Chesapeake's (CHK) stock price has gone up by about 3% in the last month. The prices of natural gave has been increasing lately and has now crossed $4. Although the company has diversified its production towards liquids and oil, and natural gas production has been declining, it is still a large portion of the total revenues of the company. As a result, increasing natural gas prices are likely to have a positive impact for the company in the near-future.
What the cold brings this year
As colder than average temperatures continue across most of the U.S., natural gas prices are heating up. Natural gas prices are at the highest point over the past two years - the colder weather has forced the utilities to use more natural gas, which has resulted in natural gas prices going up by 26% since the November 1. Furthermore, the increased demand has resulted in erosion of supply and it is expected that natural gas prices will remain high in the short-term. At the moment, natural gas futures are selling for over $4.4 per million British thermal units.
The increase in natural gas prices could be of advantage for Chesapeake in the fourth quarter. In the third quarter, the company's realized price for natural gas increased by 15%; its natural gas production decreased by 9%. Altogether, the company's natural gas revenue rose by roughly 4%. Due to the company's asset reduction and change in policy, its natural gas production isn't likely to rise in the fourth quarter.
Based on the company's current outlook and its performance during the first three quarters of 2013, its natural gas production may reach 260 Bcf, which is a 7% drop from the fourth quarter of 2013. The price of natural gas is likely to be only 2% higher than last year. In total, revenue from natural gas may fall by roughly 5%. Despite the drop in production, natural gas and NGL still account for nearly 48% of Chesapeake's revenues from production.
In the last year, Chesapeake has been enjoying increased revenues and decreased operating expenses. This has allowed the company to swing from a $3.19 per share loss in Q3 of 2012 to a profit of $0.24 in Q3 of 2013 while the average realized increase in the gas price is $0.29 over this time. Amazingly, it did produce 55% increase in the stock price in the respective period.
Natural Gas Exports to Mexico Will Support the Increase in Price
Exports of natural gas to Mexico have played an important role in tackling the issue of oversupply in the domestic market. Over the past three years, the natural gas exports to Mexico has more than doubled, and according to a report by Barclays, the demand is likely to increase over the next three years. There are a number of reasons for the increase in demand from Mexico - the country's own reserves have fallen at the rate of 11% while the population and the demand for energy have increased at a higher rate. As a result, the demand gap has increased, which has created a great opportunity for the U.S. According to Barclays, US exports to Mexico will increase from an average of 2 Bcf/d in 2013, to 2.2 Bcf/d in 2014, to 3.5 Bcf/d in 2015 and to 4.5 Bcf/d in 2016.
Natural gas exports to Mexico are beneficial to both countries - U.S. is able to tackle its problem of oversupply in the domestic market and Mexico is getting cheap energy, which gives it competitive edge over a number of other countries and makes it more attractive for investment. Mexico's competitive advantage will likely remain as long as the U.S. shale gas reserves last. These exports will surely help natural gas producers such as Chesapeake and Exxon Mobil (XOM) as the demand will remain high and result in sustained higher prices.
There is no doubt that the rising prices of gas would be of advantage to the company in the fourth quarter. I have maintained a positive outlook for Chesapeake since the company decided to shed some of its assets and change the leadership. At the time, the stock was trading close to $17. I maintain my stance that the company will continue to make recovery and the stock will be trading much higher over the next two-three years.
I usually do not talk about the stock options - however, here I will talk about some activity in the options market as a reference, and to show what the market is expecting from the company. There was an unusually large sale of put options at the strike price of $24 (sale of put options means the seller of the options has a positive outlook about the stock and does not expect the stock price to come down) - 10,000 put options were sold, much higher number than the previous number of put options (open interest of just 792 put options). The seller of the options will have to buy shares if the stock price goes below $24. This means that the market expects the stock to maintain price over $24.
Investors with the long-term investment objective might not be concerned about the short-term trends in the stock. However, it will certainly be encouraging for them to know that the market expects the stock to do well in the short-term as well.