When I first got into the stock market, Chesapeake Energy (NYSE:CHK) was one of the darlings of Wall Street. In the second half of ‘07 and the beginning of ’08, it defied the market, not to mention pretty much anything I bought at the time. (Check the ‘About’ section of this blog to look into my history with the market at that time.) So imagine me, getting back into the swing of things several years later, seeing that Chesapeake can be had at these low, low prices.
But why so low? Why has CHK been one of the WORST performers of the S&P 500 this year? A real stinker. Surely there must be a reason. So I did the research, comforted myself that this is a good long term story, and took the plunge. My first buy in years!
What is Chesapeake Energy? They are one of the largest producers of natural gas in the country, 2nd only to Exxon Mobil (NYSE:XOM). Chesapeake is also the 10th largest producer of oil and natural gas liquids in the country. You’ve probably heard of ‘fracking’; that’s what this company does.
The recent weakness in the price of oil has hurt Chesapeake. Natural gas is at ridiculously low prices, which hurts CHK even more. But low commodity prices aren’t the only problem here. Another concern is the balance sheet, though the company has an unused line of credit set up if necessary.
Some of the company’s problems can be blamed on the excesses of co-founder and former CEO Aubrey McClendon. If you look up his history you’ll see scandals ranging from using company employees to fix up his house, to the alleged misappropriation of confidential information on his exit from the company in 2013. I think I like this company better without him.
Enter CEO Doug Lawler, who seems to be focused on reducing spending, increasing efficiency, and just generally pulling this company up from the nosedive that it’s currently in. I just love a good turn-around story. But is this one real? I listened to the 2015 Q1 conference call (You wouldn’t put your money in a company without listening to at LEAST the most recent CC would you? Go listen to this one if you are considering taking a position in CHK.) and they talked quite a bit about cutting capital expenditures and putting things in order.
A great deal of the call was focused in detail on the high quality of the company’s assets, and the technical breakthroughs in how they drill wells; breakthroughs that lower cost and increase efficiency. Longer wells, wells closer together, refracking older wells. This all amounts to getting the goods out of the ground faster, cheaper, easier. That all sounds good to me, especially if/when oil and gas prices rise.
While being mainly a natural gas company isn’t working out so well for Chesapeake at the moment, that may change in the future. Look at the vehicles that run on natural gas. Look at the environmental restrictions that are constraining coal. I keep hearing that the U.S. will soon ramp up exports of liquefied natural gas to the world. This sounds bullish for the price of natural gas to me. If CHK turns into a phenomenal investment for my portfolio, I’m thinking this will be the main catalyst. I’m not expecting a buyout, or anything along those lines.
Chris Doyle, EVP of Operations, Northern Division, spoke on June 23rd at the GHS 100 Energy Conference. Anyone interested in investing should read the transcript, easily found on Yahoo Finance. What I took away from the speech was his confidence and the company’s dedication to value and efficiency.
Another factor is the huge stake in the company held by activist investor Carl Icahn. It’s nice to be on the same end of a deal as someone like him, I suppose. But then again, Carl didn’t consult me on his decision to get into Chesapeake, so he probably won’t be giving me a personal heads-up if his opinion of the company changes. I’m thinking that watching people like him is a good resource for ideas, but not an excuse to buy something without doing all the regular legwork.
So here’s what it boils down to, for me: can Chesapeake weather the current commodity environment long enough to see those prices rise? Will they burn through their cash and credit, despite the CapEx reductions and increases in efficiency? Can they make it through without a dilutive event? (Lawler said recently that he doesn’t see one taking place.)
I obviously think CHK is a good investment, but I’m not looking for short term gains here, nor am I jumping into a full position all at once. I see this as something I’ll look back on in 1 or 2 years and be glad I bought. Analyst downgrades, weak commodity prices, more analyst downgrades… that’s fine. Keep them coming. I will buy the fear.
I made my first buy at $15.17, and my second buy at $12.30, for an average price of $13.61 for 59 shares. Ok, so I’m not moving markets with my orders, but I gotta start somewhere. I’m certainly willing to buy more at lower prices. CHK is currently trading at $11.72. I’m considering buying around 55 more shares somewhere in the $8 to $8.50 range, though I have yet to put in a limit order. I expect plenty of people to tell me it will get there, sooner rather than later. Will it? Who knows? I certainly won’t be buying any more above $10. (Look at the ‘Trading Philosophy’ section to see how I make my trades, though I made my first buy in CHK before I finalized my disciplines, and bought a little too much of it.)
As always, feel free to look at my portfolio and see how I’m doing. And please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.
Michael, the Stock Picking Bartender