12/16/2019

Good morning,

I hope everyone had a good weekend. The Thunder lost a heartbreaker in Sacramento last week and then were thumped by the Jerami Grant led Denver Nuggets. OKC was playing its third game in four nights at Sacramento and still almost pulled off the unheard of sweep of winning at Portland, at Utah, and then at Sacramento in a span of four days. Golden State in its heyday never accomplished that and I refuse to go fact check that statement. The most important thing to happen in the NBA this week was the coming and going of December 15th though. Why? Because any player who signed a new contract this summer was not eligible to be included in a trade until December 15th. Trade season is officially open in the NBA now that Dec 15th has come and gone. Feel free to send me your best trade proposals from ESPN’s NBA Trade Machine. I accept all types of ridiculous ideas. I once fake traded snake during the 2016 NBA Playoffs for Giannis Antetokounmpo after snake delivered another bust of a game. Turns out, maybe I was onto something since he ended up going full Benedict Arnold on OKC anyways. My three favorite sports holidays are: the NBA Trade Deadline, first day of NBA free agency – which falls on July 1st traditionally which is also my birthday which made me think that was the NBA’s birthday gift to me every year, and the NBA Draft. All three should be national holidays. That and the first weekend of March Madness should be a national holiday. On to less holiday type things, CHK received a note from the NYSE, OPEC is no longer the almighty balancer of oil markets, Chevron issues a massive write-down, dairy farms are coming for shale producers, Aramco is worth a lot of money, and Harold Hamm starts to check out.

December 16, 2019:

CHK happenings from last week

• CHK receives a Dear John letter from the NYSE

o Or as Harry Dunne from Dumb and Dumber calls it, a John Deere letter. That movie always makes me laugh. I can really only quote about five movies and that is one of them and I am proud of it. Straight from CHK’s press release:

 Chesapeake Energy Corporation (NYSE:CHK) ("Chesapeake" or "the Company") announced that on December 10, 2019 it received written notice from the New York Stock Exchange ("NYSE") of its noncompliance with the standard set forth in Rule 802.01C of the NYSE Listed Company Manual that requires listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period.

o So the de-listing process has officially started but it could still be another 6+ months before anything actually happens. In that same release, CHK stated it plans to reach compliance through various means that include cutting CAPEX by 30% in 2020, reducing debt through capital market transactions and assets sales, and possibly executing a reverse stock split. The reverse stock split would require shareholder approval at the May 2020 Annual Meeting of Shareholders. That should be a highly interesting meeting. In the meantime, CHK will now be trading under the symbol “CHK.BC” as the “BC” means “below compliance.” Ouch.

Forget OPEC, ‘Murica controls the future of oil prices

• OPEC can have their fancy meetings where they discuss how to balance oil markets while they are in shiny hotels with hors d’oeuvres that are made with some type of fish that only lives in an aquarium that is filled with only water from voss bottles. America will keep trucking away with complex spreadsheets that keep showing how their companies need to cut oil production in order to not die while the stressed out workers drink questionable water from the “filtered” water in their company kitchens. OPEC announced two weeks ago that the cartel would be cutting production by another 500mbpd which would take the total cut up from 1.2mmbpd to 1.7mmbpd with Saudi Arabia taking on the brunt of the cuts. However, that might not be enough since the production cuts are basically going to match what was produced in October anyways so, those bbls were already out of the global oil supply picture. Oil prices spiked a bit anyways and WTI flirted with hitting $60/bbl which made all of America’s E&Ps jump up and down with excitement. There are still plenty of bears out there who believe that production from the U.S. in 2020 will cause oil prices to decline though. Most bears point to the number of drilled but uncompleted (DUC) wells that can be turned on pretty quickly as the reason for the depressing sentiment. This is still their belief despite the fact that the number of U.S. oil rigs has been in decline for pretty much the entirety of 2019 (see graph below). According to the Wall Street Journal, two forces will keep U.S. producers in check in 2020 – any potential decline in oil price because of too much U.S. production and/or financial pressures that are mounting on E&Ps from lenders and shareholders to, you know, actually spin off consistent free cash flow. Equity markets for E&Ps are pretty much barren and debt markets aren’t too far behind. E&Ps just do not have access to cash outside of obtaining it from operations. The EIA is forecasting 2020 U.S. oil production to increase by an average of 1mmbpd in 2020 when compared to 2019. However, the EIA is also forecasting that the exit rate from 2019 compared to 2020 will only increase by 300mbpd. This could cause a decent price bump for WTI in the second half of 2020.

