Good day everyone,
Background:
Recently Chesapeake has emerged from bankruptcy swinging. The previously financially destitute energy company has since decided to double down on its natural gas production even though the return of oil is at a record high. The reasoning behind this is simple, Chesapeake is investing steady and reliable growth.
During the height of the Shale Boom drilling companies eager for more profits would begin to pay for operational expenses with debt. An action which would in turn lead to higher operating costs and if not controlled carefully a runaway overhead. This is what caught $CHK with its pants down before, as when the money runs dry there is not much left to pay off the debts.
Restructuring their debt Chesapeake now has $1.3 billion in debt, a far cry from its previous high of $9 billion in q1 of last year. Further, the move to natural gas production is less capital intensive and boasts a better ROI then oil. In May $CHK crushed its quarterly earnings projection ($1.61 estimated, $2.75 actual) and also paid out a modest dividend of .34 a share. This steady but conservative growth stands out in such a “new” company.
Chart:
$CHK has steadily been climbing ever since March of this year even when other major natural gas competitors have been wavering. It is my belief that this trend will continue so long as the current prices surrounding oil production remain where they are.
Thesis:
$CHK is a buy in my book. The move to conservatively expand from oil to natural gas will pay handsomely so long as the company does not fund their expansion using debt. Further, the move to pay back shareholders as soon as possible in the form of dividends only further bolsters the credibility of operations going forward.
Most analysts issue a buy at a high $50 to low $60 but I think there is significantly more alpha to be had on the upside on CHK. The reason behind this is simple, the pairs trade of Brent and U.S Crude.
When their is geopolitical turmoil outside the U.S, Brent futures begin to waiver and U.S Crude starts to gain ground. So long as the United States stays out of direct conflicts then it is a waiting game until the shipping lines that transport Brent are disturbed.
As such I think that we can see a high $60’s or maybe even a $70 come out of CHK over the next 1.5 years (late 2022) assuming that the United States continues to remain largely energy independent, continue to mass produce natural gas via fracking, and largely push away from oil into “cleaner” forms of energy production.
I dont hold anything in CHK but it is on my list and I plan to obtain a position once there is a moderate pullback.
-Chillznday
