Friday, October 10, 2008

Holy Shit!!!

Pardon the low grade French, but it's been an awful week/month for the stock market and an even worse one for natural gas stocks. I'll not delve into the details because there is too much blood on the floor, but suffice to say that the price of natural gas is down and the values of the gas E&P companies are down much more.

The price of natural gas dipped below $7 (the spot and futures are a hair over $6.50 as I write this), so the gas stocks are getting pummeled. The $7 figure has been tossed around as the point where expensive horizontal drilling becomes economical. Below that there is not as much reason for the gas companies to risk too much capital to drill (except to hold a lease). This past month has been a death spiral for the gas stocks, exacerbated by the falling price of gas, the crappy overall market conditions and the activities of traders and short sellers who are causing severe swings in the gas stocks.

The news that prompted my headline en Francais is a press release I noticed that acknowledged that Chesapeake Energy CEO Aubrey McClendon had to sell "substantially all" of his CHK stock. He made, sold and consumed the Kool-Aid and was a big buyer when the stock was in the $50's (it closed at $16.52 today, dipping as low as the low $12's today, after peaking several months ago around $74). This man was a billionaire based on his CHK holdings and was buying stock in multiples of hundreds of millions of dollars this year. Being that much of a believer probably prompted much of the gold rush in the gas stocks we witnessed this past spring and summer. To be forced to sell most of his stock (the exact amount was not disclosed today) has to be devastating to McClendon, who was Cowboy In Charge of the Natural Gas Movement. He is in no way a poor man now (he sold the stock - he didn't lose it), but hubris can be a bitter pill.

Where do we go from here? I have no clue. Pray for a cold winter, I guess, to see a spike in natural gas prices. I think over time the call for domestically produced energy and the calming of the markets will see gas prices rise and stabilize somewhat. I think the values of the gas stocks will gradually increase to pre-boomlet prices but not back to the spiked valuations. The exploration companies took on lots of debt (adding risk to the companies) and sold lots of stock (diluting the value of the stock) this year, so a more sober market will most likely more even-handedly balance the opportunity and risk of the companies.

Without viable exploration companies and stabilized (read: higher) natural gas prices, the sexy Haynesville leases will sit on the shelf and the grandiose drilling plans will be put on the back burner.

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