Chesapeake Energy: Peaking for Now?

Last Friday the jobs report hit with another 598k jobs lost in January the market moved up in spite of the bad employment news. Now Wall-Street and Main-Street are looking to the government to pass the huge stimulus plan help things out. I’m skeptical as many others are as to whether the current rally is sustainable right now, whether the stimulus plan is passed and especially if it’s not. Back in 2008 the big bail-out money that was given out and the big Fed rate cuts just resulted in buy on the rumor sell on the news rallies. I’m betting the same thing this time again too.

Last week my stock pick was a short sell on Nustar Energy (NS). So far so good with tight stop-loss. This week I’m putting another short sell on another big energy company. Fundamentally, energy is a great investment long term as long as the economy is growing, but the oil bubble pop last year, with the economy now in the toilet with who knows when it’s getting better, and demand destruction still in place, the deflation environment is going to hurt everyone, and it’s showing in the energy stock charts.

If you now see that we are in recession, I would suggest to start looking at the components in place currently that can lead to depression now. The worst is yet to come in my opinion. I’m still looking for another big market sell-off anytime. This recent rally has been a weak one at best. Then again the bear market rally could keep extending up before the next phase of downtrend continues.

Short Sell Chesapeake Energy (CHK)

• Sell Entry: 18.85 to 17.46
• Stop-Loss: 18.86 or more
• Take Profit Areas: 16.56, 15.66 to 14.76, 13.64 to 12.02, 12.41 to 11.85, 9.57 to 9.13

Last week natural gas storage levels dropped, providing a positive for Chesapeake. Another possible positive is recent legislation that has been introduced to increase tax credits for buying natural gas powered vehicles along with a bill to increase domestic production of natural gas autos and trucks. These initiatives, if and when brought to completion, will take time to implement and affect the market. In the mean-time the economic slowdown provides a better short-sell than long position on CHK and other energy stocks near term we see.

Chesapeake Energy Company Profile

Chesapeake Energy Corporation, an oil and natural gas exploration and production company, engages in the acquisition, exploration, and development of properties for the production of crude oil and natural gas from underground reservoirs. It also markets natural gas and oil for other working interest owners in properties it operate. The company’s properties are located in Oklahoma, Texas, Alabama, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota, Nebraska, New Mexico, West Virginia, Kentucky, Ohio, New York, Maryland, Michigan, Mississippi, Pennsylvania, Tennessee, Utah, Virginia, and Wyoming. As of December 31, 2007, it had 10.879 trillion cubic feet equivalent of proved reserves; and also owned interests in approximately 38,500 producing oil and natural gas wells. The company was founded in 1989 and is headquartered in Oklahoma City, Oklahoma.

Click here to review and try out the Trading Software I used in determining my short position on CHK. Enter I2S in the "coupon code" field to receive the 5% discount.

Click the Chesapeake Energy Stock Chart for a larger view.

Disclosure: Short CHK.

Comments

[Perry1961:]

Chesapeake hedged much of their production for the next few years at much higher prices. It's also important to note that NG production is much easier to curtail than oil. Depletion rates,especially in shale areas, are extremely high. It's dangerous to short CHK here. Try again in the 40's.

Feb 10 06:04 AM

[Ozarker:]

I got your chart right here!

Feb 10 09:29 AM

[simon shain...:]

CHK and Range resources are talking to an oil terminal in Luzerne County,Pennsylvania to store millions of gallons of water for their potential 'frac' use. The susquehana River Water basin Commission is involved in talks as well. The need for many billions of gallons of water is required to get the natural gas out of the marcellus Shale deposits in these PA counties that CHK and others bought lease rights too. Thsi terminal is near the susquehana Power and Light nuclear facility by the river. Stay tuned for more info. I will check to see if this company is public or has investment opportunities.

Feb 10 09:31 AM

[Shaggieman:]

I wouldn't be shorting CHK with the Obama plan coming out today and I agree with Perry61's analysis. Who to say that XOM or some other cash rich company won't swoop CHK up?

Feb 10 10:49 AM

[BrotherMaynard:]

"Who to say that XOM or some other cash rich company won't swoop CHK up?"

Rex Tillerson, XOM's CEO, will actually say it: “There’s still a lot of settling out on valuations that has to happen,” Tillerson said. “I’m not sure the valuations have all settled out yet.”

www.bloomberg.com/apps...

Feb 10 03:48 PM

[Mmarrkk:]

Bro Maynard: Excellent reply! If Letterman is ever sick again, you'd make a great guest host!!

XOM is biding its time and counting its B-b-billions in cash, just waiting. Kind of like those turkey vultures sitting on the telephone pole waiting for the injured animal to stop moving! Or maybe a better analogy is a tiger waiting to pounce on the "runt" of a herd of zebras.

Only exception to your conclusion: I wouldn't say they won't buy CHK or someone else; I think it won't be in the first 2 qtrs of 2009. Maybe late this year?? Who knows. These guys are great at holding cards close to the vest. But they aren't letting today's market environment sway their long term approach. They are moving the same way today and they were a year ago. Slow and steady (and gigantic!) wins the race.

Feb 11 09:19 AM

[soonerxii:]

CHK and many other energy companies are good short term shorts imo.

Yes, you SWNs and your XTOs and CHKs will do very well under an Obama (Rom Emanuelle) admin. But I think the author is right to consider that the drivers of these stocks are still many quarters out.

It's simple people...we have had a nationally cold winter starting in October. Some of the highest populated areas have been cold most of the winter... and yet the wellhead price of nat gas at the henry hub is like 2 bucks?!? Do you think that price is going to go up in March when everyone is turning off their heaters?

Feb 11 09:36 AM

[Mmarrkk:]

"wellhead price of nat gas at the henry hub"??? What on earth are you talking about?? Henry Hub is not a wellhead price and there is no such thing as a wellhead price at the henry hub.

Henry Hub prices are $4.50 +/-. Well head prices range from $4.50 (no deducts from the hub) to $1.50 ($3 deduct in the remote rockies).

Feb 11 04:03 PM

[Michael Mic...:]

Closed CHK Sell Position with small profit. Off to the next low-risk high-reward trade opportunity.

Feb 16 07:06 AM