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Something took place in the gold industry that I thought would never
happen. In a stunning press release, Franco-Nevada Gold announced that
it was taking a financial stake in U.S. shale energy assets. Why on
earth is one of the top gold royalty companies investing in an industry in
which it has no expertise… especially in the shale oil industry??
Furthermore, didn’t Franco-Nevada Chairman Pierre Lassonde read about
how BHP Billiton lost tens of billions of dollars investing in U.S. shale
assets? According to the article dated July 28th, BHP
sells US onshore oil and gas assets for heavy loss:
BHP has managed to unload its contentious US onshore oil and gas assets,
but at a very heavy loss.
In a statement to the ASX, BHP announced it had sold its interests
in four large fields to energy giant BP and another US energy player for
$US10.8 billion ($14.6 billion), a heavy discount to the $50 billion
it has ploughed into the venture since 2011.
When BHP Billiton began investing $50 billion in U.S. Shale assets in
2011, its profits were $23 billion that year. However, by 2016, BHP’s
horrible shale portfolio helped turn its profits into a $6.3 billion loss.
Again, I am completely shocked that Franco-Nevada is going to dump
$220 million into the U.S. Shale Oil Industry Black Hole.
Moreover, Franco-Nevada also stated that it might purchase additional mineral
rights in shale properties over the next several years. According to
the August 6th press release, Franco-Nevada
Enters into Strategic Relationship with Continental Resources, Inc.:
Franco-Nevada Corporation and Continental Resources, Inc. have agreed to
enter into a strategic relationship to jointly acquire mineral rights in the
SCOOP and STACK oil & gas plays of Oklahoma. Franco-Nevada is
contributing approximately $220 million for the acquisition of existing mineral
rights owned by a Continental subsidiary and has committed, subject
to satisfaction of agreed upon development thresholds, to spend up to $100
million per year over the next three years to acquire additional mineral
rights. The existing mineral rights and mineral rights to be
acquired will be jointly held through a newly-formed company.
In the press release, Franco-Nevada may purchase up to $100 million per
year over the next three years to acquire additional mineral rights. If
Franco-Nevada spends the maximum amount of $100 million per year over
the next three years, they will have invested a half billion dollars in U.S.
shale energy assets.
However, I doubt Franco-Nevada will invest additional funds in shale
energy assets when they realize that the U.S. Shale Oil and Gas Industry is
the Greatest Energy Ponzi Scheme in history. If anyone
knows Pierre Lassonde or the management at Franco-Nevada, please forward
them this article.
Franco-Nevada Gold Needs To Look At Continental Resources Lousy
Financials
While Continental Resources has somehow magically turned losses into
profits over the past year, that’s an interesting story for another day; its
financials are still a complete mess. For example, Continental
Resources had to borrow over 6 billion dollars since 2008 to fund its lousy
shale energy operations. Before Continental started ramping up
shale oil production, mostly in the North Dakota Bakken, it only held $376
million in debt. Now, fast forward to today, and it currently holds $6
billion in long-term debt:
Well, there’s nothing like increasing one’s debt by 1,500% to produce
shale oil that wasn’t economical, even at $100+ a barrel. In order to
keep the Shale Energy Ponzi Scheme going, Continental Resources and many
other shale energy companies have utilized a clever scheme of issuing NEW
DEBT to pay back OLD DEBT. This is, of course, is the very definition
of a Ponzi Scheme.
We find the evidence of this by looking carefully at Continental’s
financials. Now, why would Continental
Resources need to issue $1 billion in new debt on Dec 4th, 2017 when the
company enjoyed a nearly $800 million net income profit that year, mostly due
to the Trump tax cuts??
Why? It’s a charade called “Playing the game of musical chair
debt.” Continental used that $1 billion to pay back $500
million in debt and to repay the borrowings on its revolving credit
facility. You see, shale oil and gas companies are doing some pretty
strange accounting tricks to HOODWINK INVESTORS. While I can
see this tactic fooling unsophisticated investors, I am surprised energy
analysts, who should know better, haven’t raised some RED FLAGS.
Here is an example of how the Shale Industry is using the “Revolving
Credit Facility” to BAMBOOZLE investors:
Chesapeake Energy, which was the United States second largest shale gas
producer up until 2017, hasn’t made any positive free cash flow in the past
15 years. On top of Chesapeake’s $9 billion in long-term debt, the
company continues to tap into the revolving credit facility to fund
operations and payback previous borrowings from its revolving credit
facility. If you look at the Chesapeake’s Cash Flow Statement
above, you will see that it borrowed $6.1 billion to pay back $6.3 billion in
the first six months of 2018. FOLKS… that’s a lot of borrowing
and paying back.
Now, if Continental is now supposedly making profits and positive free
cash flow, why on earth does the company continue to tap into its revolving
credit facility to fund business?
While Continental isn’t borrowing as much from its revolving credit
facility as is Chesapeake, SOMETHING JUST DOESN’T ADD UP if the company is
making profits and positive free cash flow.
As I mentioned above, Continental Resources long-term debt is now $6
billion. To hold $6 billion on one’s balance sheet, you have to pay
money to service that debt. In just ten years,
Continental’s annual interest expense ballooned to $300 million (estimated
2018) from a measly $12 million in 2008:
That’s correct… Continental Resources, is now paying nearly a third of a
billion dollars just to service its debt. And if you think that is bad,
Chesapeake Energy is forking out $425 million a year to service that $9
billion in debt… LOL.
Now, if you were Franco-Nevada Chairman Pierre Lassonde, would you
invest in a shale energy company with the financial results below?
Continental’s net free cash flow from 2008 to 2017 is a whopping negative
$7.9 billion. So, if the company spent $7.9 billion more to produce
uneconomical shale oil and gas than it made from cash from operations, it
offset it by borrowing $6.1 billion and selling $660 million in stock to
investors.
And, lastly… how has Continental Resources compensated its
shareholders by going $6 billion into debt over the past decade?? You
got it… it has paid out ZERO DOLLARS in dividends. So, if you
think it’s NOT a good idea to own a shale energy stock that hasn’t paid one
LOUSY DOLLAR in dividends in ten years, then maybe you should forward this
article to Franco-Nevada Chairman Pierre Lassonde.
There’s a lot more I will be writing about this new Gold Company Shale
Energy Investment Fiasco, as well as more details of the U.S. Shale Energy
Ponzi Scheme in upcoming articles and videos.
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