Chesapeake's Aubrey McClendon Makes A Few Good Points On Natural Gas Fracturing

I swear I’m a pretty liberal fellow. I’m Canadian so I don’t get to vote in the American elections, but I’m pretty sure I wouldn’t be a Republican. So I’m not pro-business and pro-oil companies no matter what.

And I’m not even a fan of Chesapeake (CHK) CEO Aubrey McClendon. In fact his presence has kept me from making Chesapeake a larger portion of my investment portfolio.

But I have to say that I think the people who are so vehemently opposed to the fracturing process involved in producing shale gas need to try to set their emotions aside and objectively think about the issue.

You may have seen the videos of people lighting their tap water on fire because it is contaminated with natural gas. Not nice obviously. But what you have to understand is that the fracturing process has nothing to do with this. This gas migration is caused by the well casing, which could just as easily have been a problem in a conventional gas well.

Stopping the fracturing process doesn’t solve the issue. To make sure the issue did not happen again you would need to ban natural gas production period. Fracturing has nothing to do with it.

I would also suggest that some perspective is needed as to the frequency of this water contamination. There have been millions of natural gas wells - both conventional and shale gas - drilled in the United States over the past fifty years. How many water contamination occurrences have there been ? A handful out of millions ?

We would be much better off banning the use of the automobile, which results in people getting killed every day at a more frequent rate of occurrence with a much more severe consequence.

Chesapeake CEO Aubrey McClendon presented this speech at the Marcellus Shale Insights Conference. Below are facts that he cited, which are helpful in understanding how dangerous hydraulic fracturing is:

FACT #1:

The company that I lead, Chesapeake Energy, is the most active driller in the Marcellus and the most active driller in the United States, by a factor of more than two. We employ over 12,000 Americans directly and almost 100,000 indirectly. We have been horizontally drilling and hydraulically fracturing wells since I co-founded the company in 1989. Our company has performed this process 16,000 times – the most of any company in the world. And we are getting better at it with every well. Not only are we getting better economically, we’re getting better in terms of protective barriers, water management, wastewater recycling and air quality improvement.

FACT #2:

The natural gas exploration and production industry has an excellent track record of safety and environmental integrity. Over 1.2 million wells have been fracked by our industry since 1949. Against that track record of over 1.2 million frac jobs performed by the industry, our critics can only find one or two instances of alleged groundwater pollution. And having examined those few instances ourselves, we don't agree that fracking had anything to do with the alleged groundwater contamination.

Even in the limited gas migration incidents in Pennsylvania in the past three years that have drawn so much media attention, only a couple of dozen homeowners claim to have been affected – and these incidents were not related to fracking. They were related to issues of casing design. And more importantly, the industry worked closely with Pennsylvania DEP officials to implement an updated and customized casing system that has been effective in preventing new cases of gas migration. Problem identified. Problem solved. That’s how we do it in the natural gas industry.

FACT #3:

This wellhead you are looking at on screen is a $30 million factory. It’s a factory that never closes, and will employ at least a dozen people for at least the next 50 years. This factory produces federal, state and local tax revenue. It pays landowners leasing bonuses and production royalties. It supports local school districts and non-profits. It reduces the price of just about everything we buy and gives American entrepreneurs in both rural and urban communities a strong incentive to stay and build their business in the Marcellus.

According to a newly-released study of Marcellus natural gas development by Penn State University, the shale gas revolution is the biggest opportunity to hit Pennsylvania since the steel industry more than 100 years ago. And as my friend John Surma of U.S. Steel will tell you in a few minutes, we’re helping to strengthen the steel industry and other basic industries as well.

FACT#4:

In the City of Fort Worth, in the Barnett shale, we are producing natural gas in a highly urban environment. We’re fracking within 600 feet of schools, churches and homes. To date, more than 15,000 wells have been fracked in the Barnett, over 2,500 of them are Chesapeake operated wells. If our critics had their "facts" right, I’m guessing the City of Fort Worth – a metro area almost half the size of Philadelphia – would be a massive Superfund site or a ghost town. In reality, there are no cases of methane migration or groundwater contamination in Fort Worth, after 15,000 frack jobs – go check it out for yourself.

I don’t know. Maybe I’m biased and just don’t know it.

But this anti-fracturing movement really doesn’t seem to be based on rationale thought. I think it is more a case of anything that an oil and gas company does will be opposed by certain parties. Throw in a sensational water burning videos and some folks just can’t help but get emotional about an issue before they even think about it.

Facts are facts. Well design causes the water contamination, not fracturing. And the incidence of water contamination is miniscule relative to the number of wells drilled. We should be more worried about the fire risk from cigarettes than any problems from fracturing natural gas wells. So here are the investment implications from the facts that support fracturing being a process that is here to stay (it has been with us for 50 years with no problems).

• The stock market has not caught on to the difference between a resource play and conventional oil assets. A company like Chesapeake with resource plays are manufacturing companies. There is no exploration risk, the company has the oil in the ground and the technology to get it out. But the stock market is not assigning any value to this resource play land until it actually starts producing.
• So this means that you can buy companies like Chesapeake, or EOG Resources (EOG) or Rosetta Resources (ROSE) at valuations that do not reflect the value of this land or the near certain production growth these companies have ahead of them.

There is an unconventional revolution going on in this industry. The companies in the industry know it. That is why undeveloped land is being bought through joint ventures for billions of dollars. The stock market hasn't figured out this revolution yet, and that provides our opportunity.

Disclosure: I am long CHK.