An investment in the energy sector for a long term asset is a good way to bring balance to a stock portfolio. Chesapeake Energy is a company with an excellent potential for prolonged growth. The company was founded in 1989. It has held up quite well recently despite a major drop in natural gas prices as well as surviving a bout of legal trouble.
It has been a good buy for the last year. Between May 10th and 13th of 2013 the stock hovered between $19 USD (United States Dollar) and $20 dollars USD a share. It would pass $25.00 USD in August of this past year. As recently as March of this year the stock was still trading below $26.00 USD. Last week the stock reached $29.00 USD and today finally breached the $30.00 USD.
The stock has not reached this level since the last highs were reached between 2011 and 2012 when the stock was sold in excess of $30.00 a share. The stock had reached it peak in July 02, 2008 when it hit $74.00 USD a share. This spike followed the run up in oil that occurred at the same time. When the price of oil came down in a rapid decent so did the price of Chesapeake stock.
The stock today reached $30.33 USD. It increased a total of $0.52 USD which is a 1.74% gain for the day. The low for the day was $29.73 USD with a volume of 11,725,724. Average volume is 8,574,000 with market capitalization standing at 20.21 billion USD.
The recent gains in the stock price are a result of a strong set of Quarter 1 earnings report for 2014. The report issued on May 07, ended up beating market expectations on both earnings and revenues. Chesapeake was able to achieve this by lowering production costs, and attaining higher volumes of production. Somewhat higher prices for natural gas were beneficial as well.
Production revenues were up 21% for the quarter from a year ago. The revenue total was $1.76 billion USD for Quarter 1 2014 doubling net income to $456 million.
Natural Gas Liquids (NGL) are mostly driving the production growth for the company. It has risen 55% year over year to 7.6 million barrels.
Chesapeake’s Energy overall quarterly production grew by 2% from last year’s first quarter to around 60.8 million barrels of oil. If one would include the recent asset sales (nearly $1 billion USD in total) production actually actually rose 11%.
The strongest production came from the Utica and the Southern Marcellus regions. The output from the Utica shale for example has increased over 400% alone. As a result Chesapeake was able to raise its 2014 total production level from 8% to 10 % range to a 9% to 12% range. While growth for all of 2014 is estimated to be 8% to 12% in oil production, and 4% to 6% in natural gas, in NGL there will be an increase of 58% to 63%.
This translated to adjusted earnings of $0.59 USD per share against the anticipated $0.47 USD made by a number of analysts in the industry. If you compare it to the first quarter of last year when the dividend paid was $ 0.30 USD it is a 97% increase.
The management of Chesapeake had also stated the intention to scale back capital spending. This type of spending is down 50% from the first quarter of 2013. The company had estimated an expenditure of capital for 2014 between $5.2 – $5.6 billion USD. This would represent a 20% decline for 2014 from last year. Midway between the year it looks like the company will come in at $5.4 billion for this type of expenditure.
The price for natural gas increased from $2.13 USD per thousand cubic feet (mcf) last year during the first quarter to $3.27 USD mcf this year. Natural gas prices overall did increase a total of 30%, but this was mostly the result of higher demand, which was brought on by severe weather conditions in the United States. There are many in the industry that feel the higher price may be sustainable in the long run because of increasing demand in general. More and more energy providers are switching to natural gas because of lower costs and it is deemed to be more environmentally friendly.
In addition to the reduction to capital spending already stated, the company has been able to reduce costs in production about 8% due to higher volumes. General and administrative expenditures have also declined 26% as the company is getting more efficient with cutting overall costs.
This will be the first year since 2001 that operating cash flows estimated for this year to be $5.8 billion USD to $6 billion USD will exceed capital expenditures. The steps the company has made in focusing on the higher producing property it owns, as well as the growing efficiency in production lends one to believe the company is on the right track.
A potential investor in Chesapeake Energy has the decision to either buy now with the price at a new high or to wait for the next pullback when shares will go from over $30.00 USD back to between $25.00 and $27.00 USD. Much will depend on the price of natural gas. As a commodity it is priced more on a regional level in contrast to oil, which is based on a world price. It will also be founded on a calculation on whether the United States will end up exporting natural gas by entering the Liquified Natural Gas (LNG) market. At present federal law prohibits most exports of natural gas. This keeps prices lower in the United States. New geopolitical goals like supplying more LNG to Europe to reduce that regions dependence on Russian supplied natural gas, may change the calculation. If exports on a large scale are permitted to Europe and elsewhere it will make an investment in Chesapeake Energy enormously profitable. Prices for LNG for Asia particularly Japan, are much higher than here in the United States.