We are amazed at how Chesapeake Energy (CHK) has gone from being a shooting star of the energy business to requiring significant asset sales in order to shore up its balance sheet. We are also amazed at how Aubrey McClendon has gone from being the wiz kid of the energy business to being an embattled CEO who had to give up his Executive Chairmanship. While we have tremendous respect for Aubrey for his role in the founding of Chesapeake Energy, we have noticed that his antics have helped contribute to the recent morass of mediocrity facing Chesapeake. Chesapeake Energy is facing enough headwinds with the decline in natural gas prices and doesn’t need a CEO who is going out of his way to become the world’s most reckless billionaire of all time. At least its asset sales helped to contribute net income and cash flows to offset declining operating income and increased CapEx.

Chesapeake Natural Gas: Despite its efforts to shift its production from natural gas to oil, Chesapeake is still dependent on natural gas production with regards to its total production. The good news is that Chesapeake increased its natural gas production by 41BCF (17.5%) in Q2 2012 versus prior year levels. Another bit of good news is that natural gas only accounts for 40% of its Q2 2012 revenue, down from 48% in Q1 2012 and 72% in Q2 2011. The bad news is that this shift was due primarily to the decline in natural gas prices year-over-year. Because hydraulic fracturing has changed the paradigm for natural gas production, supply and even demand, we don’t expect natural gas prices to snap back immediately to the $5/MCF levelsChesapeake enjoyed last year in Q2 2012, let alone the $10.79/MCF peak in July 2008. While the number of natural gas rigs has declined by 46% year-over-year according to Baker Hughes, the amount of natural gas in underground storage in the Lower 48 states has increased by 15.7% according to the EIA.

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