Is Chesapeake Energy Crumbling Right Before Our Eyes - And Was it Inevitable?
Here is an excerpt of an article she wrote entitled "Is Chesapeake Energy Merely an Example of Virtual Reality?":
We have been watching the demise of Chesapeake Energy (CHK) unfold. In addition to the news of $1.1 billion in unreported loans, Reuters has now exposed a $200 million hedge fund which Aubrey McClendon ran from the headquarters of Chesapeake Energy. This hedge fund invested in the same commodities that Chesapeake produces. Further, Senator Nelson has now called for an investigation by the Department of Justice to look into possible fraud and price manipulation.
The issues of corporate governance, potential fraud, the use of off balance sheet financing and the complexity of financial engineering has been nothing short of breathtaking. But I think we need to step back and examine the full import and implications of shale gas economics because Chesapeake may simply be a microcosm of a more systemic anomaly which is much broader and more problematic.
Seduction is heady business…literally. As we all know the very best part of seduction is what is in your mind, not necessarily what is reality. As so it may be with shale gas. While we were enjoying the exceptional economic party of the last twenty years, corporate America rose to new heights and an interesting dynamic quietly slipped into place. I am speaking of what I call the two economies: one real and one virtual.
The real economy is based on actual goods and services. The virtual economy is based on a perception that goods and services exist.
The financial markets are meant to provide capital to legitimate businesses for commodities or products supplied to people who need them. Public relations has an obvious role in promoting such commodities or services but somewhere along the way we began to substitute legitimate products for public relation generated perceptions or mere spin.
Industry has claimed shale gas reserve figures round the globe which are off the charts. The USGS recently slashed such estimates by 80% in the U.S. for the Marcellus Shale. Then the Polish government, working with USGS, slashed estimates there by 85% and now we learn that reserve estimates are being slashed considerably in India as well. But such original and erroneous reserve estimates by industry give the perception that shale gas is overtly abundant. It also froths the markets and makes capital more available.
Apparently, in this virtual economy, it is no longer necessary to show proof of an actual widget or a truly proved natural gas field, you merely spin a widget or reserves to receive a huge influx of cash from Wall Street. For instance, the Powers Energy Investor noted that Chesapeake and Southwestern had claimed average EUR’s in the Fayetteville of as much as 2.4-2.6 Bcf. But there has never been a single shale well in the Fayetteville play that has ever produced more than 1.7 BCF according to production data filed with the Arkansas Oil and Gas Commission. Most do well to produce even 1 Bcf and the average for Chesapeake wells is 541 mcf. Other examples abound.
So, have we created entire industries such as shale gas that spin so well that monies now chase virtual widgets on a vast scale?
I suppose it was a logical progression. We had already shifted from a manufacturing economy to a service based economy so we were used to the idea that you need not provide something physical for an exchange. Further the Internet has grown exponentially and virtual realities are commonplace, so the intellectual leap to a “virtual” economy or “virtual” reserves was simply a change…in perception.
We first bundled mortgages that would obviously never be paid and shifted them here, there and back again with the sleight of hand of a good magician. We have now bundled leases and shifted them here, there and back again in a shale gas land grab which McClendon himself bragged made him more money than actually drilling for gas. During an earnings call he stated, “I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet.”
Try producing gas at $1.85 per mcf.
In this virtual economy, some have learned to use hype and in some cases just plain lies to froth the stock market into a frenzy only to move in to shift assets, or perhaps just the perception of assets, here, there and back again for more fees and better pay. McClendon borrowed $1.1 billion without ample shareholder disclosure against assets of a publicly traded company which he ran and shifted more assets within a hedge fund that was trading in the very commodities that Chesapeake Energy was engaged in producing. Again without disclosure to shareholders.
During the past decade or so income inequality in this country has moved off the charts. The average CEO total pay package is over $400 million for the top ten CEO’s in America while the worker bees haven’t kept up with inflation. And yet it is they who actually created that $400 million in wealth. McClendon was allowed to participate in wells using someone else’s money to pay expenses while other executives at his company were forbidden to engage in such activities. He apparently made about $63 million in 2011 on such activities.
This game is elitist like LaCrosse and only played by certain players in certain elite positions. It is not baseball.
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