Chesapeake Energy (NYSE:CHK) Needs to Dump CEO Aubrey McClendon
Strategically, Chesapeake Energy Corp. (NYSE: CHK) is a great business with a long, bright future.
Chesapeake had been the largest independent natural gas producer in the U.S., with significant cross-interests in oil, a creative approach to bringing in international majors without losing control over projects, and some of the most attractive drilling acreage around.
It's positioned for a decade of growth – at least.
What's more, now that the shares have sold off, Chesapeake is incredibly attractive from an investment standpoint, too. (In fact, we're taking advantage of the company's growth potential in my Energy Advantage right now.)
So don't get me wrong when you see what I have to say today. I love the company.
But Aubrey. Oh Aubrey…
I don't normally devote an entire column to criticizing a company executive. But I have had enough of these shenanigans by the company's fast and loose CEO and co-founder Aubrey McClendon.
The latest revelations have caused yet another sell-off.
This time, there are allegedly email records of his attempts to suppress land-bidding fees with normal competitor Encana Corp. (NYSE: ECA). And this may end up in the lap of federal investigators.
While this might be concerning, I don't want anyone to overreact. I only see this as a temporary problem – and one that creates even more of a buying opportunity for potential shareholders.
Nonetheless, the time has come for more drastic action on the corporate side.
These Natural Gas Companies Found the Next Energy Hotbed
Natural gas companies have struggled as the fossil fuel's overabundance in North American shale formations has led to decade-low prices.
But don't expect those cheap prices to be around long.
You see, by 2040 there will be nearly 9 billion people on the planet, up from about 7 billion today. Most of the growth surge will come from emerging economies, meaning energy demand in those regions will hit new highs.
A recent report by Exxon Mobil Corp. (NYSE: XOM) predicts that while energy demand will remain essentially flat in developed economies, demand in emerging markets will rise by nearly 60%.
This growth is good news for natural gas, since the world increasingly favors lower-carbon energy sources. In fact, the International Energy Agency (IEA) predicts natural gas will surpass oil as the planet's number one source of energy beginning in 2035.
What's more, emerging economies are big importers of liquefied natural gas (LNG), the fuel's most portable form. That's why the world's biggest oil and natural gas companies are placing huge bets that LNG is the "new oil."
And most of their Monopoly-sized wagers are saying Australia's the place to find it.
Here's why Australia will be the globe's next energy hotbed.
My Strategy for Uncertain Times in Energy
There has been no shortage of red ink in the market lately.
Paltry new jobs figures (69,000 new jobs, less than half of what was expected) have combined with the ongoing mess in Eurozone and lagging figures from China to sap investor confidence.
This latest action will further depress oil prices, as the rash of bad news translates into even more knee-jerk projections of reduced demand.
Of course, it's much too early to make such predictions based on the news, but the pundits do it all the time.
In any case, we are now in a downward movement that will end only when the market manipulators say so.
When this happens, individual investors always take it on the chin.
That's why I want to take a moment today to outline for you the strategy I use for my Energy Advantage and Energy Inner Circle subscribers.
Of course, if we could time the market, or invest in perfect hindsight, we wouldn't need an investment strategy.
But while some of the largest investment banks are getting it (very) wrong these days, crystal balls seem to be in short supply.
So what should we do?…
Well, there are three overriding considerations you must keep in mind when approaching the energy sector in an environment like this.
- First, know that this, too, shall pass. Take a deep breath and relax.
- Second, keep your power dry. There is no point in chasing uncertain shares in an uncertain market, simply because some talking head on TV says they are undervalued. In the current situation, almost 80% of the shares I follow are well below market value. However, until the market finds equilibrium (something it always does, by the way), the undervaluation means little. Nibble when you feel targets are cheap enough, but never go all in.
- The third point is the single most important thing to remember here. A situation like this one demands that you preserve your investment capital. Uncertainty is always the mother of discretion. The energy sector has been hit harder than the market as a whole for much of the last six weeks. That means you need to set up an exit strategy and stick to it.
Natural Gas Companies: Exporters Stymied by Permit Delays
Just days after Forbesexplained how American natural gas exports will positively change the world, the U.S. Energy Department released news that could delay natural gas companies seeking to export the fuel.
The DOE announced it will temporarily halt granting new licenses for companies to export liquefied natural gas (LNG) until an economic study is completed later this fall.
