Gold Company Makes Huge Blunder By Investing In U.S. Shale Assets

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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32 Comments on "Gold Company Makes Huge Blunder By Investing In U.S. Shale Assets"

  1. Michael Kohlhaas | August 7, 2018 at 5:59 pm |

    Cryptos are falling apart. The party is starting!

  2. Michael Kohlhaas | August 7, 2018 at 6:08 pm |

    Obviously Pierre Lassonde is an idiot. Hopefully someone will forward this article to him so he can see what a complete moron he is!

    • No, Lassande is not an idiot. But somehow somebody has him by the short hairs or has a control file on him. But he has likely secured some golden parachute and will sail off into the sunset in the next year and a half or so…

    • SkeptiSchism | August 7, 2018 at 7:55 pm |

      Maybe he thinks they’ll get bailed out during the next bear market? I think eventually energy companies will get nationalized and the taxpayer will inherit their unpayable debts. Got to be some kickbacks in there for senior management you know.

  3. Spanky Bernanke | August 7, 2018 at 6:57 pm |

    Even more oblivious than Mr. Lassonde–the investors still holding Tesla stock. Folks, the ONLY WAY Elon can “go private” is by defaulting on his debt and being taken over by a capital management firm. This should be terrible news for investors, but somehow, the Supreme Spin Doctor himself, turned this into a WIN WIN. This is unbelievably stupid….

  4. At the highest levels of Geopolitics – the puppeteers will keep this bubble going by socializing the costs. Throwing companies under the bus in order to keep capital flowing into unprofitable energy in order to keep the charade going. The CEO always walks away with a big package – that’s how it works, these CEOs will do the bidding of their masters even if it destroys a company and won’t care because they get paid well to do it.

    There’s still more capital to rob/steal/plunder yet, that’s why the system hasn’t collapsed. Remember the huge amounts of money freed up by arresting Saudi Royals? It’s the same game. Find capital wherever you can get it then throw it on the fire to keep it all going.

    When the system collapses – the highest level banks Central Banks that remain solvent (such as the BIS) swoop in and purchase these bankrupt companies and cheap real estate for the lowest prices possible using their gold. It’s the same cycle repeated over and over.

    • You are probably right.
      I am a big fan of Hanlon’s razor: never attribute to malice that which is adequately explained by stupidity. But in this case we can’t assume mr. Lassonde is stupid so we may look for other explanations. Are these managers corrupted by big banks or by frackers ? Are they putting their company at risk for lenghtening the shale oil Ponzi scheme ? Do they want to create a false impression of shale profitability ? Are they trying to gain some favour from the government by propping up this calamitous sector ? Or are they simply bluffing with a decision they are not going to take ?
      Personally I don’t think Franco-Nevada is going to throw so much money down the toilet so this is probably a bluff, but one must investigate what’s the reason behind this bluff.
      I hope mr. St. Angelo keeps us informed.

      • Vitruvius,

        According to the Continental Resources Q2 2018 Report, this deal won’t go on their books until Q4 2018. So, maybe there is some time for Franco-Nevada to PULL OUT. I don’t know.

        However, I was writing about the BIG MISTAKE BHP Billiton was making by investing in U.S. Shale Assets ever since 2013. Who knows why BHP decided to lose tens of billions of dollars in the U.S. Shale Ponzi.

        But, sometimes it just comes down to PLAIN OLE IGNORANCE. I don’t think BHP really understood what it was getting into, much like Franco-Nevada today.

        steve

        • I do not know but would this 200/500 million “gamble” a royalty play like they are used in gold more than just an equity/financing into these fields ?

          • RD,

            The DEVIL is in the details. While it is true that Franco-Nevada is buying “MINERAL RIGHTS”, I have no idea what that means in terms of Royalty Payments. Regardless, I believe most of these shale oil plays are past Peak Performance… the Permian still has a bit of life left.

