Media Appearance: Commodities Bubble & Chesapeake Energy

I did a podcast interview with Derek Simon at iStockAnalyst. We discussed a variety of subjects from my blog to oil prices and a little discussion re CHK:

http://www.istockanalyst.com/podcast/podcast.xml (Dec 15 2008 podcast)

It’s been a few years since I’ve done any media appearances (back in my political days). I’m not eager to listen to myself and don’t expect that I sounded too polished so take it easy on the feedback ;-)

A couple quick points in case I didn’t express myself particularly well in the podcast:


Some readers question my stance on the oil “bubble” and whether I’m just in denial.  If something drops in price 70%, does that automatically make it a bubble?  I guess some people say yes but I view it differently.  The “speculative” (almost all investment can be defined as speculative) demand in the commodity space collapsed mainly as a result of the global economic implosion and not due to unjustified speculation.  Does that mean prices should be at $150/bbl in less than a year?  Of course not but note that I, for one, didn’t support moving into the energy space at those prices; in fact, I warned against chasing after the energy bull.

Now some readers may feel I’m playing semantics.  After all, if prices drop 30-70%, does it really matter if we label the implosion a bubble or not?  In my mind, it does matter as the answer to that question lays out the path ahead.  Assuming oil was a in bubble, that suggests that energy prices won’t recover significantly once the global economy turns up.   In that case, leaving money invested in the energy sector is probably a mistake.

Now assume the inverse. The volatility normally associated with commodities combined with massive deleveraging simply exacerbated oil’s reaction to the economic downturn.  Therefore, energy prices will rebound sharply with the further caveat that the longer this price drop plays out, the more violent the upswing will be as capital investment in the sector has already been heavily curtailed in the last few months.

For the long-term investor, each of these scenarios suggest a different course of action.  Readers know where I stand on the issue but one final distinction must be made.  My stance is a long-term play; I do not know where energy prices are headed in the short term.  Those who are short-term oriented will rightfully have different requirements for investment; my position will likely not be of much use for those people. It is possible that the energy sector can experience a sustained downturn and I am eyeing those companies that can survive such an environment.

It’s also entirely possible that I am dead wrong. If so, I will permanently lose a lot of capital. Only time will tell. As always, YMMV.

In the podcast, I mention Chesapeake Energy as my biggest position (around 16% of equity portfolio). My initial assessment of CHK has held up (even if the share price hasn’t); operationally, the company is outstanding but CEO Aubrey McClendon has yet to directly reward shareholders.  As such, management remains the biggest risk to investors.

In this sense, I’m currently reading the Graham-Dodd classic, Security Analysis, (don’t ask why I’ve waited so long — huge mistake) and the following passage, slightly out of context, reminded me very much of CHK:

“…surely there must be some point at which the return to the stockholders must also be considered. Were this not so, corporations would be constantly raising money from their owners and they would never pay any of it back in dividends.”

Thankfully, CHK has a diverse capital structure which currently offers investors leeway to “write their own returns”, so to speak, as discussed in a recent post.

2 Responses to “Media Appearance: Commodities Bubble & Chesapeake Energy”

  1. Recommended Reading - Dec 18,2008 | Old School Value Says:

    [...] Commodities bubble and Chesapeake presented by The Enlightened American [...]

  2. David H. Lewis Says:

    Gnerally speaking, the CEO’s and the executive tier in American companies are vastly over compensated, greedy and very short-sighted.

    Who do we blame for this?

    Stock holders?

    The board of directors of these companies?

    Yes, to all of the above.

    However, we have left out the most important reason for why our major public companies have let us down.

    Guess!

    Try APATHY. Then follow this up with too much money in the hands of pension fund managers with little real risk of loss to themselves, yet an unrealistic goal to archive for people who are not willing to participate in the finacial futures beyond making contributions.

    Now, we are going over the greatest economical cliff since the Great Depression of the late 20′s and the 30′s and finally yelling, “WHOA”.

    How dumb is that?

    And your answer is????????????????

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