Chevron writes down a Chesapeake

• Chevron is writing down some of its assets by more than $10B which is close to the entire enterprise value of Chesapeake. The majority of the write-down is tied to CVX’s Appalachia asset, an offshore project in the Gulf of Mexico called “Big Foot” (sweet name btw), and a major LNG export facility it is building in Canada. The reason for the write down is lower commodity prices that caused some of their assets to not be profitable anytime soon. This represents the largest write-down by an American E&P in years. CVX is not the only super major writing down assets though. Spain’s Repsol SA wrote down $5B in assets earlier in December, BP wrote down $2.6B in assets in October, and Exxon wrote down the value of its U.S. nat gas assets by $2.5B over the past few years. Analysts and industry execs believe more write downs will be on the way from fellow E&Ps, according to the Wall Street Journal. It was only 20ish years ago that the world was worried about running out of fossil fuels before there was a viable replacement. The shale boom has changed all of that to where there is likely to be an abundance of supply available for the next few decades. Several majors, and then companies like CHK, bought big and bought early in the shale boom only to be haunted by their own ability to produce oil and gas in a highly efficient way that caused commodity prices to decline significantly, and thus, caused the value of almost every major shale play to decline over the past decade. Victims of their own success.

Natural gas from shale production has competition from.. cattle? I’m Ron Burgundy?

• Move over E&Ps, dairy farms are about to own the natural gas supply world. Kinda. Dominion Energy decided to diversify its natural gas supply portfolio by partnering with a renewable energy producer and Dairy Farmers of America Inc. to extract natural gas from cow manure for a cool $200mm. “The arrangement calls for the utility to fund construction of organic-waste processing facilities called anaerobic digesters amid clusters of large dairy farms, connect the facilities to natural gas distribution pipelines and sell the gas,” according to the Wall Street Journal. A company called Vanguard Renewables will construct and operate the digesters. All in, sourcing nat gas from cows is more expensive then extracting it out of shale formations, but that isn’t stopping some utility companies from buying into the biogas game as it “is in high demand among consumers, businesses and local governments eager to lower their emissions and earn environmental plaudits,” also according to WSJ. Dominion serves 7.5mm customers in 18 states with electricity or natural gas. Eventually, Dominion expects the digester facilities to produce 1bcf of nat gas annually which is enough to power thousands of homes that the utility serves. Each digester needs manure from 20k – 30k cattle to be economical, according to Ryan Childress who is the director of gas business development at Dominion. Here is the fun fact for the year (via WSJ): “The methane from the manure of a typical cow is roughly equivalent to the annual emissions of a car that gets about 20 miles per gallon and is driven 12,000 miles.” The #buckets blog. Here for the facts you want, not the facts you need.

Aramco hits the $2T valuation mark in only its second trading day

• Aramco’s share price rose 8% to hit $10.30 last Thursday to arrive at Saudi Crown Prince Mohammed bin Salman’s treasured $2T valuation for the company. In just 48 hours, the mammoth company appreciated by $300B in value. For reference, Exxon’s entire market cap is $297B as of last Thursday. Aramco gained an entire Exxon in market cap in two days.

Harold Hamm demotes himself

• Legendary Oklahoma oilman Harold Hamm announced last week that he will be stepping down as CEO of Continental Resources and moving solely into the executive chairman role effective January 1, 2020. William Berry will become the CEO and Jack Stark will become the COO as well as maintaining his role as president. Mr. Hamm built Continental from the ground up and was on the forefront of the Bakken. His oil riches allowed him to write one of the most ridiculous checks ever seen by man when he wrote his ex-wife a check for almost $1B to go away. At the time, that was only 10% of his net worth.

How did CHK do this week?

• CHK stock price increased last week by ~1% (+$0.01/share). Stealing food. Christmas dinner will be interesting.

Thoughts of the week

• Elf on the Shelf is all fun and games until your three year old kid accidently touches the Elf and thinks he just committed a crime that will result in Santa never coming to see him again.

• Dogs that are not bigger than a cat should be considered to be some type of cat.

• Northpark Mall is the most confusing thing in OKC. It looks like a rundown building inside and out that rats would be scared to live in, but it is filled with really high end stores. I don’t get it.