Interview: Oil and gas conference
Chesapeake Energy--- McClendon, Aubrey--- Chief Executive Officer
>> after outperforming most other corporate bonds the debt of defense companies like boeing and lockheed martin may lag other bonds. overall debt of defense companies has returned about 1.6% compared to a return of 1% for all other investment grade corporate bonds. investors have been drawn to defense company debt amid record military spending by the u.s. government but investors and analysts say the economy, as the economy continues to grow higher yields in other industries may become more attractive. oil supply concerns eased today but traders say the market is still jittery. we head to denver, colorado for the oil and gas conference where my colleague peter cook is standing by with aubrey mcclendon the chief executive of chesapeake energy, an oil and natural gas producer. peter, take it away.
>> thanks very much. thanks for the time today. we appreciate it.
>> thank you, peter.
>> the timing of this event, we see record high prices for oil and gas, number five independent energy gas producer in the country, chesapeake. give me your take on the situation right now. we’re seeing a lot of smiles on some executives here. do you all have smiles on your face?
>> we are, but we work pretty hard so try to keep the smiles to ourselves because for 15 years this wasn’t a very easy place to make money. as there was too much supply of gas and not enough demand. gas prices were low. that set the stage for where we are today which is we’re in the third or fourth year of a time when gas demand is outstripping supply. you’ve had a price response. gas has gone from $2 to $6 over the last four years and so it’s just the reverse of what we saw in the 1980’s and the 1990’s.
>> do you think these prices are here to stay?
>> i think they are here to stay for as long as we’re able to look out which we think is approximately the next five years. here’s why. you have an economy that’s continuing to grow 2%, 3%, 4% per year, gas goes up every year―gas is at the margin supply and all of that new generation, you have gas supply coming down every year by anywhere from 1% to 3%. so the collision between those two very powerful structural forces has led to a tripling of gas prices over the last three to four to five years and neither of those two trends have been fixed. the economy is still getting bigger, gas supply is still getting smaller and so the only thing that can keep the market in balance is price. and that’s going to continue to play out.
>> we know gas supplies, north america and the u.s., are dwindling. your focus is essentially north america, specifically the region of texas, oklahoma, some of these areas. why exactly are you focusing so much of your attention in this one area and specifically through acquisitions which you’ve been very busy with.
>> right, peter. we think the area in which you’ve just described, the mid continent, is the best place in america to produce, to look for and explore and produce natural gas. no federal land issues, no regulatory issues, lots of deep drilling opportunities and so we just think it’s the best place for us to be the good guys here, which we’re trying to increase the supply of natural gas and have taken our company from no production 15 years ago to today, the fifth largest producer in the country. nevertheless, the growth we’re generating can’t overcome the production declines from the majors as they shift more of their hunt for gas around the world. and that’s a huge part of the story today is the majors are looking for gas that will supply america for the next 50 years over the in ex-five years their production will―over the next five years their production will continue to climb. we’ll try and make up the slack but the independent sector is not big enough to do that so you’ll see continued pressure on gas prices over the next five years until the new supplies of liquefied natural gas come into the country.
>> the acquisitions you’ve made, one deal a few days ago, $390 million i believe. you’ve hedged a lot of the gas that you’ve taken as part of this acquisition. tell me why. what sort of prices have you locked in on? and this decision with the most recent purchase, not to hedge that―those proceeds, why not?
>> that’s correct. we didn’t hedge our two most recent acquisitions because we didn’t feel we were in a time of a price spike. and our view is that with too much demand for the supply that’s out there, you get an increasing price over time, but periodically you’ll have a panic. it could be a cold winter in new york and boston, it could be a short squeeze on wall street. it could be a number of things. at which time gas prices could go up by 20% or 25% in a week or two. it would be unsustainable for the longer term at those prices. we want to take advantage of that. so this summer because of the weather patterns we just haven’t had the price spikes. we didn’t hedge these latest two acquisitions. however, we are hedged 50% corporately for the next six months and so if gas prices do get weaker, we’re in a position to still be in good shape while at the same time having maintained quite a bit of dry powder in case we do get a spike this winter.
>> you’re the number one driller in the country right now in terms of total riggs.
>> right.
>> do you expect that to continue?
>> yes, sir i do. we’re out there today with 63 riggs about 5% of all of the drilling in the u.s. we produce about 2% of the gas in the country so again we’re doing more than our fair share to try and increase the supplies of natural gas in the u.s. we’re active today because it’s highly profitable to be drig today―drilling today. we’ve built the largest onshore inventory of leasehold in america and the largest onshore inventory of three dimensional seismic over the last six years. we were built for this moment in time. and we’re executing today almost flawlessly.
>> all right. leave it right there. thanks.
>> thank you.
>> we’ll send it back to you in new york.
>> thank you. bloomberg’s peter cook with aubrey mcclendon chief executive of chesapeake energy. when we come back the index this morning raised eyebrows on the service sector.
