Monday, March 2, 2009

Chesapeake Trims Production

Chesapeake Energy announced today that it will reduce its production by approximately 7% because of low commodity prices. This business decision is a natural reaction to a poor price environment. If you can control the outflow of oil and gas, you might as well not produce more than you need to keep your company's doors open and lights on when prices are low. Once commodity prices increase, companies will increase production and see greater profits.

CEO Aubrey McClendon had a frightening statement as part of the announcement, "During March 2009, most Mid-Continent natural gas prices at major interstate pipeline delivery points will average around $2.70 per thousand cubic feet, a price at which most natural gas production is unprofitable." Zoikes! You hate to hear that. Of course, he's been wrong a lot lately, but usually because he's too optimistic. Maybe since he lost most of his Chesapeake stock to margin calls in 2008 he now is more pessimistic (or realistic). McClendon said that he expects further cuts in drilling that should lead to a re-balancing of supply and demand toward the end of 2009.

The low price environment has the potential for great gains for a company that is willing to continue to invest in new properties and drilling operations. Investing now will allow a company to be in position to really turn on the spigot when prices increase. Of course, such a company would need lots of capital, a visionary leader and board of directors, and b*lls of steel. Unfortunately, all of the oil and gas companies of any size in this market are publicly traded and are slaves to the stock market and the analysts, which makes them prone to short-term (and often short-sighted) decision making.

Chesapeake also announced that it is willing to change the terms of the joint venture agreement with Plains to allow them to forgo the upcoming $800 million payment. Doing so would change the ownership terms of the JV property in Chesapeake's favor, so it's no gimme that Plains will accept this deal.

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