Watch For the Drop $CHK
When a big company has to reorganize its usually not good for the current shareholders. But if you time it right it could be a great long term play for your portfolio.
Chesapeake Energy (CHK) has been through a lot recently and lost a considerable value due to some concerns about the debt. In the most recent earnings announcement, the management indicated that assets sales could be delayed. The company is trying to raise cash by selling assets to pay off some of the outstanding debt. Chesapeake stock is beaten down badly at the moment by the bears, which I believe presents a great opportunity to long term investors.
It is true that there have been concerns about the corporate governance of the company, and it can certainly not be called a champion of corporate governance. However, necessary steps have been taken, and the company is moving in the right direction. There have been some significant events since the earnings announcement. Let’s take a look at those events and their expected impact on the stock.
Betting on a Colder Winter:
According to the reports, Chesapeake is going to go into the winter without hedging its position against the commodity prices. At the time, when most of its competitors are establishing hedges to safeguard them against the volatile commodity prices; it can be a massive risk. According to the reports, the CEO Aubrey McClendon is expecting the cold winter to drive natural gas demand. As a result, the gas prices will show a significant recovery. On the other hand, if the bet pays off, it can prove to be an excellent decision. There are mutterings of a colder winter as compared to the previous year, which has caused the gas prices to rally. There are still fears that new pipelines will result in increased supply. Record high storage and increased supply can cause the gas prices to remain low.
In a previous article, we discussed the situation of oversupply, and how leasing system in the country pushes the participants. According to the lease agreement, the companies have to drill quickly or surrender the drilling rights. This is exactly what is happening in the sector. At Eagle Ford Shale, most of the companies are drilling gas wells just to meet the lease obligations. At a time when the sector is already facing a problem of oversupply, these lease agreements are not helping these companies. However, most analysts believe that the colder winter will have a bigger impact than an increase in the supply, resulting increased prices.
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Been waiting for gas prices to recover for some time. I think the gas fracking oversupply is going to prove to be temporary, so maybe this winter is going to kick it off. We shall see.
We aggressively played the gas bottom in April and locked in 30-50% gains. The end of the glut? The question is really a matter of when in our opinion. The drop in rigs, the increased demand and the more gas reserves being shut in, is all a receipt for a sharp bounce in price.
I think we are just begining to see a drop in production despite the “new” gas lines coming out of the Marcellus. The delay in the production drop was related to several factors, the return of the shut in volumes being the greatest. That is now behind us and even the “oil” rig count has begun to fall as companies have trimmed their capex budgets. The rapid decline of the dry shale wells production will not be maintained without the active drilling of at least 500 nat gas rigs and we have been below 430 for the last 10 weeks! I’m looking for a significant deficit by March!
The combination of those factors are likely going to start a sharp rally on natural gas prices. Any ideas where this may end up throughout 2013? Just looking for a speculative opinion. TIA
I think we’ll be north of $6.50 by june! The smaller companies will return to the nat gas fields if they have no opportunities in the oil fields. All of the bigger companies will stay put in the oil shale earning between $10- $15 mcuft/eq. The epa will make it difficult to return to coal, but price will drive this to some extent. I think we have hit bottom, and have started a multi year bull market for nat gas.
I appreciate your sediments on the performance of natural gas prices. I tend to agree with your bullish outlook. I think it is great for natural gas stocks and etfs and many oil & gas producers as a whole. Do you have any stocks you are favoring for this upcoming rally?
All nat gas companies will have a significant improvement in their current P/E ratios, but CHK has a lot more to gain since it has been taken out to the woodshed because of the street’s worry about their debt to cap ratios and perceived corporate mismanagement. I think all of these problems will be in the rear view mirror with an increase of nat gas prices above $4.50 and the final asset monetizations planned for the 1st quarter. XOM is the only company with more nat gas production, but with 7 times as many shares outstanding. This will give CHK more bounce to its bottom line with rising nat gas prices. The same goes for their current and futher increases in their liquids production.
I tend to agree $CHK has a lot of upside potential at this point. I also like $UPL $SWN $UNG.
I like swn and upl as long term stocks and like ung depending on the nat gas trend. This is a good time for ung with good short term prospects! Winter has arrived and the withdrawals will begin to be noticed, especially for 1-13-13!
I meant 1 -3-13!
Yes I agree short term $UNG is good. I don’t trust it long term. I still think $XOM is a portfolio cornerstone for anyone.
hard to go wrong with xom, but not enough beta . The next two years will be truely remarkable for CHK!
Yes I am very very bullish for $CHK I just see $XOM as a great foundation holder. Please come back and share more of your stock ideas.
will do.