Chesapeake Energy, Rolling Stone Magazine, Shale Gas Scams And Bubbles

| About: Chesapeake Energy (CHK)

Bubble, bubble, bubble. Everyone loves a good yarn about a bubble.

There was a bubble. And a housing bubble. Now a global debt bubble, and perhaps a gold bubble.

Do you know what is even better than a story about a bubble? A story about a bubble that involves the evil oil industry.

And do you know what would make the story even better? How about writing a story about a bubble that involves the oil industry AND also involves horizontal fracking.

The Rolling Stone recently did just that with an article that has a title you won't even believe…."The Big Fracking Bubble - The Scam Behind the Gas Boom.

Wow, at least the title isn't intended to stir up some controversy!

The article focuses on a company I know pretty well (Chesapeake Energy (NYSE:CHK)) and its CEO Aubrey McClendon. And not surprisingly the article paints a negative picture of Chesapeake, McClendon and the entire industry at every turn.

I read the article a few times, and what I'm left confused about is at what point does the author get to the part about the bubble and the scam?

I see the part about the environmental concerns over fracturing. I got the part about the flamboyant lifestyle of CEO McClendon. But I can't figure out where the author demonstrates a bubble or a scam.

The only part that talks about a bubble is this:

But McClendon's worst enemy may not be environmentalists or coal companies, but his own recklessness. He played a leading role in creating the fracking bubble by hyping the promise of endless natural gas and sweet-talking Wall Street into funding a massive land grab. If the bubble bursts, Chesapeake's stockholders won't be the only ones who pay the price - the shock waves will be felt throughout the economy, from homeowners who rely on natural gas for heat to manufacturers who were betting on it to power their new factories. Thanks to McClendon's gambles, Chesapeake is struggling to cover $10 billion in long-term debt. In recent weeks, the company has announced it will sell off more land and shut down some production. McClendon also hopes to increase demand and boost gas prices by promoting cars and power plants that run on natural gas, and by cutting deals to export gas to Europe and Asia, where prices are five times higher than in the U.S.

The Rolling Stone author isn't making any sense. At the start of that paragraph is the talk about a fracking bubble based on hype. Then at the end of the paragraph the author talks about Chesapeake trying to raise demand for natural gas and that Chespeake is shutting down production.

Chesapeake is trying to increase demand and is curtailing production because there is TOO MUCH natural gas being produced from shale. McClendon hasn't over-hyped the promise of endless natural gas, he has helped create a flood of natural gas that has killed the price of the commodity. He out-did himself. He under-hyped how prolific shale gas production would be. The worry of the entire industry isn't whether there is a bubble of natural gas production that is about to collapse. The worry is that there is going to be too much production for too long.

Shale gas production is collapsing. The reality is that shale gas wells keep getting better every year. The wells aren't underperforming expectations, they are overperforming.

That is why more than three years after the price of natural gas collapsed we still have a surplus of the stuff.

For its part Chesapeake replied to the Rolling Stone article and included these comments:

Chesapeake finding itself in a dire predicament won't be because of unsustainable natural gas production. It will be because the price of natural gas isn't going to recover because of the unrelenting shale gas production that has killed the commodity price. That is exactly the opposite.

I personally own Chesapeake because the company is rapidly converting to oil and liquids production and away from much less economic natural gas. At some point I hope natural gas drilling slows down enough to get prices back up to levels where drillers can at least make a little money. Concern over the shale gas production bubble popping is the opposite of what I'm worried about.

If the Rolling Stone wanted to write a controversial article that at least made some sense, it should have dropped the bubble talk and focused only on the environmental side of the hydraulic fracturing process.

Disclosure: I am long CHK.