Chesapeake Energy: Naked Risk Management
EconMatters | Apr 10, 2012 01:11AM ET
As discussed in our estimate the average cost of drilling for domestic natural gas is roughly $4, but may be as low as $2.50 or so in easier-to-drill plays like the Marcellus Shale in the Appalachian region.That suggestsalmost all the new drilling of unconventional plays are under-water at the current Henry Hub price level.
Producers are feeling the pain.Companies including ConocoPhillips, Chesapeake Energy, Encana, Ultra Petroleum, Talisman Energy have shut in production and/or cut their 2012 capital budget.However, these planned curtailments most likely will not be enough to balance out the massively over-supplied market.
In its March 2012 Short-term Energy Outlook, EIA now expects inventory levels at the end of October in both 2012 and 2013 will set new record highs as well.At this rate, some analysts are projecting storage capacity could be close to max out by October of this year.In an extreme case, with no storage space available, some produced natural gas may get dumped on the spot market, and we could see natural gas breaking below the $2 mark this year.
In this challenging commodity price environment, producers with the better risk and portfolio management skill would likely weather the storm better than peers, while companies like Chesapeake Energy may have to bite its time as well as bullet.Chesapeake Energy stocks have dropped about 37% in the past 12 months vs. +4.07% of S&P 500 in the same period (see chart above).
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