Chesapeake Energy Appears Very Well Positioned 21 comments
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For the first time in a long time, natural gas may have a time to run. When looking at oil, it has bullish technicals, but it is starting to look a little toppy in the current market environment. The refiners are absolutely getting crushed with the possibility of recession going forward and even more troubling, the price of oil is killing the crack spread.
Natural gas looks extremely bullish as the price doesn't currently reflect its value. Granted, it is generally valued off of oil and oil is linked to the dollar in its current trade, which isn't the same for natural gas as its price is more regional than international in nature. Natural gas is a highly volatile commodity and should be traded carefully, but there are other ways to do it within companies that have a large exposure to it.
Natural gas trades at around $10 and oil at roughly $110. I know these numbers are not exact but it makes it easier to figure what the true value should be. The average over time has been a six to one ratio with oil. Oil is inflated because of the devalued dollar, but if you check, even with a massive pullback in the dollar natural gas is still undervalued. Oil would have to trade for $60 a barrel for this to occur. If oil was to bottom at $80 it would still leave natural gas investors with a 33% gain.
There are several reasons I would invest in Chesapeake Energy (CHK). First, the volatility of natural gas is not for everyone, even with the possibility of it going higher. Second, it is the number one independent producer of natural gas (third including the conglomerates). It is the number one driller in the United States with 254 rigs. It has consistently beaten the market with its hedging strategies, with 2006 and 2007 gains in the billions of dollars. Year over year it has increased production, 34% and last year 23%. Estimates have increases at 21% and 14% the next two years.
Percentagewise it had growth in production and reserves better than any large cap competitor last year. It has over 10,000 prospective, unproven reserve locations that could have potential. It has a large inventory of seismographic technologies to help locate and isolate possible natural gas potential.
Estimates for 2008 have EBITDA at $57 billion (see Q1 conference call transcript). Free cash flow should increase to $5.3, with net income at $1.8 billion for this year. If you would have bought this stock 15 years ago, you would have increased your position 32 times over that period.
2007 proved to be a spectacular year for CHK. It posted $2.1 billion in revenues. It had an adjusted EBITDA of $1.4 billion, $1.3 billion in operating cash flow and $466 million in adjusted net income, giving its shareholders $.93 per share in common earnings. This was all done with a 369% reserve replacement rate.
When we look at the company from a growth standpoint, it seems to have a better outlook than many of its competitors, especially the oil conglomerates. As oil companies are having a tough time not losing production growth, CHK has huge increases in demand for natural gas. For 2006 and 2007 production grew 23% per year. In 2008 it is looking at over 20%; this with higher prices could mean substantial earnings. Its 11tcfe of proven reserves will increase by 33% in two years. Its inventory of proven drilling locations is logged for the next ten years with three times more proven reserves than unproven. In the past five years the EPS has grown from $.17 to $2.62. The stock was up 35% alone last year.
Back in 2000, CHK made several huge purchases with the oil and gas industry. The reason was that they predicted the large rise in both commodities coming, and timed it perfectly (or just got lucky), either way the company rewarded its shareholders handsomely. Many of its purchases were in areas that had difficult assets to access and thus now are affordable through newer technologies and increased price for the commodity. Now CHK is essentially moving to a drilling approach as opposed to acquisition, but selling areas at huge increases if the opportunity presents itself.
The best may lie ahead for CHK as it has huge areas to create revenue. It has a huge base to drill and as the price of the commodity increases it may be a good time to get in while others are focusing on oil. There will be a major conversion from coal to natural gas in the near future and that upside will probably be more for gas than oil. This is a safe and great play within the energy markets.
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This article has 21 comments:
In the same interview he talked about his recent purchases of the stock (a massive amount I believe and I think he mentioned he had 31 million shares, not sure if this is correct or includes options). He said flat out in the interview that he thinks the stock has a double. This is not the type of comment a competent CEO makes off the cuff. I assume the SEC would not be to happy if he were selling and pumping the stock on the way up. That is a true believer and I can not imagine anyone else who has more info about how this company will do.
Aubrey has been spot on far more often than not and he is buying shares with his own money. I think that's millions of reasons to join him.
Let's have some better analysis for a lead off article
McLendon bought shares, was right in the past & is probably right in the future doesn't pass for analysis
For example: Hedging doesn't always add to shareholder value & will be a significant negative for 2008. 3 or 4 years ago this was also true but overall they do end up on the + side. CHK HAS to hedge because they can not risk low NG prices because of high debt and cash committed to capex. Unlike companies like Cimarex which are cleaning up now because they are largely unhedged
It probably will double if NG stays in the $8 to $10 range but remember that it is a commodity & can just as easily fall back. Currently a very large facility is shut down in the Gulf and this is affecting NG prices which are virtually always down in the May shoulder season - this is an anomaly.
This company has HUGE potential with he Fayetteville & Haynesville shale areas but pull costs are not known & likely to rise + they need high NG prices to be economic.
It pays not to fall in love - even with Aubrey :-)
Better find out before investing 10k. The interview was on Fast money.
I will cover it shortly
www.investorslive.com/.../
As a long term holder in this stock, I was happy to here the CEO's interview on Fast Money speaking of hedging. He has bought a ton of shares and looks to continue to do so. I am long all year on this stock and will continue to do so. Thanks again everyone.