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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