Wednesday, September 2, 2009

Big Gas Companies Looking Forward to The Upcoming Collapse of Junior Players?

Here is a gem from Chesapeake Energy Corp. latest Conference call with Analysts, on August 4 2009. You can read the entire transcript here.

When asked why they are not reducing production, they company answered that "we didn't see any reason to take it on the chin for the team". In other words, they continue to sell whatever gas they can, while they can. The upcoming problem with storage overflow is mentioned repatedly throughout the call. At the time they thought that the first local storages to go would be Canadian and Rockies. We know the Canadian is already full.

So Chesapeake is still pumping lots of gas, regardless of what can possibly happen to the other players in the industry. These big companies will survive. They will also pick the pieces from the bankrupt junior companies. Maybe these big companies are actually looking forward to the upcoming "consolidation".

"Michael Hall - Stifel Nicolaus

Didn't seem like, if I recall, prices are lower during the timeframe from when you shut in versus when you turned production back on.

Aubrey McClendon

Yes, I think a couple things. The first thing is that basis actually improved pretty dramatically and so actually well-head prices did improve.

Michael Hall - Stifel Nicolaus


Aubrey McClendon

So by holding some production off, we certainly did benefit by basis coming in. Of course, as Marc mentioned, the basis story is a really important one. We have had bad basis for the past two years or so. We have been long gas, industry has been long gas and short pipe. We're getting ready to move into a world where we going to be long pipe and short gas and so we have already seen basis differentials really, come together in the last few months.

I think the second thing is, given where storage is it was our analysis that we are going to be full up on storage by the end of the year. As we get closer to that, pipeline pressures are going to increase and that is going to cause involuntary curtailments. I think our view was that there was no reason for us to voluntarily curtail gas, when pretty soon, everybody is going to start involuntarily curtailing gas and so, we didn't see any reason to take it on the chin for the team, more than we did and instead, we will just let the system work, to spread the pain across the whole industry here over the next couple of months."

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