Chesapeake's Fracking Stirs Fears

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Memories of the Fukushima Daichi nuclear plant disaster are etched in our memories and no one will ever forget the devastation that the earthquake brought about in Japan. With that dark memory lingering in our minds, I would like to discuss the recent permission given to Chesapeake Energy (NYSE: CHK) to drill for natural gas via hydraulic fracking. How are these two issues connected, one may ask. The problem is, the site where fracking is going to take place is located just a mile away from the Beaver Valley Nuclear Power Station in Shippingport, Pennsylvania. Obviously, a lot of people are alarmed and have begun to question not only Chesapeake, but also the Pennsylvania Department of Environmental Protection, which has declined to comment in detail on the matter.

The consensus is that Chesapeake's drilling is not going to cause earthquakes and tremors that are intense enough to cause disruptions within the nuclear plant. However, there was disturbing news that fracking wastewater injection wells cause earthquakes. Moreover, Nuclear Regulatory Commission's (NRC) regulation and oversight rules do not apparently tackle related activities off site. These activities include injection wells, oil and gas drilling, and fracking. Many people have voiced their fear, angst, and a sense of being stupefied at the thought of fracking less than a mile from a nuclear plant.

Before hell is set loose, I would like to point out that there needs to be a 500 foot setback from any building to an unconventional well, according to John Poister, a spokesperson for the Pennsylvania Department of Environmental Protection. Moreover, many experts suggest that seismic activities are related to injection wells, but not to fracking, as is commonly believed. So far, we can assume that as long as Chesapeake does not build its injection wells close to the nuclear plant, nothing terrible should happen. Also, the area where fracking is going to take place is a mile away, while official requirements are that it should be 500 feet away.

Technically, Chesapeake has not done anything out of the ordinary, except that it chose a place which is rather close to a nuclear plant. This does not necessarily mean that there is going to be a Fukushima sort of nuclear accident because of an earthquake caused by fracking. This is the sort of catastrophic thinking that psychologists help individuals deal with, during cognitive behavioral therapy sessions. Being one of the largest oil and gas companies in the U.S. and the world, Chesapeake is not going to take nuclear infrastructures lightly.

The company's executives know that if they make one misstep close to a nuclear plant, the consequences can be so damaging to the company and the environment that there may never be absolution. Thus, I believe that Chesapeake has enough plans and strategies in place to avoid accidents and mishaps at the nuclear site. In order to silence its critics, Chesapeake must make its plans clear and also explain how it plans to ensure safety related concerns. I do hope Chesapeake executives take time to explain to the local press about their safety strategies when it comes to dealing with a nuclear plant just under a mile away.

By disclosing their plans and motives, they will have fewer critics and far fewer bad press. At the moment, for Chesapeake, the key is to open up, be transparent and allay the fears of local residents and environmental groups who firmly believe this is a conspiracy between oil and gas companies and nuclear watchdogs to set off another Fukushima-style nuclear disaster. The truth is, there is never going to be such a disaster.

Peabody Energy (NYSE: BTU) paid $6.5 million for 29 coal leases where unconventional fracking might be necessary. Exploratory officials at the company claimed that the seams were too deep to mine conventionally. Apache (APA) cleared a lot of air that surrounding hydraulic fracking in an article on its website. The company is swearing by the process, and so far it has done well in all the countries where it operates.

Clean Energy Fuels (NASDAQ: CLNE) may also end up using hydraulic fracking in order to deliver cheap natural gas to long haul vehicles. In effect, Clean Energy Fuels may help American truckers to drive an extra mile by spending less, all thanks to hydraulic fracking. Meanwhile, Devon Energy (NYSE: DVN) summarizes how safe and clean fracking really is. In a sort of white paper on its website, Devon explains the procedure behind hydraulic fracking and also how it has successfully used the method without causing any harm to the environment. All these instances lead me to believe that Chesapeake is right using hydraulic fracking in order to minimize costs and also in order to safeguard the environment.

Chesapeake currently trades at $17 with a market cap of $11 billion and an enterprise value of $27.55 billion, it is a valuable oil and gas corporation, though not as big as its peers like Chevron and Exxon Mobil. It has a price to sales ratio of 0.95 and a price to book ratio of 0.72, which suggest that it can do better than how it is doing at the moment. Chesapeake's profit margin is negative too, at -5.18%. With an operating margin of 12.94%, we can safely assume that Chesapeake may have fluctuations at the moment and if one is looking for a stable source of income, it may not happen so with Chesapeake. However, the company had a revenue of $11 billion and an operating cash flow of $4 billion. Its total debt is $16 billion, but I expect the company to liquidate its liabilities in the near future. At the moment, Chesapeake does not appear to be bullish, but it's not bearish either.

If Chesapeake convinces people that there will never be a Fukushima sort of disaster because of its fracking techniques in the U.S., it will be able to gain investor confidence. It is time for Chesapeake officials to hire a good writer and publish that very important document.

jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Energy Fuels and Devon Energy. Motley Fool newsletter services recommend Clean Energy Fuels. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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