Oil depletion

Clouds on the horizon for fracking companies?

in Peak Oil by

The Oil & Gas Journal has published an article with the headline, “Chesapeake mulls spinoff, the 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 the production of oil and NGL in the USA. 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 negatively 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 principal problem is “cash flow.”

That one of the largest companies in fracking is giving such signals shows 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.

Kjell Aleklett is Professor of Physics at Uppsala University in Sweden where he leads the Uppsala Global Energy Systems Group (UGES).

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