            So, it seems to me that Franco-Nevada will not enjoy its return on investment, especially when the oil price falls back towards $30 during the next Market Meltdown.

            steve

          • I think that it will not change much whether oil is at 30 or 60 for Franco if they will be suing the same method used for gold and silver royalty business model. Funnily greedy royalty companies is OK where nasty bankers are evil as they are exploiting a very precarious sityation for commodity producers where the risk is still taken mostly by resources companies (and sometimes also some of their bondholders) while potential profit will go in large part to the royalty company : it is just a logic form of usury…

        • I agree with you: stupidity often comes from ignorance. But with your example at hand, the Billiton calamity, is even more striking to see Franco-Nevada doing this blunder. We should have now enough experience to know that shale oil is neither profitable nor it will be.
          Have you tried sending an e-mail to mr. Lassonde ?

          Another way to understand the problem would be to look at the incentives structure of Franco-Nevada. Are these managers rewarded by short term results ? Or also by long term results ? System analysts always give a lot of importance to the incentives felt by the decision makers.

  5. Why oh why? | August 7, 2018 at 9:34 pm |

    I smell a rotten fish here. Gold and shale oil are being linked. I don’t know why because I haven’t given it much thought yet. I’m guessing a key part will be to fudge the numbers somehow – transfer assets between entities. Perhaps it is being used to take down the gold industry? Or give it a dirty reputation with big losses? Take or hide gold off the books?

    But yeah, something is up and it seems very very wrong.

    Oh wait… had a thought… bring down a gold miner and place it into receivership – translation: “legally” steal the company from shareholders. Quite likely this.

    • silverfreaky | August 7, 2018 at 10:38 pm |

      Yes.That’s what i seee too.They make one PP after the other.And when you look to the financing they had 50 Millionen warrants in waiting position(german Notation).
      Sandspring Resources here for example.Re-Split 4:1 some years ago and now Frank Guistra holds a lot of shares.I see only an up and down at the miner stocks.At the same time they create new shares and warrants.Or they make unions with other companys and give security with a part of their own shares.From the partner they get knowledge.Bla Bla.The US and Canadian miner are the worst.Nothing is transparent.
      Maybe steve should talk more about the miner CEO behaviour!
      But Mark Twain said it all.

      A gold mine is a hole in the ground with a liar on top.

  6. dated but on Continental: https://www.bloomberg.com/news/articles/2017-09-28/it-ll-take-oil-above-50-for-shale-boom-oil-sands-to-pay-off
    “creatures of the capital market” – Jim Chanos.

  7. Northwest Resident | August 8, 2018 at 12:08 am |

    I doubt that we’ll ever know the real reason for this decision by Chairman Pierre Lassonde. I don’t think he’s an idiot, and I don’t think he’s oblivious to the dismal performance of the shale industry. Most likely, he’s been given his marching orders by superiors even if we don’t know who those superiors might be. And since everything else in the corporate and financial world is geared toward one and only one goal these days — to buy time, to keep BAU going a little longer — we might finally guess that it has something to do with that.

    • Northwest Resident,

      I truly believe that Pierre Lassonde and CEO David Harquail are investing in Continental Resources because they BELIEVE it to be a good ROYALTY INVESTMENT. I highly doubt they received any instructions from the ELITE to make this investment.

      You would be surprised at the severe lack of knowledge management has of other industries.

      It’s probably quite simple… Franco-Nevada is making a poor investment decision without knowing all the details.

      steve

      • Northwest Resident | August 10, 2018 at 12:01 am |

        Good points Steve. Just thinking outside the box here. I see that in a “Wall Street first” that now Goldman Sachs is looking to do the same thing basically, invest in shale/LNG. According to the article posted below. My “logic” is that when American oil/NG production goes into serious decline, it is game over. The financial and political elites know this. So, to keep it all going, profitable companies are now suddenly finding interest in investing in what everybody knows is a financial black hole. Sure, it makes no sense, unless you accept as I do that there is an unstated urgent national imperative to keep BAU going for at least a little while longer.

        https://oilprice.com/Energy/Natural-Gas/Wall-Streets-First-Goldman-Sachs-Looks-To-Venture-Into-LNG.html

        • Northwest Resident,

          You bring up an interesting point that I will be discussing as a NEW THEME here on out. Many followers have suggested that the Central Banks or even Commercial banks can bail out or backstop the Oil Industry. While this is a likely option, the world can no longer use finance to FIX a problem that is a PHYSICAL one.

