Tuesday, October 2, 2012


A friend of mine has been blessed to have purchased some mineral rights many years ago.  Before her husband died, he told her to never sell the rights as he "knew" the land was very valuable.

Years after his passing, his words have been revealed to be extremely accurate as the income generated from the leasing of the rights has been a tremendous gift to this widow.  Since she has found that she has become the target of the Fed's war on income generating assets using their ZIRP bombs to destroy her retirement income, the royalty stream has become more important than ever.  Because the mineral right income is so critical to her ability to financially survive, she watches the price of natural gas daily.  I find that I check in on Nat Gas too especially whenever I speak with her.

She called me yesterday to ask about a health insurance policy and we spoke briefly about natural gas and also about how low it had dropped.  I mentioned that it had rebounded and after our conversation I pulled up the graph above.

In my view, it looks like natural gas may have bottomed and could easily hit $4.00 since it exploded through the $3.25 level.  Even the $5.00 2011 level could be within reach.  I had to look at the portfolio killer, UNG as well, it frankly, it looks like it has broken out too and even though I hate it, a conservative look at UNG would suggest a move to $25 would be easy.

My examination of natural gas also led me to find this article in Reuters today.
In the article Casualties of Chesapeake's Land Grab Across America, the authors highlight several interesting techniques that Aubrey McClendon, CEO of Chesapeake, has used to lock up parcels of land and mineral rights.  Unfortunately, the firm's approach to becoming the largest mineral right holder and leaseholder in the US has been one that has left several owners feeling they weren't treated fairly.

Specifically, Chesapeake has been said to sign contracts for leases and then many days or weeks later demands lower lease rates.  The main problem with this is that the signed lease effectively locks up the landowner and crowds out any competitor bids.  After the dust settles, Chesapeake returns and turns the tables on the owner threatening to back out completely if they don't accept the lower amount.

Second, when the driller cannot get a landowner to do business they have been using the court and legal system to effectively "steal" the land and minerals from the owners.  In these examples the company uses the notion that the lone landowner cannot deprive neighbors from using their property as they please.  The firm argues that the hold-out landowner is a block to the other owners and therefore uses legal statutes to access their land and drill.  In Ohio, the land is exploited and the landowner receives royalties.  In Texas, the landowner relinquishes their right to control the land as the firm drills AND they also forfeit the royalties!!!

I read about these practices and this only adds to my thoughts that McClendon is simply a bad guy. Recall early this year when it was discovered that he had taken out loans totaling more than $1Billion against oil and gas wells he shared stakes in with Chesapeake.  (This is scary considering losses in his portfolios could be detrimental to the positions of Chesapeake.  We saw some terrible leverage issues with the CFO of Cheniere (LNG) in 2008 as margin calls crushed the company stock).  Additionally we discovered that McClendon also was running a $200 Million hedge fund that traded commodities and had failed to disclose this.   We also learned about the serious corporate governance issues where personal expenses could have been paid for by Chesapeake (and its shareholders).....Tyco anyone?

So, while I think natural gas may be going higher, I'm surprised to see a chart of CHK (Chesapeake) and I'm not convinced that it too is going to new levels.  As I close, let's view the CHK chart and see what might be going on there.


The chart of CHK shows that there has been a solid gain in the stock since May 2012.  As it has moved higher, volume has fallen dramatically.  Personally, I feel like the bullish move in the stock is done.  IF it trades above $20.50 I believe it could go to $23, but I would expect to see a fall to $16 before we'd ever see a move higher than $20.50.

Long natural gas looks good, so I guess if you are stuck with UNG and all it's widow-maker traits, go for it!

Avoid a long CHK unless there is a powerful rise through $20.50.  If there is significant macro weakness a short CHK could work to test $16.



Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/ 

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