Monday, January 23, 2012

"Natural Gas Dead-Cat Bounce Continues; Chesapeake Makes Its Move"

CHK is up 5% at $22.01, natural gas futures up 5.5% at $2.471.
The writer is correct, this is just a bounce in an oversold market. What we'll need to see is wells being shut in, not just a slowdown in drilling. The current calendar of well completions will overflow storage capacity sometime this spring which means gas will be directed onto the spot market for whatever bid it can catch.
From MarketBeat:
The sharp plunge in natural gas prices has finally taken its toll on at least one company: Chesapeake Energy.
The second-largest U.S. natural gas-producer — behind only Exxon Mobil — announced today it will cut its drilling activity in response to natural gas prices tumbling to a 10-year low. And if prices remain this low for an extended period, it could cut spending on gas wells.

Chesapeake CEO Aubrey McClendon offers an explanation:
An exceptionally mild winter to date has pressured U.S. natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S., shale or otherwise.
The news sent natural gas prices higher. Nymex February natural gas was recently up 4.5% at $2.50/mmBtu, after earlier rising nearly 10%. Even as the dead-cat bounce continues, prices are still down about 18% this year.

Chesapeake’s announcement doesn’t drastically change the supply picture for natural gas. But it does indicate that producers have taken note of the sharp plunge in prices and could prompt other companies to take similar action sooner than later....MORE
It's time to double check the balance sheets of the NatGas guys for liquidity and cash flow.
For example CHK's 6.625% notes of 2020 hit 98 last week. That is expensive money and implies the market is questioning the company's ability to avoid a cash crunch. To quote myself:
...Balance sheet factors don't move stocks on a day-to-day basis but over time they rule. Period.
It's not rocket surgery.

Here's an example we posted in August 2007. It's from a popular history for crying out loud, William Manchester's "The Arms of Krupp":

Liquidity in Business and Markets

''Liquidity is expensive but illiquidity is much more so,
because it destroys the very existence of a firm"
I don't remember if it was Johannes or Ernst, it was a long time ago that I read Manchester, quoting one of the Schroeder boys on the insolvency of Krupp. That line has stuck with me. Here's the book.