          For example, for the Central Banks or Commercial Banks to FIX our oil problem, they need to FIND MORE OIL and not use PAPER to prop up the Energy Industry. If you look at the following chart, you will understand what I mean:

          The world is only replacing about 10% of the Oil & Gas that it is consuming. We consume about 65 billion barrels of oil equivalent (Boe) every year, and in 2017 we replaced 6.7 Boe.

          So, if the Central Banks want to try to FIX the problem, they have to FIND US MORE OIL. But, the problem is… THEY CAN’T because the market is unable to find much in the way of commercially viable oil projects.

          There lies the RUB.

          steve

  8. In the long run it may be that the prophecies of THE LIMITS TO GROWTH come to truth and we may see the phenomenon they described: in order to keep the primary sector running in an environment of ever scarcer raw materials the economic superstructure must be dismantled to fuel the infrastructure. It reminds me of that old MARX BROTHERS scene where the brothers burn a train in order to keep the train running. The only difference is that we are not shouting TIMBER! but ENERGY!

    If this is true and the forecasts of the CLUB OF ROME were correct then destroying a company in a non strategic sector like gold mining may be useful to keep the system healthy in the short term. In the long term, of course, the results will be calamitous.

    I hope dr. Meadows health doesn’t fail him and he can see if his forecasts were accurate. He is such a wise man !

  9. Frank Reindo | August 8, 2018 at 8:41 am |

    Good Article as usual. But there is nothing unusual about borrowing and repaying a revolver and how it is being reported above (what you highlighted). If you borrow $5K on your revolving credit card line per month and repay $4.5K every month, you would report total $60k proceeds from your revolver and $54K repayments at the end of the year…. with a outstanding balance of $6K at the end of the year.

    • Frank Reindo,

      True. However, borrowing from one’s revolving credit, especially at $6 billion in 6 months, suggests that the situation is much worse than what the Cash Flow Statement and Balance Sheet are showing.

      Why would a company need to borrow from its revolving credit facility if Shale Energy is such a wonderful thing???

      steve

  10. Recommend FNV investors swap all shares for WPM,and hope WPM doesn’t do something this dumb. WPM is gold/silver with now some cobalt streams. The fact that WPM went into cobalt also worries me some about Wheaton management going outside the realm of expertise as well.

  11. Investing in shale oil and having that listed as an “asset” is the equivalent of having “.com” on your unprofitable tech company’s title back in 2000.

    Is this an honest “blunder” born of stupidity, or is it outright fraud through deceptive advertising of your company with the goal of short term stock price appreciation, with the intent by this CEO to bail just before investors realize they have been duped?

  12. This may sound completely nutz but the stock market (The international commodities exchange) is run by a “Turing complete software” this is NOT a good thing. Last upgrade to the software was a BIG mistake. The market can not crash! This is totally insane! If you have accounts at TDAMERITRADE/Scott Trade. Bring up any stock chart than go to candles and examine all the naked shorts and longs! Brake it down to the trades of the last week!The FANGS are all zombies! I am real curious about the metals exchange. Disney and Microsoft and The list is to long!
    Nobody would be that STUPID to release a “TURING COMPLETE” AI !!

  13. Oh sh*t the pilots have all bailed the aircraft and everything is on autopilot!!!
    Every CEO, CFO, CIO and upper management of every company I’ve checked are gone!
    Now I think I know who authorized this insanity..
    Remember Obama and Yellen saying the market will not crash …..
    IF this is a Turning complete system….
    They need to find some way, some how to shut it down and SHUT IT DOWN NOW!!

  14. I always used to rate Pierre highly . . . now it seems he’s fallen by the wayside like Hoffman. Lets hope Keith Neumeyer doesnt lose his marbles . . .
    R

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