3:19am

Wed August 8, 2012
Business

Natural Gas Giant Tries To Shift Gears

Originally published on Thu August 9, 2012 3:54 pm

A drop in natural gas prices is hurting balance sheets across the petroleum industry. The second-largest natural gas producer in the United States — Oklahoma City-based Chesapeake Energy — has been hit especially hard.

After 23 consecutive years of touting its increasing natural gas production, Chesapeake CEO Aubrey McClendon told investors during a conference call Tuesday that the company projects its gas output will drop about 7 percent in 2013.

Chesapeake has been a leading cheerleader for the natural gas drilling booms taking place across the country. But prices have dropped to about $3 per 1,000 cubic feet (1,000 cubic feet of natural gas will supply the average U.S. home for about four days). That price is less than a third of what Chesapeake and other companies were selling natural gas for in 2008.

"They're, in some ways, a victim of their own success," says Ken Medlock, the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at Rice University.

Medlock says a warmer-than-expected winter chilled demand. That, combined with increasing supply, sent prices tumbling.

Gas production is up because of controversial technologies like hydraulic fracturing. Fracking, as it's better known, has made it possible to extract gas trapped in tight shale formations deep underground. But there's concern about fracking's effect on the environment.

Some in the entertainment industry have signed on as fracking opponents. Last month on Late Night with Jimmy Fallon, Yoko Ono held a globe labeled "Mother Earth" while her son Sean Lennon sang "Please don't frack my mother."

A Shareholder Backlash

Creative activism is just one of the challenges Chesapeake Energy faces. In May, a shareholder backlash prompted the company's board of directors to strip Aubrey McClendon of his chairmanship, though he remains CEO.

In June, the company said the Securities and Exchange Commission launched an investigation into a compensation program for McClendon, called the Founder Well Participation Program. It gave McClendon a stake in wells the company drilled.

McClendon and the company agreed to end the program early after much criticism. Questions were raised because McClendon borrowed money against his stakes in the wells to pay for drilling costs.

More recently, there have been questions about whether Chesapeake colluded with another gas company to suppress how much it paid for land leases in Michigan.

After years of fast growth, Chesapeake is making changes.

"By being so aggressive and really pushing an aggressive acquisition and drilling program, they've had to sort of reach outside themselves a little bit and seek some capital infusion," says Medlock, at Rice University.

A Shift In Business

Chesapeake is selling assets, including a pipeline division for nearly $600 million. And now the company says it will drill more for oil and other petroleum products that can bring in extra cash.

But Chesapeake likely will always be primarily a natural gas company. And McClendon says when prices rebound, his company will be prepared to benefit.

"We think a multiyear up-cycle is now under way," McClendon told investors Tuesday, "The die has been cast, the chess pieces on the table have been played, and now it's just a matter of physics and time for them to play out."

As Chesapeake and other companies have cut back on drilling, prices have started rising in recent weeks. And if this winter is a cold one, that could help Chesapeake and other natural gas companies boost their profits.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

STEVE INSKEEP, HOST:

Let's talk now about natural gas, which is big business for a company called Chesapeake Energy. It's based in Oklahoma City and Chesapeake is the second largest natural gas producer in the country. But the company has faced a series of problems this year, including investigations and questions about its finances.

On top of that, NPR's Jeff Brady reports natural gas prices have dropped dramatically.

JEFF BRADY, BYLINE: After 23 consecutive years of touting its increasing natural gas production, Chesapeake Energy CEO Aubrey McClendon said this during a conference call with investors yesterday:

AUBREY MCCLENDON: I hope you noticed that we are now projecting a decline in Chesapeake's gas production of approximately 7 percent in 2013.

BRADY: This is a big change for Chesapeake, which has been at the leading edge of natural gas drilling booms across the country. But prices have dropped to about three dollars a thousand cubic feet. That's two-thirds less than natural gas was selling for three years ago. Such a steep decline has cut into Chesapeake's profits.

KEN MEDLOCK: It's probably a fair thing to say that they're, in some ways, a victim of their own success.

BRADY: Ken Medlock is an energy economist at Rice University. He says last winter, demand was down, thanks to warmer-than-expected weather. At the same time, supply is growing, so over the past year prices tumbled. Gas production is up because of controversial technologies like hydraulic fracturing.

Fracking - as its better known - has made it possible to extract gas from deep underground. But there's concern about fracking's effect on the environment. There are now some big names signed on as fracking opponents.

Last month on "Late Night with Jimmy Fallon," Yoko Ono held a big Mother Earth globe while her son Sean Lennon sang.

(SOUNDBITE OF TV SHOW, "LATE NIGHT WITH JIMMY FALLON")

SEAN LENNON: (Singing) So, please don't frack my mother.

YOKO ONO: (Singing) Don't frack me. Don't frack me.

LENNON: (Singing) Don't frack my...

BRADY: Creative activism is just one of the challenges Chesapeake Energy faces. The others are much less musical.

In May, a shareholder backlash prompted Chesapeake's board of directors to strip Aubrey McClendon of his chairmanship, though he remains CEO. In June the company said the Securities and Exchange Commission was investigating a compensation program for McClendon. And more recently, there were questions about whether Chesapeake colluded with another company to suppress land lease rates in Michigan.

After years of fast growth, Chesapeake is making changes, says Ken Medlock at Rice University.

MEDLOCK: By being so aggressive and really pushing an aggressive acquisition and drilling program they've had to sort of reach outside themselves a little bit and seek some capital infusion.

BRADY: The company is selling assets, including a pipeline division for nearly 600 million dollars. And Chesapeake says it will drill more for oil and other petroleum products that can bring in extra cash. But Chesapeake Energy likely will always be primarily a natural gas company.

CEO Aubrey McClendon predicts better days ahead.

MCCLENDON: This has been a four-year down cycle and a lot of headwinds the last four years, but we think a multi-year up-cycle is now underway.

BRADY: Already prices have started rising in recent weeks. McClendon says his company is set up to profit if that trend continues.

Jeff Brady, NPR News. Transcript provided by NPR, Copyright National Public Radio.