Will The Recent Rally of Natural Gas Help Chesapeake?

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The price of natural gas hiked in the past several weeks to its highest level this year. Did the recent rise in natural gas prices helped keep the stock price of Chesapeake Energy Corporation (NYSE: CHK) from further tumbling down? Further, assuming the price of natural gas will maintain its current level, is it good enough to help rally one of the leading gas producers in the U.S? Let’s further explore this issue and see if the company is out of the woods.  

NG and Chesapeake

Natural gas hiked in the past several weeks by nearly 30% (from September 7 up to October 1) and United States Natural Gas (NYSEMKT: UNG) also rose by a very similar rate.  Chesapeake's stock price fell during the same time by nearly 5.2%. On the other hand, in the last several days shares of the company made a modest comeback. Chesapeake's officials continue to blame the relatively low price of natural gas, compared to previous years for the company's financial troubles. But for valuation purposes if the future price of natural gas rises, then the value of the company should rise assuming we use DCF valuation, which means the recent recovery of natural gas should also reflect in a rise in the company’s stock. The linear correlation between the stock price and natural gas daily percent change was 0.19. This means that only 4% of Chesapeake's volatility could be explained by the changes of natural gas prices.

The chart below presents the relation between Chesapeake, Chevron Corporation (NYSE: CVX), and Henry Hub during 2012 (up to date). As seem below, despite the recent recovery of the price of natural gas, it didn’t help Chesapeake much or other natural gas producers such as Chevron. Since natural gas operations still account for a lion's share of Chesapeake’s operations, such a sharp change in the price of natural gas should have affected the company’s stock. There are two considerations that may have come into play in this regards: the price of oil and the company’s financial stands.

Oil and Chesapeake

During September and October the price of oil has declined. The correction between the prices of oil and Chesapeake may have also contributed to the decline of Chesapeake during recent weeks. During September and October the linear correlation between the stock price and oil's (spot) daily percent reached 0.6. This means that nearly 37% of Chesapeake's volatility could be explained by the movement of oil.  Therefore, the rise in Chesapeake's stock price may have been partially curbed by the decline in oil prices. The recent fall in the price of oil may have curbed the rise of the price of other energy producers such as ExxonMobile. During September/October the linear correlation between Exxon’s shares and oil's (spot) daily percent was 0.57. This means that nearly 33% of Exxon’s volatility could be explained by the changes of oil. 

S&P500 and Chesapeake

The S&P500 also rallied during the first week of October by 1.4%. The recent positive news regarding the progress of the U.S economy including the growth in the U.S manufacturing and non-manufacturing sectors and the modest growth in the U.S employment may have contributed to the rally in the U.S stock market.  This rally, in turn, may have also contributed to modest rise in Chesapeake's stock price in the last few days. The linear between the stock price and S&P500 daily percent reached 0.46 (during September/October). This means that nearly 21% of Chesapeake's rise could be explained by the movement of S&P500. All these correlations point out to one thing: despite the recent modest rally of the company's stock, the rise in stocks and natural gas may have had a large role in Chesapeake's recent rise.

Chesapeake's Micro View

The company continues with its plan of selling assets that are mainly related to its natural gas operations (but not only). This process is expected to generate a total proceed of nearly $6.9 billion. These funds, according to the company’s press release, are supposed to fully pay off the company’s $4 billion loan by the end of 2012. The proceeds from the company’s assets sales include the following: Chesapeake entered into multiple agreements in order to sell its Permian Basin assets for a net proceed of nearly $3.3 billion.  The company sold all its holdings in Midstream assets for nearly $3 billion. The company also sold non-core leasehold assets in the Utica Shale and various other areas for roughly $600 million. These funds will help the company pass 2012 successfully, but there is still uncertainty around the company’s future in 2013.

There are reports that the company is planning to sell additional assets for nearly $5 billion in order to pay some of its costs of drilling in 2013, which is expected to reach nearly $7 billion.  As long as the company will continue to struggle in generating earnings and at the same time little growth, this could keep the company’s stock price at its current low level. Therefore, the company’s situation hasn’t improved enough to ease the concerns of its investors. Finally, the recent rally of natural gas doesn’t seem enough to pull the company’s stock up.      

This article on Chesapeake and Natural Gas was first published in Trading NRG

For further Reading see:  

Why the Recent Rally in Natural Gas won’t help XOM

Will Oil Continue Its Tumble?



liorc has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, short JAN 2014 $17.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Chevron. 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.

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