MJMM its not just the oil in storage its the oil from the wells that have been drilled but not completed. Hundreds of wells that once completed will produce millions of barrels of oil. The current situation is somewhere in between the bust of the 1980s and the dip in 2008. Oil could be stuck in the $40-$50 range for a long time which would not make energy stocks anything other than a possible good swing trade rolling stocks. I owned shares of Baker Hughes for years that I got from working for a subsidiary. They seemed to be stuck in a range for the longest time thru the 89-90s. I think we could only see the low targets $20-$30's if the broad market takes a dump and pulls everything down with it. That would be a good senario to pick up some real bargains. For now Im playing the DHOT60 bounce on CHK that got interrupted by the 300pt drop on Friday. I made a little money on CHK selling early Friday before the market fell. I bought it back before the close. If the market gains CHK will as well but I don't plan on holding it for long.
I read an article CHK is in the same position they were a few years ago when crude dropped. Sounds like could be more downside.
Chesapeake Energy Sees History Repeating Itself
By Investopedia | March 06, 2015 AAA |
Despite its best intentions, Chesapeake Energy can't seem to catch a break. The company was on the wrong side of natural gas when its price plunged in 2012, and the situation appears to be repeating itself after the price of oil plummeted. Now Chesapeake Energy expects, once again, to announce a big asset writedown in the first quarter.
Here we go again
In its annual report, Chesapeake Energy laid out a number of risk factors to the business, as it does each year. Most of the risks are probably both familiar and obvious to investors. For example, the company said oil and gas prices could go down or it might drill dry holes, both of which would impact earnings results. Other risks are only familiar to investors based on the company's history.
One of those ghosts from Chesapeake's past is apparently about to haunt the company again. The company stated in this year's annual report that "We expect to write down the carrying value of our oil and natural gas properties in 2015 if commodity prices remain low." It noted that it is required under accounting rules to write down the carrying value of its oil and gas assets if capital costs exceed the quarterly ceiling limit, which is based on average commodity prices as of the first day of the month over the trailing-12-month period. Given where prices are now, a writedown is coming, and not for the first time. Per the annual report:
Such writedowns can be material. For example, in 2012, we reported a non-cash impairment charge on our oil and natural gas properties of $3.315 billion, primarily resulting from a 10% decrease in trailing-12-month average first-day-of-the-month natural gas prices as of September 30, 2012, as compared to June 30, 2012, and the impairment of certain undeveloped leasehold interests.
That writedown came at a bad time for the company as its cash flow was dropping and its debt was far too high. Chesapeake Energy was forced to take a number of steps to fix its balance sheet, including selling assets at fire-sale prices. However, it survived, and the balance sheet is now the strongest it has been in the company's history.
It's gonna be big
Given the company's strong financial position these days, its looming asset writedown probably won't have the same impact it would have had in the past. That said, it's likely going to be a big number. The company's reserves had a PV-10 value, which is the present value of future cash flow discounted by 10%, of $22 billion as of the end of last year, which incidentally is the company's current enterprise value. However, those values were based on the following commodity prices: $89.09 per bbl of oil, $2.68 per Mcf of natural gas, and $24.10 per bbl of NGL.
Those prices are no longer realistic -- the company noted in its annual report that the price of oil fell from $105.37 per barrel in June to just $50.34 as of late February, while the price of natural gas slumped from $4.46 per Mcf to $2.95 per Mcf over that same time frame. That big drop in oil means the company's assets are no longer worth what they were at the higher prices. The company admitted as much, writing in its annual report:
Based on the first-day-of the-month prices we have received over the 11 months ended February 2015, we expect to have a material writedown in the carrying value of our oil and natural gas properties in the first quarter of 2015. Further material writedowns in subsequent quarters will occur if the trailing 12-month commodity prices continue to fall as compared to the commodity prices used in prior quarters.
There's no point in speculating how big the writedown might be, but a material writedown means it will be sizable. If the writedown is substantial, say, 10% of the company's PV-10 value, or $2.2 billion, that could send the stock meaningfully lower, as it would tell investors that a large amount of the company's acreage isn't profitable at current commodity prices.
Investor takeaway
Chesapeake Energy investors should brace themselves for bad news when the company reports first-quarter results later this spring. Given where commodity prices are right now, that report will probably contain a big writedown, which could send the stock lower.
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