A drop in natural gas prices is hurting balance sheets across the petroleum industry. The second-largest natural gas producer in the United States — Oklahoma City-based Chesapeake Energy — has been hit especially hard.
After 23 consecutive years of touting its increasing natural gas production, Chesapeake CEO Aubrey McClendon told investors during a conference call Tuesday that the company projects its gas output will drop about 7 percent in 2013.
Chesapeake has been a leading cheerleader for the natural gas drilling booms taking place across the country. But prices have dropped to about $3 per 1,000 cubic feet (1,000 cubic feet of natural gas will supply the average U.S. home for about four days). That price is less than a third of what Chesapeake and other companies were selling natural gas for in 2008.
"They're, in some ways, a victim of their own success," says Ken Medlock, the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at Rice University.
Medlock says a warmer-than-expected winter chilled demand. That, combined with increasing supply, sent prices tumbling.
Gas production is up because of controversial technologies like hydraulic fracturing. Fracking, as it's better known, has made it possible to extract gas trapped in tight shale formations deep underground. But there's concern about fracking's effect on the environment.
Some in the entertainment industry have signed on as fracking opponents. Last month on Late Night with Jimmy Fallon, Yoko Ono held a globe labeled "Mother Earth" while her son Sean Lennon sang "Please don't frack my mother."
A Shareholder Backlash
Creative activism is just one of the challenges Chesapeake Energy faces. In May, a shareholder backlash prompted the company's board of directors to strip Aubrey McClendon of his chairmanship, though he remains CEO.
In June, the company said the Securities and Exchange Commission launched an investigation into a compensation program for McClendon, called the Founder Well Participation Program. It gave McClendon a stake in wells the company drilled.
McClendon and the company agreed to end the program early after much criticism. Questions were raised because McClendon borrowed money against his stakes in the wells to pay for drilling costs.
More recently, there have been questions about whether Chesapeake colluded with another gas company to suppress how much it paid for land leases in Michigan.
After years of fast growth, Chesapeake is making changes.
"By being so aggressive and really pushing an aggressive acquisition and drilling program, they've had to sort of reach outside themselves a little bit and seek some capital infusion," says Medlock, at Rice University.
A Shift In Business
Chesapeake is selling assets, including a pipeline division for nearly $600 million. And now the company says it will drill more for oil and other petroleum products that can bring in extra cash.
But Chesapeake likely will always be primarily a natural gas company. And McClendon says when prices rebound, his company will be prepared to benefit.
"We think a multiyear up-cycle is now under way," McClendon told investors Tuesday, "The die has been cast, the chess pieces on the table have been played, and now it's just a matter of physics and time for them to play out."
As Chesapeake and other companies have cut back on drilling, prices have started rising in recent weeks. And if this winter is a cold one, that could help Chesapeake and other natural gas companies boost their profits.