Does anyone know the economics of the gas to liquids plant in I believe Qatar?
Chesapeake's McClendon: Searching for 'Holy Grail' on Behalf of Natural Gas Producers
seekingalpha.com
Never afraid to dream big, Chesapeake (CHK) Energy CEO Aubrey McClendon recently spoke at an investment conference in New Orleans. Part of McClendon’s message was that he is planning to track down the “holy grail” for the natural gas industry.
That “holy grail” is the development of a gas-to-liquids process that could transform natural gas into a liquid transportation fuel that could be easily adopted by current distribution systems. McClendon predicted that such a system would be commercially viable within four to six years.
His exact words were “we expect Chesapeake to have a role in this, we do intend to find, seize and enjoy the Holy Grail, which is to convert $4 natural gas into a $20mcfe in the form of a transportation fluid."
Yes, I’d say that would be pretty good news for natural gas producers. Currently these producers, through their own success finding vast amounts of unconventional shale gas, have created a seemingly unending glut of the stuff. By having natural gas as a simple substitute for transportation demand their product would skyrocket. And if that were to happen an investor would want to be invested in the sector.
But the problem with McClendon is that you are just never sure whether what he is saying he has some real substance or if he is just talking his book.
I’ll give you a couple of examples.
Chesapeake Production Growth and Asset Sales
I’ve followed Chesapeake for what must be almost eight full years now. Every year Chesapeake provides production growth guidance and every year they exceed it. And the guidance Chesapeake provides isn’t a low growth, easy-to-beat target.
Chesapeake entered the year 2000 producing roughly 250 MMCF/day . Ten years later the company was pushing 3,000 MMCF/day going from a small gas producer to the second largest natural gas producer in the United States. That is just an incredible accomplishment. The amount of production Chesapeake adds every year these days is equal to the total production of another top 10 natural gas producer.
McClendon has made bold growth predictions for his company, and backed them up with performance. Some serious credibility points.
The same goes with a series of multi-billion dollar joint venture deals that Chesapeake has strung together over the past couple of years. McClendon told everyone that Chesapeake would go out and spend a lot of money leasing acreage, then sell a small portion of that acreage and fully recover everything Chesapeake had spent. The net result to Chesapeake being that the company ended up with large land holdings for which they paid a net amount of $0.
I know I didn’t really think he could do that. I thought such a plan was simply a grand but unachievable plan. But he did it, exactly as he said he would. More credibility points.
Predictions on Natural Gas Prices
The benefit of following a company closely for a long time is that you can look back in your notes to see how reality has matched what the company has guided.
One thing McClendon has always been willing to predict confidently is the direction of natural gas prices. And he likely should be a great source to look to since he produces more of the stuff than almost anyone and has a better pipeline of information than most analysts ever could.
The problem is that if you are willing to take questions on where the price of natural gas is going and then answer confidently that it is going to go one way or the other you need to sometimes get the answer right. There is nothing wrong with saying “I’m not sure” if you just aren’t sure.
But McClendon isn’t afraid to give his opinion and he has lost some credibility with me for that. He answers such questions on the direction of natural gas as though he is providing facts, not opinion. A couple of instances that bother me:
1) June 2008 – McClendon was speaking on the direction of natural gas prices and he volunteered that the age of $10 plus natural gas was here for the foreseeable future. In the meantime the new supply of natural gas from unconventional plays is about to explode up and the demand for the product about to drop due to the 2008/2009 recession. How could McClendon think the future for natural gas was so bright when he better than anyone knew just how vast these shale plays were? It is a pretty big whiff to call for $10 natural gas going forward only to have the price collapse for multiple years (three and counting).
2) Spring 2009 – Chesapeake posts a presentation titled “the fix is in” referring to the fact that the drop in natural gas rigs would cause a rebound in natural gas prices by the end of 2009. Chesapeake very confidently supplied a series of graphs and rationale supporting the claim. Of course it is now 2011 and natural gas is still bouncing around $4 a full year and a half after the fix was supposed to be in. The “fix is in” presentation disappeared a long time ago. I still remember it though.
I’m afraid to say that McClendon has earned no credibility points with me when it comes to predicting natural gas prices. The part that amazes me is that he is still willing to speak on the subject as though he knows where the commodity price is going. Does he not think we can remember the bungled calls from a year or two earlier?
So What to Think?
Maybe McClendon and Chesapeake really are well down the road with some chemical companies toward creating a commercial gas to liquids process. If that is the case I really, really want to own Chesapeake and a basket of other unconventional players.
Or maybe commercial gas to liquids within six years is just McClendon’s wishful thinking and such grand talk should just be ignored. I’m not sure he knows what his gut tells him and what he really knows.
There are some reasons to think that the future of natural gas in the United States could improve dramatically in the next five years even without a gas to liquids process. LNG export opportunities, CNG vehicles, increased use by power plants and a commitment to the environment could all contribute to an increase in natural gas demand.
I’m still on the fence about future natural gas prices. One thing that I do know is that if we end up with long term natural gas prices over $8 due to an increase in demand there are fortunes that will be made by investors long natural gas producers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. |
