Chesapeake Energy Corporation (CHK), Chevron Corporation (CVX), Suncor Energy Inc. (USA) (SU): The Next Big Energy Short Is Coming

Page 1 of 2

The EPA recently decided not to publish a report trying to link ground water contamination to fracking, due to weak findings. With environmental concerns falling away, fracking firms will have free reign to increase production, if they can. Given then high decline in shale production wells, it is time that investors take a less sanguine look at the market.


US Producer Price Index: Natural Gas Liquids and Residue Plant Condensate, Ethane, Mixtures, Other data by YCharts

Free market chaos

In the past decade increased drilling has driven natural gas prices to very low levels. The majority of this increased production is driven by horizontal fracking wells with rapidly declining production profiles. The above chart shows how natural gas production has increased 21.92% in the past five years and 4.15% in the past year, but it has fallen by -0.07% in the past six months.

The increase in natural gas production created a collapse in the natural gas pricing. This caused many drillers to move into natural gas liquids (NGLs) rich plays where they can make money from other substances like butane and condensates. As the industry moved into NGLs the supply boom in NGLs caused prices to fall, and drillers were stuck in the same situation. Now they are looking for crude oil rich plays, like the Bakken formation in North Dakota.

Beware of rosy projections

Regardless, analysts are warning of over stated reserves. While the shale bubble will not burst overnight, eventually companies with high debt loads will have to face the music. The Romans taught us that fortune favors the bold, but it also favors the patient. Shorting the fracking bubble isn’t a six month game. As the years go by production levels will continue to fall, and increasingly more capital will be needed to defeat declining production.

Chesapeake Energy Corporation (NYSE:CHK)

Chesapeake Energy Corporation (NYSE:CHK) is one firm to avoid or consider shorting. This natural gas fracker was driven into the ground by its former CEO, and it still has a total debt to equity ratio of 1.06. The company has already sold off stabilizing midstream pipeline assets and sold a number of other assets into trusts. These asset sales allowed the company to survive, but it has left it a less stable firm.

The company has shifted its focus to oil rich plays, but it still faces a number of challenges. Its Q1 2013, production in the greater Anadarko Basin was just 38% oil. It is expected that its current earnings before interest and taxes (EBIT) margin of -3.8% and profit margin of -3.7% will increase, but investors need to take a hard look at Chesapeake Energy Corporation (NYSE:CHK)’s long term trajectory.

Chevron Corporation (NYSE:CVX) is involved in the U.S. shale market through in the Marcellus Shale play and others. At the same time Chevron Corporation (NYSE:CVX) is better diversified than Chesapeake Energy Corporation (NYSE:CHK). Its diverse international upstream earnings were over four times greater than its U.S. upstream earnings in Q1 2013. It is also involved in the liquefied natural gas (LNG) market. The company continues to work on its Gorgon and Wheatstone LNG projects in Australia.

While the deflating fracking boom will impact Chevron Corporation (NYSE:CVX), it is a large diversified company with a manageable total debt to equity ratio of 0.1. Its international operations will help to maintain its EBIT margin of 19.5% and profit margin 11.4%.



North Dakota Crude Oil Production data by YCharts

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!