12/23/2019

Good morning,

I hope everyone had a good weekend and have all the things for Christmas ready to go. Good luck to any of you who still have shopping left to do. The Thunder are on this thing called a “winning streak.” I am both severely disappointed and thoroughly thrilled. OKC had not one, but two massive comeback wins in a span of three days. They first came back against an underachieving Bulls team last Monday as they were down 26 at one point and ended up winning on a late Adams free throw that banked in because of how nervous he was. Then OKC decided that it likes that strategy so it went down by 24 to the Grizzlies two nights later, who have a bright future and maybe the heir to RUSS’s fearless playing style in Ja Morant, but then came back to win that game too. OKC then dominated the Suns on Friday night and welcomed back Paul George yesterday. PG13 didn’t have a long stay in OKC, but I do think he will be remembered fondly for his time here. He put together two spectacular seasons while in Thunder blue, choose to re-sign (kind of), and then demanded a trade but it worked out since he set up OKC for the next decade by forcing the Clippers to trade OKC 8 million draft picks. I was thoroughly glad to see the crowd cheer him when he was introduced before the game. Well done fans. Everyone else should be booed though. No mercy. Except RUSS. If anyone boos RUSS when he returns, then they can no longer live on planet earth. Those are the rules. CHK had quite a bit of success in its debt exchange, President Trump was impeached, nat gas production is starting to finally slow down in key areas, Exxon is celebrating its 10 year anniversary with XTO, and Devon says ‘its not me, its you, Barnett’ as it breaks up with the shale play.

December 23, 2019:

CHK happenings from last week

• CHK offers insecure unsecure debt holders security

o CHK reached out to its debt support group and offered them peace by offering to secure their debt with some good old fashioned assets. A couple years ago, CHK did some nice work to remove all of its secured debt and free up its assets from being tied to debt holders in case the company ran out of cash and did the bankruptcy thing. It also provided a lever to pull down the road to offer up secured debt again in case the company needed to go that route. Unfortunately, CHK had to go that route but it did so in a very opportunistic way. Some of CHK’s longer term debt was trading at ~60 cents on the dollar. The guru of all things finance, CHK’s very own Nick Dell’Osso, offered $1.5B in secured debt at a 11.5% interest rate due 2025 in exchange for paying off some unsecured debt at a discount. There was an “Early Tender” period that ended on December 17th where unsecured debt holders would receive a slight premium to the 60 cents their debt was trading for on the open market if they tendered their notes before this date. It was a smashing success. So much so that the secured debt offer increased to $2,210,156,000 which is basically Chris Paul’s remaining salary. CHK was able to pay off $3.22B in exchange for the $2.2B, wiping off ~$1B in debt just through some financial wizardry. Mr. Dell’Osso definitely is getting some #buckets right now.

President Trump impeached by the House

• To the surprise of no one, President Trump was impeached by the Democratic controlled house last Wednesday. The first article of impeachment, abuse of power, was passed with a vote of 230 in support and 197 in opposition. The second article, obstruction of Congress, passed 229 to 198. Pretty much right along party lines for both except for a couple of votes on either side of the aisle switching sides. Two member of Congress ended up switching parties altogether. One Democrat switched to being a Republican and vice versa. Now the articles will move to the Senate for them to conduct their trial and then vote. 67 senators will need to vote in favor of either article in order for Mr. Trump to be removed from office. However, this seems highly unlikely given the high level of partisanship that has occurred throughout the impeachment process. Republicans currently hold the majority of the Senate with 53 members versus the Democratic population of 47. According to math, 14 Republican Senators will need to go against their party’s wishes for Mr. Trump to be removed. There could be a handful that do, but unless there is a major plot twist waiting at the end of this saga, then Mr. Trump will remain in office and American voters will have the ultimate verdict in November 2020 when he, along with quite a few house members and probably a few senators, are up for re-election. As of now, American voters are split down the middle when it comes to removing Mr. Trump from office according to a WSJ/NBC News poll of 900 American voters that was concluded last Wednesday morning before the House impeached Mr. Trump. 48% of voters think that Mr. Trump should be removed and 48% believe he should not be. 90% of Republicans believe he should remain in office while 83% of Democrats believe he should be removed. For independents, 50% support removing Mr. Trump from office while 44% oppose. The WSJ had an interesting view on this as the article stated that “the poll is more evidence of the unusual nature of politics in the Trump era: While the daily political news is turbulent, views of the president remain stable.” Whether in favor or against the President, everyone seems to be firmly entrenched in their views. Even after the impeachment process, America has not budged either way. Fascinating and scarier than Mike Myers during Halloween all at once. The chasm in American politics only seems to be growing.