Despite finishing in January the first part of a critical study on the impact of LNG exports on U.S. energy production, prices, and consumption, the rest remains incomplete. Until this section is finished and evaluated by members of Congress and executive officials, the DOE will also suspend assessments of proposed export sites.
"The second part of the study, which will assess the broader economic effects of increased natural gas exports, is ongoing," Energy Department spokesman William Gibbons wrote in a release Wednesday. "We expect to be able to release the comprehensive study results late this summer."
The DOE has delayed permits and assessments of proposed sites mainly due to worries from Congressional members. Congress remains concerned about the long-term U.S. energy security and the potential that natural gas prices could increase dramatically as exports begin.
Oil Price Forecast: Expect Oil Prices to End the Year Higher
Forecasts for oil prices in the second half of 2012 and on into 2013 are varied, but there's one point on which virtually all agree: Oil prices won't be going down.
One reason is that oil prices have already dropped substantially in recent weeks.
In fact, oil futures – as measured by the July New York Mercantile Exchange (NYMEX) contract for West Texas Intermediate (WTI) crude – closed below $90 per barrel last week, the lowest level for an active contract since October 2011. That's down $17 a barrel since the beginning of May.
Two factors have contributed to the decline in oil prices:
- A modest increase in U.S. crude supplies – up 3.8% in April from March levels and 1.5% from a year ago – primarily due to continued low demand as a result of the slower-than-expected economic recovery.
- Increasing strength in the U.S. dollar – the global pricing currency for crude oil – due to safe-haven buying in response to continued concerns over Eurozone instability.
Oil Prices Continue to Climb
Longer-term, however, both of those situations should stabilize, and then reverse – meaning current oil price levels will likely serve as a base for a rebound in the second half of the year, continuing into 2013.
Even so, the leading "official" sources for oil-price forecasts aren't projecting major spikes, either.
The U.S. Energy Information Association (EIA), in its most recent report issued May 8, predicted prices for WTI crude will average about $104 a barrel for the rest of the year, and that costs to refiners for all crude – domestic and imported – will average $110 a barrel.
The WTI number is down $2 a barrel from March estimates, but $9 a barrel higher than the 2011 average, while the refiners' cost figure is up $8 from 2011.
The American Petroleum Institute (API), a trade organization of more than 500 oil and natural gas companies, didn't issue price forecasts for crude in its most recent (May 18) report, but noted that increased domestic production, slightly higher crude oil stocks (374.8 million barrels) and lower imports in April should serve to keep prices stable to modestly higher going forward.
API also expressed optimism that rising crude production in North Dakota, which hit 551,000 barrels per day in March, and a possible reversal of President Obama's rejection of the Keystone Pipeline project could keep price hikes in check for the remainder of the year.
Such optimism wasn't nearly as prevalent among many private analysts and industry commentators.
These High-Yield Natural Gas Stocks are Cheap Buys
Cheap natural gas has made this a year for price pullbacks among natural gas stocks and related investments.
Look at United States Natural Gas Fund (NYSE: UNG), the exchange-traded fund following the price of the fuel. In July 2011 it was selling for over $45 a share.
UNG hit a 52-week low of $14.25 on April 19.
Now it's climbed back up to near $20, but still well off its 52-week high of $50.52.
But don't think this price lull is permanent. There are many reasons the fuel will be more in demand – and eventually, more pricey.
"Natural gas doesn't give cancer…it'sa very useful product, very cheap per Btu — much less than oil, and is less pollutive than oil or coal," said legendary investor Wilbur Ross, who is long-term bullish on natural gas, in a recent interview. "There may be a little more downward blip but I think the worst part has got to be over."
Still, no one wants to "catch a falling knife."
How Natural Gas Companies Could Save You 25% on Fuel
Thanks to new developments from natural gas companies, fuel costs might soon be falling by as much as 25% for some individuals.
Royal Dutch Shell PLC (NYSE: RDS:A, RDS.B) plans to spend $250 million on a liquefied natural gas (LNG) plant and filling stations in what is the biggest single investment yet in making frozen gas a transport fuel.
LNG has been a hot topic of late as an overabundance of fuel from North America's shale rocks has made the U.S. the world's largest natural-gas producer and led to decade-low natural gas prices.
