Controversy surrounding a New York Times series arguing that the shale gas industry is misleading investors has drawn the SEC into the fray.
By Robert Sullivan – Exclusive to Gas Investing News
Following a month of mud-slinging between shale gas advocates and detractors, the Securities and Exchange Commission (SEC) has subpoenaed a number of drillers, requesting documentation to verify how they measure the performance of their wells, as well as how information on shale gas drilling is presented to investors.
Although the federal securities regulator hasn’t commented on which companies had been subpoenaed, at least two have already confirmed in routine securities filings that they are being investigated.
Exco Resources Inc. (NYSE:XCO), with plays in the Haynesville, Bossier, and Marcellus shales, revealed on Aug. 3 that the SEC had requested records dating back to 2008 on proved well reserves and estimates. Addressing the subpoena in their filing, Exco explained that “…this investigation is a fact-finding inquiry. We understand that a number of other shale-gas producers have received similar subpoenas from the SEC.”
A week later, Quicksilver Resources Inc. (NYSE:KWK), who operate in the Barnett shale, also announced they had been subpoenaed. A quarterly filing from the company stated that “the SEC has informed [Quicksilver] that their investigation arises out of recent press reports questioning the projected decline curves and economics of shale gas wells.”
New York Times series leads to SEC investigation
The ‘recent press reports’ cited by Quicksilver stem from a series of articles published by the New York Times, that call in to question the economics behind the shale gas “rush.” Using leaked emails from industry insiders, government officials, and market analysts, lead author Ian Urbina argued that shale gas drillers were misleading investors and the public by overstating their reserves and underestimating operating costs and the rates of decline of their wells, which can often be quite rapid after the first year.
With shale gas drilling already a polarizing issue, the New York Times series has only added fuel to the fire. Though the oil and gas industry has for the most part been unified in rejecting Urbina’s assertions, analysts, government officials and the media have all lined up on their respective sides of the debate.
This showdown has now been upped a notch with the SEC stepping in to conduct a formal investigation. A market research report by financial services firm Robert W. Baird & Co. commented that “the use of subpoenas makes clear that the S.E.C. is taking a formal, not a casual, look at the matter.” The report also clarifies, however, that the subpoenas do not mean that the SEC necessarily intends to take action against particular companies, only that information has been requested.
Although companies such as ExxonMobil Corp. (NYSE:XOM) and Anadarko Petroleum Corp. (NYSE:APC) have stated that they haven’t received any requests for information from the SEC, more disclosures are anticipated from other drillers as subsequent securities filings are made. Among some of the major shale gas players, Chesapeake Energy Corp. (NYSE:CHK), EOG Resources Inc. (NYSE:EOG), and Petrohawk Energy Corp. (NYSE:HK) declined to respond to inquiries concerning the SEC subpoenas made by the New York Times and Dow Jones Newswire.
Analysts caution against abandoning shale gas
Despite the inevitable stigma that follows an SEC investigation, some analysts cautioned against bailing out on those companies caught up in the storm generated by the original New York Times series. The author has come under heavy criticism in recent weeks over the sources behind his articles, and has even been publicly called out by an editor at his own paper.
The more pressing issue for investors in the short-term, they counter, is not too little shale gas, but too much. If shale gas isn’t economic it would more likely be a result of an overabundance of supply, which would hold conventional and shale gas down around $4 per thousand cubic feet (mcf) and hamper profits.
Disclosure: I, Robert Sullivan, hold no direct investment interest in any company mentioned in this article.