Friday, February 4, 2011

U.S. Natural Gas Producers are Not a Good Inflation Investment

Bottom Line: Domestic U.S. Natural Gas producers are not a good inflation investment. As we have previously advised, we like natural gas, but the price point for the shale gas producers is substantially overvalued and we have gone short these producers as they have no pricing power, and thus no ability to "participate in the inflation trade".

Natural Gas producers are facing substantial regulatory pressures, and environmental taxes on the fracking process are a foregone conclusion all placing substantial pressure on earnings power in the next 3-5 years.

As far as a general investment allocation, excluding inflation, the numbers don't add up for the U.S. Shale gas producers at the current time, in addition to the external factors descending upon the industry from massive market oversupply, regulatory restrictions and substantial new taxes.

Mr. Miller believes the lease, flip land game for shale deposits has run its course in the U.S. and environmental taxes, coupled with very high production decline curves of shale gas deposits, lead to the conclusion that the entire shale gas producer composite is overvalued, especially Chesapeake Energy (NYSE: CHK).

CHK has a complex web of off balance sheet debt and long term mortgages on its future production. Even if natural gas prices were rising, which they are not, CHK would not be able to participate due to the complex forward sales/hedges they have executed to keep the Company afloat and service a massive debt load.

For further reference see: "Chesapeake Energy (NYSE: CHK): Domestic Natural Gas is in Over-Supply, No Premium in Storage, and No Pricing Power; What Justifies Value" at

Themes: Natural Gas, Shale Gas, Energy, Chesapeake Energy, CHK, RRC Stocks: CHK, RRC, XTO

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