Natural gas production is finally tailing off a bit

• Market fundamentals are finally starting to verify. Rig counts have been dropping in pretty much every region in the U.S. throughout 2019. The Appalachia region alone has seen its rig count drop from 83 in March, which was close to a multi-year high, down all of the way to 51 in December. As a result, production from the region has fallen ~170mmcf/d through mid-December when compared to November production levels. Production clocked in at 33.3bcf/d on December 17th. The majority of the production decline has been realized in the NE portion of the Marcellus as production has averaged 160mmcf/d below November month average levels. The south dry window has declined by 60mmcf/d month-over-month so far. Other regions in the Marcellus have experienced slight upticks to eventually arrive at the 170mmcf/d in production loss month-over-month. Huzzah for lower gas production. Hopefully this keeps verifying and a strong winter shows up.

Happy 10 year anniversary to Exxon’s acquisition of XTO!

• “We probably paid too much,” said former Exxon CEO and U.S. Secretary of State Rex Tillerson or as his friends probably call him “T-Rex”. He was referring to Exxon’s megadeal for XTO that was announced 10 years ago this month. Exxon acquired XTO for $41B. $30B was paid in stock and the remainder was Exxon taking on XTO’s debt load. At the time, Exxon was itching to get into the shale game and saw a long, positive runway for natural gas prices. T-Rex believed that XTO had a strong management team and superior shale expertise that Exxon could leverage and build out a shale asset base around the world. Of course, like strong natural gas prices, that never materialized. Ethan Bellamy, of the Robert W. Baird & Co house, called this transaction “the AOL-Time Warner merger of the energy sector.” Yikes. After 10 years and all that money, Exxon’s stock price has ultimately declined slightly (see chart below). Exxon went on to acquire acreage in every major U.S. shale basin after the XTO deal. One of the company’s better transactions was acquiring prime Permian acreage from the Bass family for $6B in 2017. Exxon plans on producing >1mmboe/d out of the Permian by the year 2024. Currently, Exxon is producing 293mmboe/d out of the Permian. So the XTO acquisition kinda sorta helped Exxon out a bit as they were able to understand shale a bit more and acquire better acreage elsewhere, but ultimately, history is currently viewing it as a bad deal because of the enormous cost.

Devon exits the father of all shale plays

• The Barnett Shale is the Dirk Nowitzki of oil and gas. It changed things and brought about an entirely different style of drilling and unlocked entire new basins for oil and gas production. Dirk unleashed a new era of big men and now every big man on the floor always thinks they can shoot threes. I witnessed Aron Baynes from PHX take a three pointer when the Suns played OKC last week and it took five minutes for my eyes to stop bleeding. #thanksdirk. Father time is undefeated though and eventually the Barnett took a back seat to all the young hot shot gas plays like Marcellus and Haynesville. The Barnett quickly became a Loul Deng type contract where teams forget they are still paying him a ton of money to not do anything (looking at you, Lakers). Eventually, every major producer in the basin wanted to offload the Barnett and move on with their lives. Devon was one of the first horizontal frackers in the play and now they are set to exit it for $770mm. Apparently there are people out there that love taking on a very complex shale basins that do not make a lot of money. Kalnin Ventures will be taking over the play from Devon. Kalnin is backed by BKV Oil & Gas Capital Partners LP and Banpu PCL which is based in Thailand.

How did CHK do this week?

• CHK stock price increased last week by ~20% (+$0.16/share). Stealing food but WE ARE GAINING ON MCDONALD’S RANGE. Never thought I would be happy to type that.

Thoughts of the week

• Kevin McAlister, from Home Alone, doesn’t get enough credit for how good of a housekeeper he was. Even after all the shenanigans to keep Harry and Marv out, the house was still spick and span before his mom got home.

• The couples in commercials who buy each other brand new vehicles for Christmas have to be drug dealers who are just looking for a way to spend their cash.

• Christmas movies are fantastic. There is always one or two from each decade that standout and are must watches every year. That is, except for the 2010 decade. I arrived into this world in the 80s so that is where my timeline begins for my list below. Except for It’s a Wonderful Life. I don’t think I was alive in the ‘40s but I am including it on this list since it is the best Christmas movie of all time. The List:

o 1940s: It’s a Wonderful Life

o 1980s: Christmas Vacation

o 1990s: Home Alone, The Santa Clause

o 2000s: Elf, Polar Express

o 2010s: What happened in this decade? No Christmas classics were released. Wildly disappointing.