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Chesapeake Energy continues to grind down

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It was another tough week for Chesapeake Energy Corporation (CHK), once the darling of the Pennsylvania Marcellus shale. On Wednesday it posted an unexpected 2013 loss of $116 million which came a day after the company’s announcement to sell off its core oilfield services group. Last week Pennsylvania State Attorney General Kathleen Kane confirmed her office has put together a working group to look into allegations of fraud against Chesapeake Energy who has been one of Pennsylvania’s biggest natural gas driller. Despite all the tough news, Chesapeake’s CEO Doug Lawler remained remarkably upbeat stating, "2013 was a foundational year in which we focused on optimizing our business processes, implementing a disciplined capital budget, decreasing per unit cash costs, selling non core assets and reducing liabilities.” Shares of the company have continued to decline, today at $25.90 down from a 52 week high of $29.06 in November 2013.

Continued charges to end leasing rights property obligations in Texas along with charges for terminations and layoffs of Chesapeake employees and ending numerous drilling rig leases, among other major cost issues, moved the company into the red. Average daily production output was just 2% over prior year same quarter. The company had to sell its natural gas production at an average price of a $1.90 per thousand cubic feet due in part to its prior volumetric production commitments. In order to raise cash starting back in 2009 the company entered into a series of agreements to sell its then future natural gas production at agreed to prices going forward.

With the price of natural gas going to a low of $1.72 per million BTU in April 2012, Chesapeake now finds itself having to sell its production below the current market price rate. Analysts had been expecting the company to realize significantly higher prices for its production for 2013.

Since 2012 the company has sold off nearly $15 billion of oil and natural gas field, pipelines and partnerships while terminating more than one thousand employees. This week the company announced it will sell or spin off its core oilfield services group to raise more cash to pay down continued debt. The oilfield services group had 2013 revenues of approximately $2.2 billion, and its service offerings include drilling, hydraulic fracturing, oilfield rentals, rig relocation, and fluid handling and disposal, all key operating processes in hydraulic fracking. It is clearly a core and critical asset to the company.

A remarkably upbeat CEO Lawler said, “COS (Chesapeake Oilfield Services) is an outstanding business with a talented management team that we believe will offer Chesapeake and its shareholders enhanced return opportunities as a stand-alone company.”

This morning the company announced it had signed agreements to sell midstream compression assets for a combined $520 million. The realities are Chesapeake Energy is selling off its asset base in virtually every part of its company business model leaving industry observers and analysts to wonder if the company has not drilled itself into financial exhaustion.

In addition to an ongoing Department of Justice and SEC investigations into the company, it’s yet again facing allegations it has cheated Pennsylvania leaseholders out of royalty payments. In 2013, the company agreed to settle a class action lawsuit regarding contested royalty payments but the deal is yet to be approved by a federal judge. Several weeks ago Governor Corbett, recipient of large amounts of oil and gas industry political contributions in his 2010 run for governor, and state senator Gene Yaw (R- Bradford) asked the state Attorney General to look into allegations of fraud against the company, over its royalty payments.

First Deputy Attorney General Adrian King stated, “We’re looking at it very closely.” “If there’s fraud we’ll take appropriate action, but it’s a little too early to say,” “At an appropriate point we’ll meet with the Marcellus Shale Coalition and Chesapeake Energy.”

The Marcellus Shale Coalition is the shale gas industry’s Pennsylvania based front group to aggressively promote shale gas development in the state. It has been powerful beacon of all good things shale gas while consistently downplaying any associated financial or environmental risks to Pennsylvania landowners. It was founded back in 2007 and largely funded by Chesapeake Energy under its former CEO Aubrey McClendon.

First Deputy Attorney General King did not state why it would be necessary for the state to meet with the industry front group given the Coalition is not legally involved in the royalty payment issues specific to Chesapeake.

Chesapeake Energy has repeatedly refused to comment on the royalty allegations. CEO Lawler did reply to Governor Corbett’s letter which demanded to know what is going on with royalty payments within the state. Lawler replied in writing, “We take your stated concerns seriously,” “Chesapeake is aware of questions regarding royalty payments in Pennsylvania, and we are working diligently to respond to these inquires.”

To learn more about Chesapeake Energy, go to: http://www.chk.com

Disclosure: The writer does not hold any U.S. securities in any oil or gas industry drilling company. He is not a member of any environmental or anti-fracking group and is not being paid by or has financial arrangements with any of the entities or people listed in this article.

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