Thursday, September 5, will most likely go down as one of the worst days in the history of Chesapeake Energy (CHK). Why is that, you ask? According to Jacqueline Sahagian, "Chesapeake is being forced to give up a substantial chunk of land in New York, as the state doesn't look like it will lift its existing ban on hydraulic fracturing anytime soon and the company must also pay a $7.5 million settlement to Pennsylvania landowners who accused the company of making illegal deductions from their royalty payments". In the wake of Thursday's news, I wanted to take a closer look at Chesapeake and highlight a number of additional catalysts that I think could be beneficial to any investment related decision regarding shares of the company's stock.
Headquartered in Oklahoma City, Oklahoma, Chesapeake Energy's operations are focused on discovering and developing unconventional natural gas and oil fields onshore in the U.S. Chesapeake owns leading positions in the Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime and Niobrara unconventional liquids plays and in the Marcellus, Haynesville/Bossier and Barnett unconventional natural gas shale plays. As of August 22, 2013 Chesapeake was the second-largest leaseholder in the Eagle Ford with a total of roughly 485,000 net acres of land.
Performance and Trend Status
On Friday shares of CHK, which currently possess a market cap of $17.0 billion, a forward P/E ratio of 12.38 and a beta of 1.42 settled at a price of $26.02/share. Based on their closing price of $26.02/share, shares of CHK are trading 1.90% above their 20-day simple moving average, 10.48% above their 50-day simple moving average, and 28.03% above their 200-day simple moving average. These numbers indicate a short-term, mid-term, and a sustainable long-term uptrend for the stock, which generally translates into an aggressive buying mode for most traders. From a cash and debt perspective, Chesapeake has a total of $677 million in cash and $13.29 billion in debt on its books as of June 30, 2013.
Near-Term Catalyst #1 - Recent CDD Figures Bode Well For Chesapeake
A Cooling Degree Day, or CDD, is a measure of how much warmer the outside temperature is compared to the room temperature of a person's main living space is. When it comes to natural gas, the higher the CDD figure the better. According to Ingrid Pan, of Market Realist, "For the week ending August 31, cooling degree days for the United States totaled 80 versus the normal figure for corresponding weeks past of 55".
This implies more natural gas demand and therefore higher natural gas prices. For the remainder of the year and through 2014 the EIA notes that, "Colder winter temperatures in 2013 and 2014 (compared with the record-warm temperatures in 2012) are expected to increase the amount of natural gas used for residential and commercial space heating". If the number of CDDs continues to grow well into the fourth quarter of 2013, there's a very good chance shares of Chesapeake could trade higher heading into the first quarter of 2014.
(Source: Market Realist)
Near-Term Catalyst #2 - A Potential Target for M&A Activity
In a recent article, my fellow SA colleague Matthew Smith noted that Chesapeake has the potential to be considered a very viable takeover target. Mr. Smith says that Chesapeake "is a company which has enough assets to keep one of the 'Big Oil' names occupied for some time developing the properties while also offering a solid mix of oil, NGL and natural gas production possibilities. When one looks at possible takeover candidates one of the top questions is how much more value could you realize from those assets than is currently being derived from the owner and when you look at Chesapeake the answer everyone seems to come up with is a lot".
Investors need to keep in mind that many of the 'Big Oil' names have what I'd like to think is much more clout in places like Washington DC, and therefore could potentially negotiate the current anti-fracturing regulations that are holding things up throughout parts of western New York.
When it comes to those who may be looking to establish a position in Chesapeake Energy, I'd continue to keep a watchful eye on a number of additional catalysts. In this instance I'd keep a closer eye on the demand for natural gas over the next 12-18 months, as well any chatter that would bring the idea of potential M&A activity involving Chesapeake to the table.