[...drilling companies (are) hunting for capital to fund continued
drilling — and they are increasingly turning to so-called private
equity — a category covering both private investors like Warren
Buffett and asset managers like pension funds. ]
[[link removed]]

THE FRACKING INDUSTRY IS IN DEBT. RETIREMENT FUNDS ARE HELPING BAIL
IT OUT.  
[[link removed]]


 

Sharon Kelly
July 31, 2019
DeSmogBlog
[[link removed]]


*
[[link removed].]
*
[[link removed]]
*
* [[link removed]]

_ ...drilling companies (are) hunting for capital to fund continued
drilling — and they are increasingly turning to so-called private
equity — a category covering both private investors like Warren
Buffett and asset managers like pension funds. _

Retirement. , Monica Silvestre from Pexels

 

A year ago, Chesapeake Energy, at one time the nation’s largest
natural gas producer, announced it was selling off
[[link removed]]
its Ohio Utica shale drilling rights in a $2 billion deal with a
little-known private company based in Houston, Texas, Encino
Acquisition Partners.

For Chesapeake, the deal offered a way to pay off
[[link removed]]
some of its debts, incurred as its former CEO, “Shale King
[[link removed]]”
Aubrey McClendon, led Chesapeake on a disastrous shale drilling spree.
Shares of Chesapeake Energy, which in the early days of the
fracking boom traded in the $20 to $30 a share range, are now valued
[[link removed]]
at a little more than $1.50.

Encino has marketed itself
[[link removed]]
as a stable source of long-term returns (something the industry
overall has struggled so far to create), attracting the managers of
one of the world's largest pension funds to drill and frack the land
that Chesapeake sold off to repay its enormous debts from
fracking nationwide.

'A Unique Model' for Shale Drillers

Chesapeake, of course, is not alone in discovering that shale drilling
can be financially disastrous
[[link removed]]
for investors. In 2018, the top 29 shale producers spent $6.69 billion
[[link removed]]
more than they earned from operations, an April report by Reuters
concluded — a spending record racked up two years after investors
began pushing shale drillers to start turning a profit. In December
2017, the Wall Street Journal found that shale producers had spent
$280 billion more
[[link removed]]
than the oil and gas they sold was worth between 2007 and 2017, the
first 10 years of the shale drilling rush.

“We lost the growth investors,” Pioneer Natural Resources CEO
Scott Sheffield recently told
[[link removed]]
the Journal. “Now we’ve got to attract a whole other
set of investors.”

Encino, which bought up Chesapeake Energy’s 900,000 acres of
drilling rights in Ohio’s Utica shale in that $2 billion deal, may
have found its “other” investors: the Canada Pension Plan
Investment Board [[link removed]] (CPPIB), which manages
retirement funds on behalf of the Canada Pension Plan.

“We’re not your typical private equity company in that the Canada
pension plan is I think the third largest pension plan in the
world,” Ray Walker, Encino’s chief operating officer, told
attendees at last month’s DUG East shale industry conference in
Pittsburgh. “They have a long-term view on capital and they don’t
expect their funds to start declining — in other words more people
[in Canada] are putting in today than will be taking out, and they
don’t expect that to flip til 2050-plus.”

“So, it’s a unique model and it’s something I had not ever run
across in the industry,” Walker, who served
[[link removed]] as chief operating
officer for the gas drilling company Range Resources until early
2018, added. “It’s what really attracted me to come out of
retirement, to do something different and a little bit more exciting
and a long-term — really long-term view.”

“Patient money,” responded moderator Richard Mason.

“Yeah,” Walker replied with a laugh.

“Who’d have ever thought, right?” said Mason.

Long-Term Investments as the Climate Changes

The Canada Pension Plan — often compared
[[link removed]]
to the U.S. Social Security system — is funded
[[link removed]]
by mandatory
[[link removed]]
contributions
[[link removed]]
from workers’ wages that generally begin at age 18 and end at age
65. The CPPIB invests
[[link removed]]
that money on behalf of the plan.

Last May, Mark Machin, the chief executive officer of the CPPIB,
pledged to start taking the risks associated with climate change
more seriously.

“We’re going to make a huge push on it this year,” he told
[[link removed]]
the Calgary Herald. “We want to do a much better job of being able
to understand the risks that we’re taking on in each investment and
the risks we have embedded in the portfolio, and make sure we’re
being paid for them.”

As the impacts of climate change are increasingly felt around the
globe, watchdog groups have pushed pension fund managers to keep in
mind the ways that climate change will impact the global economy in
the coming years
[[link removed]] and
decades
[[link removed]].

“Pension funds have legal obligations
[[link removed]]
related to their fiduciary duties, to consider long and medium-term
risks, such as those related to climate change that could have adverse
effects on their investments,” the Global Initiative for Economic,
Social, and Cultural Rights [[link removed]] wrote
in an April 17 report
[[link removed]].
“Such risks include physical impacts of climate change on pension
fund assets and investments, but also the increasingly evident risk of
stranded assets and the associated legal risks of failing to address
the climate-related risks.”

