Massive Bullish Bet Placed on Chesapeake Energy

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

Natural gas and energy giant Chesapeake Energy (NYSE: CHK) has had a rough 12 months as natural gas (NYSEMKT: UNG) continues to move lower. In fact, CHK hit a new 52-week low on Jan. 17 and now sits right near the multi-year lows reached in the market plunge during late 2008. However, that didn’t seem to stop investors from placing a massive bullish call spread on the Jan 2013 $35/$45 strike prices.

They both traded well over 36,000 contracts and approximately double the open interest, indicating these were new positions being established. The net cost was $.35 on this sizable trade as investors are hoping that CHK closed on Jan. 18, 2013, at least above $35.35 to break-even and any price higher up until $45 is profit. In the favorable event that CHK closes above $45, the investors stand to net an approximately massive 28-bagger, which isn’t too far out of the question as CHK has had wild price swings in the past. However, let's analyze CHK and see if we should be bullish as well.

The commodity, natural gas, that makes up virtually all of CHK’s revenue and asset base has unfortunately plunged to multi-year lows and now trades at well under $3 per 1,000 cubic feet. With new drilling technology increasing supply and currently mild winter weakening demand, experts still predict natural gas to stay low in the foreseeable future.

However, one has to believe that the well documented transportation possibilities with natural gas, as popularized by companies such as Clean Energy Fuels (NASDAQ: CLNE), should gain more backing as the cost gap between natural gas and crude oil grows.  Moreover, if prices stay this depressed, companies will most likely cut supply and wait for prices to rebound. CHK has done that in the past and its well-respected management team -- headed by Chairman and CEO Aubrey McClendon -- will no doubt look to do that again if it makes financial sense.

The stock now trades at a relatively cheap 10.5x trailing P/E, 9x forward P/E, .7x PEG, 1x P/B, and decent 1.7% dividend yield. Overall, I think CHK’s common stock is a buy, but this vertical call spread is only right for the more aggressive and experienced investor.

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