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Nat Gas Ventures Not Moving Stocks

Another year, another big deal in the natural gas space. Chesapeake (CHK) has announced a $2.3 billion joint venture sale of shale assets, this time in the Utica, to another foreign multinational oil company, this time French giant Total (TOT).

These deals are becoming more and more common, as the big land grab for shale acreage of the last two years changes into a full-scale effort of major natural gas E+P companies looking to monetize those purchases.

As if not to be outdone, Devon (DVN) on Tuesday announced a similar joint venture with Chinese refining giant Sinopec (SNP) for $2.2B for five shale assets, most dealing with shale oil and not shale natural gas.

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I speak blithely about these deals because they have become almost commonplace, and the progression is now so predictable, following three basic stages:

1. Oil and gas E+P company (like Devon or Chesapeake) buys assets but needs to issue debt in order to do so.

2. Signed leases mandate immediate development, causing mania in the newest drilling areas with all the concurrent jobs flurry and environmental blowback.

3. E+P company can no longer develop without further debt, and instead of reaching for junk bond status, reaches for well-heeled mega-cap integrated oil companies for financing, selling off minority percentages of the asset fields in the process.

I also speak blithely because these joint ventures, as impressive as they have been, have done little to move the underlying stocks. Most of these natural gas E+P companies have massively underperformed the markets, even in the energy sector in 2011, and that has been much more a function of the horrible natural gas market of the year just ended -- now trading for under $3 per mcf.

And it is not the deep interest of foreign investors in U.S. shale assets that have turned those stocks like Chesapeake and Devon around in 2011, nor is it likely to turn those stocks around in 2012. It will be the final acknowledgement of the U.S. government and the capital markets that the United States could be energy independent in less than five years if we could generate a national energy policy that embraces natural gas and shale assets in oil.

That is what's needed, and the current political environment suggests that energy might be a very big issue in the upcoming election. While you wouldn't expect any resolution during an election cycle, what you might hope to get is a little more intelligent conversation about a consolidated energy policy - something we have needed for the last 30 years, but never more so than today.

And I'd wait for that conversation to start to embrace shale before jumping back and investing into this space. While these names have underperformed in 2011, there is no reason to get caught in the "value trap" they present now without proving something first. When the conversion turns to natural gas and shale oil, you'll see it coming and have plenty of time to get in. Now's not that time.

(Also read Will Supply Continue to Overpower Demand for Natural Gas in 2012?)

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