5 catalysts make Chesapeake Energy a stock pick
06/07/2013 1:55 pm EST
There are reasons that Chesapeake Energy trades way, way below its 2008 high of $66. The company is still struggling with low natural gas prices that have started to recover (maybe) but that are still well below the cost of production for many companies in the industry. The company, which loaded up on debt to acquire drilling leases, is still looking to sell assets to fill a funding gap of about $3.5 billion in 2013. And asset sales, uncomfortably, have been going more slowly than the company projected at the beginning of the year.
But I see five major catalysts that make me willing to buy Chesapeake Energy now.
First, it looks like natural gas production in the United States will grow by just 1% in 2013, according to the U.S. Energy Information Administration. That's a big drop from the 8% growth of 2011 and the 4% growth in 2012.
Second, that decline in production growth, plus growth in demand for natural gas, looks like it will push natural gas prices higher. Standard & Poor’s is projecting Henry Hub spot prices will average $5.00 per million BTUs (British Thermal Units) in 2014, up from $2.58 in 2012 and a projected $3.72 in 2013.
Third, Chesapeake’s production is showing an increasing shift toward oil and natural gas liquids that command higher prices than natural gas.
Fourth, Chesapeake has shifted away from its traditional strategy of land acquisition and asset sales to a more conventional emphasis on drilling and production. In 2013 spending on land acquisition will drop to just $400 million out of a $6 billion capital spending budget. That’s a huge shift for a company that spent $5.8 billion on acquiring leases in 2010.
Fifth, long-term CEO Aubrey McClendon retired in April and has been replaced by Doug Lawler from Anadarko Petroleum (APC.) McClendon built Chesapeake but his strategy of aggressively growing acreage under lease has seemed increasingly out of touch with the current natural gas market. Lawler comes to Chesapeake having most recently headed Anadarko’s international and deepwater operations including the company’s LNG project in Mozambique. Before that he had headed Anadarko’s unconventional onshore development.
I’m adding the stock with a 12-month target price of $31.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares in Chesapeake Energy as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/