significantly colder than last winter, I don't have to look any farter than my own heating bill to see that, yet natural gas prices have gotten worse...not better during this traditionally strong period.

Of course, I'm certainly not psychic and a lot can happen to bolster the price of natural gas. Perhaps the Obama administration will pass some sort of "clean" legislation that gives a boost to the industry, such as cap and trade, carbon tax, or support for natural gas vehicles (though I highly doubt that the latter will ever happen). Similarly, the economy could rebound much more quickly than I expect or the value of the U.S. dollar could collapse. Both would likely cause nat gas prices to rise.

I wouldn't bet on a quick rebound though.

Chesapeake shares slide after quarterly loss


Long Chesapeke Energy Conv. Preferred 6.25%

7 Comments – Post Your Own

#1) On February 18, 2009 at 3:11 PM, jgseattle (26.15) wrote:

I have wanted to research conv preferred but do not know where to find them and where to research the T&C.  Can you help out.


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#2) On February 18, 2009 at 3:48 PM, skeptic86 (39.66) wrote:

Domestic natural gas prices are going to be interesting in the next couple of years. Production from those shale plays drop like a rock for the first year or two. Slowing down drilling activity may set us up for a shortage in the future. Who knows whats going to happen though?

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#3) On February 18, 2009 at 4:19 PM, TMFDeej (97.65) wrote:

Hey seattle.  Thanks for reading.  Unfortunately, I am not aware of a resource that has a compiled list of all of the preferred stock that is out there. 

I do a lot of reading, including Barron's, Smart Money, Forbes, Fortune, the Web, etc... and I have found out about most of the the preferred shares that I own by seeing them mentioned in articles.


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#4) On February 18, 2009 at 7:07 PM, nuf2bdangrus (< 20) wrote:

Many of the drillers are down over 75% from their peek, so I would start drawing up a list of low debt companies and building positions.

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#5) On February 18, 2009 at 7:26 PM, nuf2bdangrus (< 20) wrote:

jgseattle.  Ticker for CHK pref series E is CHK.E  Current yield 10.8%


I've been looking at CHK for awhile, would like it under 15.  Just put in a limit for the Preferred E at 144.  HOpe I get it filled.

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#6) On February 18, 2009 at 7:36 PM, Inept (93.51) wrote:

For those who're interested, CHK recently issued 1.3B in new, high-yielding debt due 2015 that will be publicly traded. Might be worth checking out the prospectus.

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#7) On February 18, 2009 at 10:06 PM, Tastylunch (28.56) wrote:

I agree Deej, barring Russia doing something really dumb to the Ukraine Nat gas doesn't look rebound worthy yet.

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