We remain cautious on near-term natural gas prices but constructive over the intermediate to long term, explains Elliott Gue, resources sector expert and editor of Energy & Income Advisor.
Despite all the hype surrounding the US/EU trade deal on natural gas, there is no near-term impact on US natural gas demand. Rather, we believe the bigger driver of front-month natural gas futures prices remains the tight US gas storage situation.
Companies that produce gas have limited exposure to near-term gas prices and the stocks tend to follow longer-term price indicators. However, if we do get a drop in gas back toward $4/MMBtu this summer, you would likely see a pullback in some natural gas levered stocks.
That’s why we’re starting with a small base position in Chesapeake (CHK) for the model portfolio with the intention to recommend buying more if the stock were to dip somewhat from the current price.
Many investors will undoubtedly remember Chesapeake as one of the pioneers of the US shale boom, particularly in natural gas some two decades ago. It was a premiere energy growth company under former CEO Aubrey McClendon.
However, CHK became a controversial name after the global financial crisis of 2007-09. First, the US gas industry was a victim of its own success — rapid development of US gas shale fields, resulted in a chronic oversupply and plunging prices.
Later, the company’s co-founder and CEO, Aubrey McClendon was forced out due to his involvement with personal deals on CHK wells. In any event, Chesapeake today is a very different company than it was 20 years ago or even in 2013 when McClendon resigned as CEO (he was essentially forced out).
In 2020, after years of depressed gas prices and poor financial performance, CHK filed for bankruptcy and was delisted from NYSE. However, just a few months later in early 2021, CHK emerged from bankruptcy protection with a stronger balance sheet including just about $1.4 billion in net debt down from almost $10 billion at the end of 2019.
Today, the company produces gas from three main regions, the Eagle Ford play in Texas, the Haynesville in Louisiana and the Marcellus in Appalachia (Pennsylvania for CHK).
And, CHK is now firmly focused on capital returns over growth. In 2022, the company is projecting total free cash flow of $1.9 to $2.1 billion with a total of as much as $9 billion projected over the next 5 years. That’s a lot of cash, especially when you consider that the total value of all of CHK’s outstanding shares and debt is just $12.6 billion.
Better still, management has plans to return much of this capital to shareholders via a combination of share buybacks and a generous base and variable dividend structure.
In March 2022 the company paid a $0.4375 per share base dividend and a $1.33 per share variable dividend for a total of $1.7675. And for the entirety of 2022, CHK expects to pay between $900 million and $1.1 billion in dividends, which annualizes to a yield of close to 10% in 2022.
Over the next 5 years, CHK plans to return approximately $5 billion as dividends, which means that an investor would receive almost 45% of their current investment in the stock in the form of dividends over just the next 5 years alone.
That’s impressive and with most free cash flow forecasts still based on $3/MMBtu long-term gas prices, I’d also judge that $5 billion dividend payout as conservative.
