Chesapeake will continue its rise

Ishtiaq is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chesapeake Energy (NYSE: CHK) has shown an impressive rise in stock price over the past three weeks. The stock has gained almost 20%, and the rise in price is expected to continue on the back of an increase in the demand for natural gas. I have always been a believer, and my view is that in the long-term Chesapeake will prove to be a good investment. At the time of declining stock price, I suggested to some of my friends that the fall in price was temporary, and Chesapeake will make a turnaround soon. I still believe the stock is undervalued, and it has substantial upside potential.

My friends were obviously skeptical, like many other investors, and blamed me of having a blinkered view about the company. The market has put too much focus on the corporate governance situation and the funding gap of the company. As a result, investors have ignored the true potential of the asset base that Chesapeake possesses. Unlike these investors, I look at the future of the company and see a prospering organization. Chesapeake was betting on a colder winter instead of hedging its position, which scared some investors. However, after the recent increase in demand, it looks like the bet has paid off. Furthermore, the company has been selling assets to bridge the gap and improve its balance sheet, which has also played an important role in restoring investor confidence.

However, an increase in stock price does not suggest that the company is completely out of the mire. There are still some issues to be resolved, and Chesapeake has to go a long way before it can be called a trouble-free company. Nonetheless, the company is on the right track and the board is taking all the necessary steps to restore the position of this energy giant.

Corporate Governance Issues Finally over?

Corporate governance issues played a big role in the downfall of the company. Some suspect dealings by the co-founder, Aubrey McClendon, led to a shareholder revolt. As a result, there were some significant changes at the board level and among management. Changes at the top are still underway, and the decision of Aubrey McClendon to step down as CEO may prove to be the final piece in the puzzle. McClendon will leave his position as CEO of Chesapeake on April 1. The news was taken positively by the market, and the stock price went up by almost 10%.

Aubrey McClendon made massive investments during the boom of Shale gas. However, investment in new wells were structured in a way which benefited McClendon personally. The company also had to borrow heavily to fund the expansion. In fact, Chesapeake is still suffering due to the heavy borrowing. Although recent sales of assets have helped the company improve its balance sheet, there is still a lot to do. McClendon will be paid $11.7 million in cash compensation over four years. Furthermore, McClendon is also entitled to restricted stock options worth $33.5 million, which will take the total compensation package to $47 million.

Chesapeake to Benefit from Exports?

There is a great opportunity for the U.S. to export natural gas to Europe and Asia.  Demand for natural gas a gone up substantially in Asia due to an increase in economic activity. On the other hand, Europe is still showing little signs of recovery. The United States can build facilities to convert natural gas into liquid natural gas and export it. I believe Chesapeake will benefit from the export potential of the natural gas. Exporting natural gas will also help eliminate the issue of oversupply and support the companies operating in the domestic market. However, Chesapeake will have to move fast to take advantage of this opportunity.

Recently, Royal Dutch Shell (NYSE: RDS-A) struck a deal with Tokyo Electric Power Co. Shell will export 800,000 tons of liquefied natural gas annually to Tokyo Electric Power Co. Also, the Canadian government and the U.S. Department of Energy have recently approved export gas projects in British Columbia and Texas, respectively.

Furthermore, Cheniere Energy has the only approved LNG export terminal in the U.S., which has the capacity to ship up to 2 billion cubic feet of gas per day by 2015.  The company is also planning to open a new export terminal in Corpus Christi by 2017.  Owning the only liquefied natural gas terminal puts Cheniere in a better position than its competitors.

Last but not least, Chevron Corp (NYSE: CVX) can become a leading player in the LNG exports arena with the help from its Gorgon and Wheatstone projects in Australia. Wheatstone's initial capacity is 8.9 million metric tons of LNG per year. Furthermore, the Gorgon Project is Australia's largest single-resource project, with a 15 million-metric ton per-year LNG facility. In the face of such strong competition, Chesapeake will have to enter this market quickly to benefit from this opportunity. 

Summary

Chesapeake is a stock that has been penalized too harshly for its past mistakes. Sometimes markets takes such a harsh view of the past dealings that it overshadows the future potential of the company. There is no denying that past mistakes have affected the company badly. However, almost all of the recent steps taken by the company are in the right direction. Chesapeake has built a massive portfolio of assets, which will help the company grow. I believe Chesapeake will prove to be a solid long-term investment and investors should be patient. I would recommend that investors hold to their positions, and add on the dips in the stock price. I believe Chesapeake can turn the corner during 2013, and return handsomely to investors.


IshtiaqAhmed has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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