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Gas from Permian oil wells causes big Chesapeake Energy investor to walk away

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Gas from Permian oil wells causes big Chesapeake Energy investor to walk away

Two of the biggest investors in Appalachian shale stocks walked away from two of the biggest natural gas producers in the country during the first quarter, according to a review of SEC filings.

Saying associated gas from oil drilling in the Permian Basin is going to depress natural gas prices for a long time, Southeastern Asset Management Inc. sold its remaining 4% stake in Chesapeake Energy Corp. for a loss. For years, Southeastern had been Chesapeake's largest shareholder.

Southeastern's Longleaf Partners Funds, managed by "the Warren Buffett of Memphis," CEO Mason Hawkins, still had kind words for the company on its way out. "Despite our mistakes in Chesapeake, which resulted in a 65% loss over our holding period," the fund praised CEO Doug Lawler and board Chairman R. Brad Martin in its quarterly commentary, "for doing terrific work from a tough position to improve the company's balance sheet and operational efficiency."

"They grew value per share where they could control it, but the present and future impact of Permian associated gas production on the long-term natural gas futures price swamped their great efforts," the fund said in a quarterly letter to investors.

Hawkins and Southeastern still see value in Appalachian shales, having invested $1.5 billion for a 21% stake Appalachian coal and gas producer Consol Energy Inc. in July 2015 and pushed for its eventual split into pure-play shale gas driller CNX Resources Corp. and a coal company that kept the CONSOL name.

CNX gained 5% for Longleaf in the quarter, a bright spot in a portfolio that lost 2.6% at the same time. "Hedges and a conservative balance sheet should help protect the company from natural gas price volatility for at least the next several years," Longleaf said. "Earnings should grow above 10% annually in almost any commodity price environment."

Another fund to close a large stake in an Appalachian driller was JANA Partners LLC, which fought EQT Corp.'s merger with neighbor Rice Energy that closed in November 2017. JANA challengedchallenged the rationale for the $6.7 billion merger creating the U.S.' largest gas producer that combining acreage positions would create space for EQT to drill more cost-effective wells.

It is not clear if JANA made any money for its efforts with EQT. According to SEC filings, JANA had owned 9.66 million shares in EQT, purchased for $558.1 million. JANA's Form 13F indicates it sold that stake sometime in the first quarter. EQT's share price opened the year trading near $60 per share then dropped below $50 per share in early February. EQT ended trading on June 8 at $53.12 per share.

Two other big Appalachian drillers, Range Resources Corp. and Southwestern Energy Co., caught the eye of large investors during the quarter. Balyasny Asset Management LP bought millions of shares in both companies in the period.

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