Chesapeake Energy Corporation (CHK) is the second largest producer of natural gas. It also produces oil and natural gas liquids. The company's operations are focused on discovering and developing unconventional natural gas and oil fields onshore in the US.
Due to its high leverage and some internal issues with the former CEO Aubrey McClendon, the stock plummeted more than 75% from around $67 to around $17 in July 2008. It hasn't been able to recover since then and has been trading in the range of $17-$19. But now due to an expectation of natural gas price rise, the stock might also see a spike.
Rising natural gas prices
Natural gas prices have gone up from the 2012 low of $1.84 to $4.21 now. The demand for natural gas has also increased and is expected to increase further because of its increasing use in different fields. At the time of low natural gas price, many producers cut the rate of natural gas drilling and converted their rigs to drill the more profitable oil. Now that the price is rising, this will cause a shortage in supply of natural gas and therefore will lead to increase in the price.
The company pumps out 4% of the total production of natural gas in the country and has the potential to produce even more if the price rises. It will also be able to expand its drilling budget to increase production.
Well-known investor Jeremy Grantham expects natural gas price to triple within five years. The reason is the lower price in the US as compared to other major economies of the world. The financial performance of the company is tuned in to natural gas prices. Former CEO Aubrey McClendon said that for every 10 cents increase in the natural gas price, company's EBITDA increases by $100 million. Therefore an increase may turn-around the fate of the company.
The company has more than $12.6 billion in both senior debt and term loan outstanding, with an average maturity of five and a half years. Due to its expansion programs, the cash flows generated are not used for retiring the debt. Rather the company has turned to asset sale. After selling about $10.8 billion in assets throughout 2012, the company is ready for more big sales in 2013. It just announced the sell of 98,000 acres in the Utica shale region of Ohio. These asset sales are helping the company get out of the massive debt, but this strategy is not sustainable and soon it will have to pay off its debts from the cash flows generated.
Earlier, the company expanded aggressively in the natural gas space. Its price fell due to the industry trying to produce more than the available infrastructure. Due to this, the market was flooded with excess natural gas, which led to the fall in its prices. Due to this, the company was left with a lot of debt and low cash flows.
Anadarko Petroleum Corporation (APC) is among the largest independent oil and natural gas E&P companies in the world, with 2.56 billion barrels of oil equivalent (BBOE) of proved oil reserves at year-end 2012. Its stock has achieved higher highs and higher lows over the past five years. This is an indication of an upward trend in the price movement. The P/E ratio of the company is in line with the industry average. But because the company has been beating the market estimates for many quarters, the stock is expected to move up when the next quarterly earnings result will be announced on 29th April.
British Petroleum (BP) is an integrated oil and gas company, which operates in two business segments- E&P and refining & marketing. Its stock has been range-bound since July 2012 and has been trading in the range of around $38-$45. It has been experiencing a support level of $40. The P/E ratio of the company is higher than its competitors and industry average EPS growth forecast is also not very encouraging.
The company is trading at a massive discount when compared to its industry peers. This low valuation is because of the concerns regarding the company's management and spiraling debt.
If the natural gas price rises as expected, the debt scenario of the company will get resolved. This will not only generate enough cash flows for the company to pay off its debt, but will also help it to carry on its expansion plans.
Since the future of the stock depends on the probability of natural gas price rise, this stock has a long term investment window. I don't see anything for it in the short term.