Chesapeake Will Race Higher On Natural Gas Upswing

| About: Chesapeake Energy (CHK)
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Times are tough for Oklahoma City-based Chesapeake Energy (CHK). Chesapeake is the number-two producer of natural gas in the U.S., and is also the nation's most active driller of new wells. Unfortunately for Chesapeake, natural gas continues to settle to new lows. Natural gas managed to slide under $2 per million BTUs on Wednesday. Chesapeake's revenue in 2012 has fallen in-step with the declining price of natural gas.

So, what is Chesapeake doing about the pinch? It's raising cash by selling assets to rival Exxon Mobil (XOM) and other investors. In a statement Monday, Chesapeake released information about $2.6 billion generated through three separate deals to numb the pain from natural gas's plummet. Chesapeake agreed to sell 58,400 acres of rich oil shale in Oklahoma's Woodford Shale to the nation's top energy company, Exxon. The land was valued at $590 million. It raised an additional $1.25 billion through preferred stock sales to a Blackstone Group affiliate. The new subsidiary created by the deal will operate as CHK Cleveland Tonkawa LLC, and Chesapeake will retain control over 100% of its equity. Lastly, Chesapeake signed a $745 million deal with an affiliate of Morgan Stanley (MS) to sell off 10 years of volumetric-production payments. The deal allows the energy company to be paid upfront for the next decade of natural gas production in its Anadarko Basin wells.

Is There Hope For Natural Gas?

T. Boone Pickens made his bullish sentiment clear in an interview on CNBC's Street Signs Wednesday.

"I have to think you're close to a bottom. You've got the rig count going down. That's what you want to watch."

The billionaire Texan also looks forward to the use of natural gas in heavy-duty trucks. In a previous CNBC interview, he discussed the nation's switch to diesel for these vehicles in the 1970s.

"OK, go back to '72 when we switched from gasoline to diesel for our heavy-duty trucks. Well, what was that all about? Price. Diesel was cheap. How long did it take to accomplish it? Five years."

Hertz sees the potential in compressed natural gas for commercial vehicles as well. The rental company announced Wednesday that it is testing the waters by offering10 CNG cars for rent at Oklahoma City's airport. Chesapeake's CEO Aubrey McClendon welcomed the news.

"Through its natural gas vehicles rental program, Hertz shows its industry leadership and further illustrates the exciting future of natural gas as a transportation fuel," said Aubrey K. McClendon, Chesapeake Chief Executive Officer. "By renting a CNG vehicle, Hertz customers will cut their fueling costs in half, while driving a vehicle that is better for the environment. We hope the success of Hertz's program in Oklahoma City leads to adoption of this program nationwide."

Beyond personal vehicles, natural gas fuel cells are finding a home in new bus and mass transit systems. Fuel cells are inexpensive and can be operated for thousands of hours. In addition to cost-effective operation, they produce such low levels of carbon dioxide that the pollutant can be trapped, rather than emitted into the atmosphere.

I see the potential for the aviation industry to welcome natural gas as well. As a private pilot, I have watched the price of the gas used for light piston aircraft rise to $5.77 a gallon. Jet A now stands at $5.45 per gallon and the airlines, even Southwest despite its famous fuel-hedging strategy, are feeling the strain. Just three years ago, Qatar Airways demonstrated the first commercial flight using a 50-50 syngas made from kerosene and natural gas, and plans to expand its use. Qatar is the world's largest exporter of liquefied natural gas and, following the 2011 opening of the Pearl Gas-to-Liquids Plant, holds the top spot for GTL exports. The potential cost-savings to airlines and passengers is enormous, possibly as high as 50%. Airbus predicts that 30% of the fuel jets burn in 2030 will be alternative. Converting current turbine technology to use the new fuel will not be prohibitively expensive. Turbines are designed to run on essentially any flammable liquid.

Who Will Profit From the Resurgence?

Investors are bearish about Chesapeake's asset sales to Exxon, Blackstone, and Morgan Stanley. The stock shed 3% on Wednesday to close near $20 while the S&P rose .74%. Yet, the company offers a low price-to-earnings of 8.67, earnings of $2.32 per share and pays out a $.09 quarterly dividend yielding 1.60%. The stock has fallen 40% in the last year, despite positive cash flows of $249 million and a net profit of $1.57 billion. That's opportunity knocking, folks. I must add, while I feel that Chesapeake is an excellent way to play rising natural gas prices, it is saddled with debt. Chesapeake's current ratio is .45, meaning it has only cash on-hand to pay down 45% of its liabilities within the year and will need to refinance a large amount of its debt. Despite the debt, I believe natural gas and Chesapeake Energy have turnaround written all over them. Buy Chesapeake or the US Natural Gas Fund (UNG) to add some exposure to your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.