Chad Porter, the COO of Ferus, a Calgary-based oil services company, tested the savings of running vehicles on LNG compared to diesel and liked what he saw.
Porter told Bloomberg News that he estimated switching from diesel to LNG as a transport fuel will lower his fuel bill by 22%, or $1 a gallon at the tank.
That helps make the case for switching to engines that run on liquefied natural gas.
"LNG holds great potential as a transport fuel," Mark Williams, Shell's director for downstream, said in a speech this month. "North America, for example, now has a century of gas supplies at current consumption rates. So gas is likely to gain market share in transportation."
- The Five Biggest Roadblocks to America's Energy Future
Investing in Alternative Energy Stocks: Five Solar Power Winners
It has been a tough year for solar power.
Solyndra famously imploded, the price of polysilicon dropped 60%, and a glut of natural gas has made it the "new" alternative energy source.
But make no mistake about it: alternative energy stocks are going to be long-term winners-especially for solar power investors.
For instance did you know that Germans are initiating a campaign valued at more than $260 billion to harness wind and solar power. It is already being called the biggest restructuring of the national energy landscape since the end of World War II.
Or that China plans to double its solar power capacity by installing three GW this year, according to China Daily.
And despite the recent declines, analysts expect European demand to rise again in 2012. UBS forecasts that solar power generation will rise from 21 GW in 2011 to 25 GW in 2012.
What's more, solar panel prices are expected to stabilize as a result of tighter inventories and improving demand.
That's increasing talk within the industry that pure-play alternative energy stocks could be gobbled up by oil companies or large-scale manufacturers.
With that in mind here are five solar power possibilities, including innovative companies, takeover targets, and companies that can compete on cost.
Oil Prices and the Death of Greece
As the Eurozone continues to show weakness, events last weekend in Athens may accelerate the situation. The downward movement in oil prices this week in both London and on the NYMEX testified to the rising concern.
The aftermath of the Greek elections propelled the new radical left party SYRIZA into the limelight as the second strongest party in the country. Given the adamant refusal by SYRIZA leadership to accept bailout reforms, the party's new brokering position means the crisis will continue.
Bitter austerity measures await the formation of a coalition government, since no party received a majority of the seats in parliament from the vote. The coalition is supported by both the New Democracy and socialist PASOK parties, which have taken turns ruling Greece for nearly four decades.
But the surprise showing of SYRIZA has thrown the possibility of an accord into disarray.
At best, this means a further delay and likely a new election.
On the other hand, Greece has little time left. Any further delay in forming a government, with no guarantee that a very angry population will vote any differently the next time around, puts the next tranche of the European Union bailout package in jeopardy.
It is now more likely that Greece will leave (or be pushed out of) the Eurozone, casting a greater uncertainty on both the currency and the southern tier of countries still in the zone.
Spain is the current focus of concern, but Italy is also exhibiting renewed weakness.
Unlike Greece, Spain and Italy have debt problems that dwarf the ability of any Brussels-led support package. These economies are simply too large to be "rescued" from the outside.
The concerns over contagion, therefore, may actually expedite a Greek departure earlier than most thought possible.
It is true that any members leaving the Eurozone will have a negative effect upon currency strength and economic prospects. It is also unclear how the Greek departure will aid in shoring up either Spain or Italy. The problems in each of these economies are endemic; they are not primarily a result of "spillovers" from the situation in Greece.
All of which means, to borrow a phrase from former U.S. Secretary of Defense Donald Rumsfeld, there are a series of "known unknowns" now facing the EU. The credit and banking problems are essentially the "known" part of this equation. The extent of the fallout on the euro as a whole is the massive "unknown" flowing through the calculations.
This is accentuated by recent developments in the two major economies using the euro — Germany and France. No rescue package for any EU member is possible without the leadership of these two dominant European economies. To date, Paris has emphasized protecting its suspect banking sector, while Berlin has a strong political undercurrent demanding additional protection of German production and trade.
However, the recent French elections, in which a socialist has been elected president, and indications surfacing that the German economy may be facing a slowdown, will put continued support of a "bailout for austerity" approach to Greece in question.
Thus far, both major nations have led the EU-Greek approach, strongly arguing that the preservation of the euro demands it. The dramatic political events unfolding in Athens are rapidly undermining that support.
And this has impacted the price of oil.