Our Plan, Part XXI
The only thing stranger than the high values of the producers stock is the promotion these stocks are receiving from the brokerage community. If you watch the movie “The Big Short” you can see that the banks offloaded their junk on an unwitting public just before the crash occurred. Even though it was known that the mortgage market was ripe for collapse people were hoodwinked into buying the bank's positions in these products. I think the same thing is happening here. The promotion of the producers is completely out of left field. It makes no sense to me. Commentary does not fit the producer firm that is being covered. The ability and capability of the producer to survive the next two years is in serious question, in my opinion, and the brokerages are stating that it's the next Apple.
To contrast the ridiculous nature of the commentary we will take the most extreme example available. That is Chesapeake Energy. The commentary is coming from this Financial Times column. Below I’ve separated some of the comments between those that I believe are truthful and those that are not consistent with the truth.
Some truth
Chesapeake still faces an uncertain future.
When Mr Lawler arrived, he faced a two-fold task: improving performance to make Chesapeake’s operations more profitable, and cleaning up the Augean stable of the balance sheet.
A renewed slump in prices, though, would threaten his plan to cover spending from cash flows by the end of next year, and Moody’s has warned that Chesapeake’s ratings could be downgraded again if it appears unlikely to deliver production growth in 2018.
Some mistruths
Notably, the company’s profitability is higher now with US crude prices at about $50 per barrel than it was at $100 per barrel in 2014.
Mr Lawler suggests that real success at Chesapeake would mean not just keeping the company afloat, but being able to show that “not only did we fix our problems, during the worst commodity price cycle in decades, we also positioned the company to show extremely competitive growth versus some of our peers”.
“The company’s profitability is higher now with US crude prices at about $50 per barrel than it was at $100 per barrel in 2014.” I don’t understand any of this comment. In 2014 Chesapeake reported $1.917 billion in earnings. During 2015 and 2016 Chesapeake reported losses of $19.086 billion. $4.399 billion of that loss in 2016. Chesapeake is 75% natural gas. Oil prices are not material to their profitability. These two statements provide the reader with the false hope that, with current, somewhat higher oil prices, Chesapeake has weathered the worst of the storm. It’s production profile has also declined precipitously over the past two years, from 770,000 boe/day to 575,000 boe/day.
Oil and gas is predominantly held by institutions. They certainly wouldn’t be buying this. If, as I suspect, these institutions are rotating out before the big collapse, so that John Q. Public can be left holding the losses in their recently purchased oil stocks, then the industry will be in for the reckoning that I’ve been writing about. The big, or smart money moving out of the industry is a sign of a loss of faith that there is any plan for the future. Producers can’t, won’t and will not ever change, and there is no plan. Other than drill more wells and lose a lot more money. This is why we need to be prepared and moving forward on September 4, 2017.
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