Chesapeake Energy (CHK) was probably the most affected company after the natural gas prices slumped. While Exxon Mobil (XOM), the biggest natural gas producer, was able to get out of the slump relatively unscathed, Chesapeake Energy was not so lucky due to its heavy exposure to natural gas. In addition, some corporate governance issues also contributed towards the poor performance of the company. However, corporate governance issues have been resolved and the company looks to be on the right track at the moment.
Future challenges for the company include funding gap, reducing the exposure to the natural gas segment and getting rid of non-core assets - the last of these three challenges can help the company solve its funding gap as well. Let's look at how the company is tackling these issues, and what are the future prospects of Chesapeake Energy.
Natural Gas Making a Recovery and Potential for Exports
Natural gas prices are on the rebound, and we might see a substantial recovery in prices over the next two years. Winter was relatively cold this time around, and domestic demand played an important role in driving up natural gas prices. One of the main reasons for record low natural gas prices was over-supply in the market. Shale plays have blessed the U.S. with a treasure that can help the country fulfill its energy needs for years. However, relentless drilling resulted in oversupply. Although this was beneficial for the domestic consumers; it proved to be destructive for natural gas drillers.
Drilling licenses in the country forced the drillers to maintain a certain production level; however, demand for those production levels was non-existent. As a result, inventory levels went through the roof and demand and supply mismatch resulted in record low prices. However, more recently, domestic demand has been on the rise, which has caused the natural gas futures to trade at significantly higher prices compared to the record low levels. Natural gas futures have crossed $4 after a very long time, and if the improvement in demand continues; we might see further upward movement in natural gas futures.
At the moment, almost everyone is focusing on the export of liquefied natural gas (LNG) - without realizing that LNG exports might not start in the near future. On the other hand, natural gas exports to Mexico have already been increasing. Mexico is expanding its energy infrastructure and the country is in need of natural gas. At the moment, Mexico is increasing its imports of natural gas from the U.S., and the demand is expected to grow further over the next five years. As a result, I do not believe the domestic market will face another period of oversupply, which should result in improved natural gas prices in the future. In the long-term, LNG exports along with natural gas exports to Mexico will provide support to natural gas prices.
Funding Gap and Non-Core Assets
Funding gap was one of the main issues for Chesapeake during the last year, which caused the stock price to fall for a short while. However, asset sales allowed the company to make up for the gap and get out of this trouble. Chesapeake will carry on its sale of non-core assets during the current year. The sale of these assets will solve two issues for the company: funding gap for Chesapeake will be covered with asset sales and sales of non-core assets will also allow the company to clean its balance sheet. Underperforming assets can be sold to bring in much needed cash.
At the moment, the company is trying to sell 98,000 acres in the Utica shale region. If the acreage is sold; it will be the third sale during the year after the $3.2 billion joint ventures with Sinopec (SHI) and Total (TOT). Assets in the Utica shale have not yet been assessed; however, Chesapeake might still be able to get good value due to liquid rich land in the area.
I am optimistic about the prospects of Chesapeake energy due to the considerable recovery in the main market segment of the company. Furthermore, Chesapeake have been successful in getting rid of most of its non-core and underperforming assets, which has allowed the company to become lean and more focused. In addition, capital needs have also been fulfilled because of these sales. Going forward, I believe if the company is able to execute its asset sales and reduces the debt, we will see a substantial rise in the stock price. If the natural gas prices keep rising, Chesapeake might reach between $24 and $27 per share by the end of the year.