Other large pension funds have concluded that the oil and gas industry
carries too much economic risk to make for a sound long-term
investment — even without taking climate change into account. This
March, Norway’s $1 trillion Government Pension Fund Global
[[link removed]]
announced that it would be divesting from oil and gas exploration
firms, a move affecting $7.125 billion worth of its holdings.

“The objective is to reduce the vulnerability of our common wealth
to a permanent oil price decline,” Norway’s finance minister, Siv
Jensen, told The Guardian
[[link removed]]
as the move was announced.

Outside observers have specifically warned that pension plans that
invest in shale companies might wind up with regrets.

While the shale drilling industry’s financial instability may not be
so large as to pose an overall risk to the financial system, “I
think there's risk to pension plans that are pouring their money into
private equity firms, which in turn are pouring billions into shale
companies,” Bethany McLean, author of the book _Saudi America: The
Truth about Fracking and How It's Changing the World,_ told E&E News
[[link removed]]
in a September 2018 interview. McLean is also widely credited as the
first financial reporter to take a critical look
[[link removed]]
at energy company Enron before its collapse.

In addition to the long-term risks that all fossil fuel companies face
from the drive to keep oil, coal, and gas in the ground and prevent
catastrophic climate change, shale drilling companies face some unique
long-term risks.

Many shale drillers told investors that they plan to drill multiple
wells — in some cases 20 or more
[[link removed]]
wells — from the same well-pad. But the industry has discovered
[[link removed]]
that those later wells, called “child” wells, often perform worse
than the first well drilled, called a “parent” well.

“It’s something we’re all trying to synthesize,” Encino’s
Walker said in Pittsburgh as he discussed parent-child well
interference. “There’s still a whole lot of learning curve to go
through. But I think the one thing that everybody is noticing,
probably even more so in West Texas than up here, is that parent-child
relationship is playing a huge role in the recoverable reserves. In
other words, the second, third, fourth well are not anywhere near as
good as the first well.”

A Gamble on Shale

The stock markets and banks have become increasing unfriendly places
for shale drilling companies as the oil and gas industry has
under-performed compared to other parts of the economy. This has left
drilling companies hunting for capital to fund continued drilling —
and they are increasingly turning to so-called private equity — a
category covering both private investors like Warren Buffett and asset
managers like pension funds.

Drilling companies plan to source 40 percent of their capital for 2019
from private equity funds, according to a recent survey
[[link removed]]
by Haynes and Boone, compared to 26 percent from selling the oil and
gas they produce, 21 percent borrowed from banks, and 12 percent in
debt and equity from capital markets like Wall Street.

Privately held companies like Encino are more opaque
[[link removed]]
than publicly traded oil and gas companies because they generally are
not required
[[link removed]] to make
their financial information public. That means there’s little
publicly available information about how private shale drilling
companies have performed over the past decade. And every shale
drilling company has unique financial prospects, based on a broad
array of factors that include the amount it spent to acquire drilling
rights, its drilling and fracking costs, and the amount of oil, gas,
and natural gas liquids it can tap.

Encino did not respond to questions sent by DeSmog. “Our assets
generate strong cash flow, we have modest debt, and we support our
development activities with a robust commodity hedging program,” the
company says [[link removed]] on its website.

Canada’s pension fund praised Encino’s acquisition of Chesapeake
Energy’s acreage in Ohio when that deal was announced. “We are
pleased to support EAP’s [Encino Acquisition Partners'] acquisition
of these highly attractive Utica shale assets, which provides CPPIB
with meaningful exposure to a leading North American natural gas play
and aligns with the growing focus on energy transition,” said
[[link removed]] Avik
Dey, managing director and head of energy and resources at the CPPIB.

Others saw the deal as carrying a significant degree of risk.
Moody’s Investor Services rated
[[link removed]]
debt associated with Encino’s Utica deal at B2. “A B2 rating is
deep into junk status and means there's a very significant chance
you'll end up in default,” Axios explains
[[link removed]].
Moody’s rated the overall probability of default one notch higher at
B1.

For its part, Encino predicts that it can do better in the Utica than
Chesapeake Energy could — not just in terms of individual well
performance
[[link removed]],
but also in avoiding the boom-bust cycle for which the oil and gas
industry is notorious.

“All of that is part of a longer-term strategy to run this as a
normal business that needs to be profitable, less volatile, and
therefore better for its shareholders, its employees, and the
community,” Encino CEO Hardy Murchison told
[[link removed]]
an Ohio newspaper after a talk at Kent State University in March.

Chief operating officer Walker sounded a similar note at the DUG East
conference this June.

“Pretty excited about what we’re seeing, the economics are very
favorable,” Walker said at the industry conference. “So,
Chesapeake did a great job of setting this up, but we’ve got a lot
of running room going forward.”

*
[[link removed].]
*
[[link removed]]
*
* [[link removed]]

 

 

 

INTERPRET THE WORLD AND CHANGE IT

 

 

Submit via web [[link removed]]
Submit via email
Frequently asked questions [[link removed]]
Manage subscription [[link removed]]
Visit xxxxxx.org [[link removed]]

Twitter [[link removed]]

Facebook [[link removed]]

 




[link removed]

To unsubscribe, click the following link:
[link removed]