Chesapeake Energy (CHK) has been a hot topic and lately has been on an outstanding run. The recent move up has turned heads and money flows into the company like it hasn't seen before as the stock shoots up. I am wondering how long the stock can keep this type of growth, or are we destined for a large pullback. The company has some heavy challenges it faces and has made some good business moves in 2012. Should investors get in now?
The U.S. East Coast is seeing some of the coldest weather in two years. This cold weather is expected to last, according to most of the extended forecasts. I believe it is one of the catalysts that have driven energy companies over the last 10 days. Chesapeake is not the only company that has spiked. Exxon Mobile (XOM), Chevron (CVX), and Southwestern Energy (SWN) have also spiked over the last 10 days because of the sudden need for heating oil and the spike in energy use to keep warm. There is another arctic blast expected to hit the east coast again this week, so I would expect that to continue to benefit the energy companies.
Just before the Spike
Investors were lukewarm to the company as they observed its latest business moves as just "catching up" to how responsible companies should operate. In terms of corporate governance, certain shareholders would now be allowed to nominate up to 25% of the company's directors. Certain types of spending would be policed tighter; such as charitable, political, and trade association budgets. Executive bonuses were trimmed and even Mr. McClendon volunteered to forego his 2012 bonus. Should investors be impressed? Responsible companies should operate this way. Philip Weiss, senior analyst at Argus Research, chimed in his views on these moves:
The changes were merely 'incremental.' The house is not in order yet...We are far from a resolution. [McClendon] is likely to stay, but not as powerful as he would want or as he used to be. If you don't have a position [on Chesapeake], don't take one.
CHK continues to diversify away from natural gas only but also continues to be affected by the price of the commodity. Investors are also interested in the ongoing investigation into McClendon's spending practices in 2012.
The Company Is Making Smart Business Moves
With the downtrend in natural gas prices, it has gravitated toward spending on drilling "liquid-rich" oil plays in the short term. Drilling capital expenditures were increased 20% and the results have been excellent. The company increased oil production 96% in the third quarter year over year. It has the greatest inventory of "unconventional resource" of any domestic independent producer.
Unconventional oil is petroleum produced or extracted using techniques other than the conventional (oil well) method. I also believe it has done a good job with its determination to minimize capital expenditures and devolve $14 billion in assets in 2012 and $4 billion plus in 2013.
Even though I like the moves I see the company making, big challenges remain. The low natural gas price monster still looms strong, influencing the company's bottom line. The third quarter also revealed 79% of the total production still came from natural gas. The combination of a weak financial profile (due to natural gas prices) and its debt level, still posts a challenge to the company.
After building a strong foundation for 10 weeks from early November through mid January, the stock suddenly spiked and for almost the last two weeks, shot up. It went from about '$16.3' to '$19.36.' This is a gain of 18.8% over a two week period; it is quite a run! The bullish move, (finally coming), is not something that is a surprise as I observe the chart. As it builds its foundation, I can observe strength building in the stock. The RSI indicator continued to move up and finally broke through the '50' line into bullish territory before the spike up. I can observe the same thing in the MACD MA's as it moved up. It did not hit bullish territory until the spike, but it does not look like it is done moving yet. The Bollinger bands do not tell us anything because it was moving sideways, but I will be interested to see how the stock moves in the near future. It has really gone up too fast.
The Options Play
Buy the March 2013 put with a strike of '19' priced at $0.84.
Net Debit to Start: $0.84
Maximum Profit: unlimited (stock value)
Maximum Risk: net debit
Maximum Length of Trade: 8 weeks