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Kevin Kersten's Analyst Insights

Options Analyst Writer
Kevin Kersten
Author Bio

March 03, 2014 - Is Natural Gas the Energy of the Future?

Chesapeake Energy (CHK) s the one of the top natural gas companies in the United States. Chesapeake leases and drills for the natural gas and the oil that keep your home and your family warm. It has been an exceptionally cold winter across the U.S., which has doubled gas prices and helped natural gas companies this winter.

The US has taken its stockpile of inventories down to a five-year low.  Low inventories could easily mean that prices could spike or some areas could even run out of natural gas, but it also shows good management of reserves. I for one expect inventories to be a low after a hard winter.

Natural gas has had an eventful history. It was only a few years ago that prices spiked and people were talking about importing natural gas into the US. Then hydraulic fracturing was discovered, an oil boom took over and the US supplies of oil and natural gas shot up while prices fell. With our stable of huge natural gas supplies, companies have relocated industries here and the talk has turned to pipelines and exporting the natural gas. It really is amazing how the free market has worked to meet needs and combat shortages.

With an abundant supply of natural gas, prices fell and companies have cut back on development. Companies refocused drilling efforts away from gas and more towards oil. Both oil and gas come out of fracked wells, but some production of natural gas is pumped back into these well to encourage more oil to come out.  With the low gas prices, Chesapeake Energy had a major management shake-up where it cleared out the entire board in 2012, cut back on expenditures, and eliminated debt in order to get the books in order.

Chesapeake is trading at $27 giving it an $18.1 billion market capitalization. The company pays a 1.28% dividend yield and has a P/E ratio of 20. Revenues came in at $12 billion in 2012 and $17.5 billion in 2013.  The company made 1.19 a share in 2013, but it lost 1.46 a share in 2012 as prices for gas plummeted. In 2010 and 2011, the company made over $2 a share in earnings.

Chesapeake Energy has been selling leases and freeing up cash. The company was heavily invested in leases and equipment, but with falling prices it scaled back development and spun off assets to free up cash.  In 2013, the company is spending about 5.5 billion to drill new wells, down 27% from the prior year. The company is also planning to sell assets of $4-7 billion. Basically, with too much debt on the books, the company is selling drilling rights in areas it does not want to develop. Strategically, the company has decided to focus on specific reserves and regions. This targeted plan can help keep costs down and profits up.  These are big sales, as $7 billion represents about 40% of the current market cap. This change in strategy started, when the new CEO and board changed in 2012.

Stock chart courtesy of

You may want to look at a covered call on Chesapeake (CHK). The stock was recently at 25.61 and the May 26 call is going for 1.24. One can enter a covered call trade for a net debit of 24.37. That gives the stock a 6.7% assigned return over the next 79 days for a 31% annualized (for comparison purposes only) return. The covered call has 4.8% of downside protection and will need to rise 1.5% in order to be assigned. With the cold temperatures, oil and gas companies have been doing better, with all the divestment CHK is well poised to focus on its areas of strength and will continue to be a market leader supplying oil and gas to a cold country.

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