Is the Price of Natural Gas Affecting Chesapeake and Exxon?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The recent rally of natural gas didn’t seem to pull up energy stocks such as Chesapeake Energy Corporation (NYSE: CHK) and Exxon Mobil Corporation (NYSE: XOM). I obviously don’t expect the recent rise in natural gas to reflect a substantial change in the second or third quarter reports of these companies. But shouldn’t the natural gas rally reflect in these companies' stock prices? After all, a rise in NG prices should change the valuation of these companies. I think there are some factors that could explain the little effect the rise of natural gas price has had on these energy prices.
During the past couple of months the price of natural gas rose promptly, increasing by 11.4% during May, 16.6% during June and 17.7% during July. United States Natural Gas also rose during these months by a similar rate. The rally, however, seems to have changed direction in the past week or so, yet the prices of NG are still much higher than they were a couple of months ago.
Nonetheless the rise in natural gas didn’t help natural gas producers, as prices are still very low compared to last year and the five year average: The current price is nearly $1.3 below the price level from the same time in 2011; it is also $2.5 below the 5-year average price.
Further, these natural gas producers continue to limit their exposure to natural gas as the rig count continues to dwindle: According to the recent EIA report there are only 505 natural gas rigs; a year back the number of rigs was nearly 900.
The effect of natural gas prices is weaker than the effect oil prices have on Chesapeake and Exxon. In 2012, the linear correlation between Chesapeake’s stock (daily percent change) and UNG has been 0.26; the correlation between Exxon and UNG, 0.15. This means under certain assumptions the changes in natural gas prices could only explain nearly 7% of Chesapeake’s stock volatility and only 1.3% of Exxon’s.
There is another factor that could explain the weak effect natural gas has had on Chesapeake’s stock. The company is in the process of selling some of its natural gas operations; In order to compensate for the company's $22 billion shortfall, it started to sell off its assets. The Company completed the sale of 46% of Chesapeake Midstream Partners at a price of $2 billion to Global Infrastructure Partners. It is considering selling its entire stake in Chesapeake Midstream Partners. Chesapeake is also in the process of selling Barnett Shale acreage in North of Texas.
Bear in mind that during 2011, Chesapeake's natural gas operations accounted for nearly 53% of the company’s revenue. Therefore a rally in natural gas prices should have helped this company, or at least its stock price.
In regards to Exxon, its natural gas related revenue accounts for only 4% to 5% of its total revenue (as of 2011); this share might shrink in 2012. The currently low natural gas prices and the high extraction costs of reaching shale gas lead to a decline in the profitability of extracting natural gas compared to the past.
Nonetheless, the recent discussion of Exxon's CEO on the financial results during Q2 suggests the company did well during the quarter with $15.9 billion in earnings, a rise of $5.2 billion from Q2 2011. But this rise was mostly due to a one time "divestments and one-time tax related item" of $7.5 billion.
The Foolish Bottom Line
Even if natural gas prices were to rise by another dollar, I suspect it won’t help these energy companies much, as the low prices and change in strategy might result in a decline in natural gas production so that the price of natural gas will have a lesser effect on these companies than it did in the past.
For further reading: Will Oil Prices break the $100 mark?
liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls 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.If you have questions about this post or the Fool’s blog network, click here for information.