Last Friday, Dec. 4, PennLive.com published a story titled “Severance Tax ‘100 percent guaranteed’ to be in next PA budget, Wolf policy secretary says”.
I have a prediction that Governor Wolf and his policy secretary, John Hanger, might find interesting.
I consider myself to be a fairly qualified and experienced investor – I regularly go on Yahoo Finance and check out financials and news of public companies.
Here is my prediction: I predict that Chesapeake Energy (NYSE Symbol – CHK) will file for bankruptcy protection within the next 12 months.
Here is my reasoning:
#1 Natural gas prices are at historic lows – natural gas companies are not able to cover their fixed costs and cover debt payments at the current price – to simplify this – if gas is selling for $2 per gallon and your fixed costs are $3 per gallon the company is losing $1 per gallon, and as a result the company will burn through massive amounts of cash quickly – in business when you run out of cash – you have a HUGE problem.
I researched Chesapeake’s most recent financials – just in the quarter ending September 30, 2015 – their third quarter revenue was $2.893 billion – after paying ALL expenses they lost $4.695 billion – that means just in the third quarter alone Chesapeake would have burned through $1,802 billion of cash. They cannot continue at this rate. Chesapeake will run out of cash.
#2 Natural gas pricing is not going up for quite some time because the natural gas supply is far GREATER than demand – in addition, there are almost 1100 gas wells in PA that have been drilled, and are capped, and are not producing gas. Almost all of the 1100 wells do not have pipe lines in place to carry the gas to the main transmission line so there is still a lot of infrastructure that needs to be installed. This infrastructure costs money. Gas companies do not have the cash to install these pipe lines at the current low natural gas prices.
#3 Another large issue is that oil and natural gas companies routinely hedge their prices to protect for a price collapse – this is a type of insurance – typically these hedges only go out for two years. In simple terms, many of the natural gas companies had hedges in place when prices were a lot higher that paid them double or triple the current market rate for their gas supply. When prices are as low as they currently are, hedging is not an option.
#4 Chesapeake Energy had a class action lawsuit filed against them last week by Pennsylvania landowners because they are deducting from royalty payments the cost to transport the gas from the wellhead to the main transmission line.
Many landowners receive zero royalty payments after Chesapeake deducts the transport costs, and some land owners have received invoices to back bill for prior years transportation costs.
The class action lawsuit will be settled for cash that Chesapeake is running out of.
#5 If you are familiar with stock market investing there is term called margin. This term means that you can buy a stock for cash and the brokerage house will lend you money to buy more stock – this is called buying stock on margin. SEC rules do not allow a stock to be purchased on margin if it is under $5 per share. Last Thursday at the close of the New York Stock Exchange, Chesapeake stock closed under $5 per share. This means that any investor who used margin or borrowed money to purchase Chesapeake stock had a margin call which is a demand to sell the stock immediately so the loan is repaid. When a stock drops under $5 per share large investors flee. Investors will shy away from Chesapeake because their future does not look good.
This morning as I am writing this ( 10:10 a.m. Dec. 7) Chesapeake stock is trading at $4.17 per share, down almost $.40 since the open of the stock market.
Chesapeake is one of several companies in Pennsylvania that are choking financially because natural gas prices are so low – there may very well be more companies than just Chesapeake Energy that will be forced to file for bankruptcy protection.
So what is my point? It’s this: Governor Wolf ran his campaign for Governor telling everyone that he was going to get $1 billion dollars in severance taxes from the natural gas companies. With current natural gas prices a severance tax would yield $100 million dollars at best.
There is currently an impact fee – tax in place – so the severance tax would cost the gas companies more money, which they do not have.
The reality is that the gas companies will pass any taxes on to consumers – which means YOUR gas bill will go up if there is a severance tax imposed.
Don’t believe me?
Read York Daily Record’s latest article, “Columbia Gas Gets Smaller Rate Hike Than Sought” which talks about the gas company passing on the costs.
And by the way, this morning the price for a barrel of oil dropped under $40 – it is currently at $38.71 at 10:20 a.m..
Oil companies are facing the same challenges as the natural gas industry because the price of oil is at historic lows.