Asset sales and increased revenues from oil production nearly doubled second quarter profits at Chesapeake Energy.
But the Oklahoma City natural gas giant wiped a “massive amount” off its oil and gas reserves — 4.6 trillion feet of natural gas worth — of its books, largely in the Barnett and Haynesville shale plays in Louisiana and Texas, Forbes reports.
The market seems excited — shares were up 9 percent Tuesday morning — that Chesapeake has found buyers for billions in assets, and doesn’t seem to care much about the reserve write down.
But maybe it should, Christopher Helman writes for Forbes.
How big is this? Well Chesapeake started the second quarter with 18.8 trillion cubic feet of reserves. That makes the write down equivalent to 24% of total reserves.
Why write down those plays? They’re “dry,” which means they produce little liquids like propane or crude oil. Chesapeake and other petroleum producers are after liquids right now because the prices are higher.
For example, natural gas has to sell for $6 per thousand cubic feet for Chesapeake rigs in the Haynesville play to break even, Helman writes. That’s a problem when gas prices are at $2.81 per mcf.
Chesapeake spent billions drilling in the Haynesville and Barnet, and told investors the plays held decades of drilling promise. He says it’s unlikely Chesapeake will return because it’s moved on to more promising plays like Utica, Hogshooter and the Mississippi Lime.
It’s as if Ford Motor Company were to spend billions building a car factory only to later inform investors that it was mothballing the factory and writing off the investment because it couldn’t make the car economically after all.
Chesapeake managed to “obscure” the write down by announcing 4.2 trillion cubic feet equivalent in new reserves, Helman writes. But the company’s $12 billion in long-term debt is backed by land assets. If enough of that acreage “goes sour,” as Helman puts it: “No one’s going to lend against gas in the ground that isn’t worth drilling.”
More oil and gas is good for America, but Chesapeake investors shouldn’t be willing to keep paying to find gas that’s never worth pulling out of the ground.