If you get a chance to see Deborah Lawrence speak, take it. She explains The Shale Game better than anyone.
And perhaps more importantly – before anyone (other than Art Berman) and years before The Wall Street Journal, ctc.
Simply put, The Shale Game is a whole a lot like the Sub-Prime Mortgage Market – before it hit the fan . . .
Like Sub-Prime Mortgages, The Shale Game is dependent on systematically over-valuing an asset on the financial markets.
The Shale Game is actually a lot simpler than the Sub-Prime Game – since the Sub-Prime game depended on loan guarantees – from AIG.
All it takes to play The Shale Game is a balance sheet that consistently overstates the value of the company’s shale gas reserves.
As long as you can show in increase in the value of those estimated reserves, you can sell more junk bonds, sell more stock, drill more wells, hype reserves.
Or – and this is the trick part – sell those reserves to another public company that needs to show an increase in its reserves.
The Shale Game exploded – not because of improved drilling techniques – which have been around since the 1980’s, but because of voodoo frackonomics.
Because of changes in the way shale gas reserves are allowed to be valued for financial reporting by the SEC.
Guess when that happened ? Guess who did that ? Want a hint ? (Rhymes with “Sick Rainy”)
That’s right – it was Cheney’s Last Frack Job while VP – to change the SEC reporting rules that allowed shale gas reserves to be overvalued.
(For you Fracking History buff’s this was 3 years after the Halliburton Loophole – back when Cheney was still on heart #2)
The Sub Prime Mortgage Bubble was about to burst and Wall Street needed a new bubble. So Team Cheney delivered. Big time.
These liberal (how you like that adjective ?) valuation rules allow a public company to estimate what it thinks its shale acreage is worth.
There is no standard, there is no independent review, it’s just whatever number they can pay the engineers to come up with.
And they come up with some whoppers – as Deborah explains with startling clarity to the audience’s astonishment.
(Wish you could do that ? Estimate your assets, then sell shares and junk bonds based on those estimates ? )
You can if you are a Shale Gas Scammer. All it takes is a public listing and a flair for overstatement.
And over-stating reserves comes easily to the shale gas companies and their camp followers.
“400 tcf Terry” Engelder still holds the world’s record for over-hyping reserve estimates by 5x :
Plus it helps to have some ex ENRON people on staff – they know the drill
The problem is that this only works when the dollar value of the reserves are going up – the way the housing market was . . .
When the dollar value of the assets goes down – based on a number you can’t rig – the price of natural gas – The Shale Game starts to unravel.
(It wasn’t until the price started to decline that the mainstream press began to really pay attention to what Deborah had been saying. )
Now Chesapeake and other shale gas companies are selling assets to pay off the debt they sold on inflated reserve estimates.
Ironically, they are selling assets to companies that want to book an increase in reserves – based on the inflated estimates.
Which, despite a lower gas price, are still as pumped up as the Terminator’s biceps. By as much as the SEC’s liberal accounting rules will allow.
Which is only limited by one’s imagination – which is considerable for the former ENRON executives in the shale game
As a reality check – look at the valuation methodology of a gas well under New York’s ad valorem property tax appraisal method.
Under that method, only the amount of gas produced is given any value. No value is given for gas in the ground.
If a public shale gas company was valued by those rules – by what it produced – it would trade for a fraction of its share price.
And many shale gas companies – like Gastem – would be worth nothing. Because the only gas they produce is in the press releases from their shale $hills:
The Sub-Prime Lending Spree ended in an over-supply of housing and a collapse in house values.
The Shale Game has lead to an over-production of natural gas – and a collapse in gas prices that will persist.
The overbuilt housing market has to be dealt with domestically – hard to export houses to China.
Trout streams, water wells and villages in New York will be ruined in order to export shale gas overseas.
And keep The Shale Game going before it implodes under a mountain of debt and indictments.
Deborah will be speaking this month in NYC, Oneonta, Corning and Owego.
Check her out.
James “Chip” Northrup