2012 was definitely a rough year for Chesapeake Energy (CHK). Natural gas prices were abnormally low all year long, leading to the company losing nearly a third of its total share price. Now of course natural gas prices alone weren't the sole cause for Chesapeake Energy's struggles; mounting debt and corporate guidance were also issues. However, the suppression of natural gas prices definitely made business much more difficult for Chesapeake, seeing as though Natural Gas Production alone accounts for nearly 40% of Chesapeake's total revenue. Despite the negativity in 2012 though, there are many reasons to believe that 2013 might be a much better year for Chesapeake.
- Diversifying Revenue Streams
Due to the high volatility of natural gas prices, Chesapeake had to do something to reduce its revenue streams dependence to the prices of natural gas. 80% of total sales last quarter were from natural gas. In an attempt to diversify, Chesapeake doubled its oil production year-to-date and increased its total liquid production. Natural gas now only makes up 70% of Chesapeake's total reserves, as opposed to 83% last year, so the company is heading in the right direction for diversification. Still, Chesapeake plans to continue diversification to reduce revenue dependency on natural gas prices.
- Increased Business Prospects for Natural Gas
Thus far this winter, temperatures in America have been lower than expected. This has been great for natural gas companies like Chesapeake, where it is seeing an increased demand in natural gas for heating homes.
Natural gas is also expected to account for more power production in the United States in 2013. In 2011, natural gas accounted for 25% of the countries total energy production, however in 2013 that number is expected to grow to 30%. Over time too, the country is expected to begin to phase out coal power plants in favor of cleaner alternatives such as natural gas.
- Debt Reduction
Chesapeake has had a long history of debt and in 2012 its debt situation got much worse after the company reported that its debt had risen to $16 billion in Q3. Chesapeake is lucky because it holds plenty of assets in which it is selling to help pay off the debt. This year it sold large portions of assets to Chevron (CVX) and Shell (RDS.A), including its Permian basin acreage. With these asset sales, Chesapeake was able to raise about $3.3 billion. Chesapeake plans on continuing asset sales and reducing investing this year to help further reduce the companies debt.
Despite these three positives for Chesapeake energy in 2013, I do not see Chesapeake as more than a speculative play on natural gas. The current debt situation is a red flag for me, and until I see Chesapeake substantially reduce its debt, I am not interested in this stock. I would rather invest in a company like Exxon Mobil (XOM) with a more diversified energy portfolio that is not so dependent on the price of natural gas.
Chesapeake is currently priced right around $17 per share with a 52-week high of $26.09. Chesapeake currently yields 2.04% and has a long term price target around $21 per share according to Trefis, giving the stock a 15% upside from current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.