Here’s Why Chesapeake Energy is Heating Up

On October 9, 2012, the stock price for Chesapeake Energy (NYSE:CHK) rose 15 cents, reaching $19.59 per share by market’s close.

Although not a remarkable increase when taken alone, the gain came as the overall market declined by one percent. Furthermore, the stock rose again the following day with a positive overall market. For the United States’ second-largest natural gas producer, which has lost 60 percent of its value in the past year, the gains indicate the company’s fortunes may be changing.

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After prices for natural gas in the United States reached a low of $1.902 per thousand cubic feet in April, prices have risen by 88 percent. As of October 12, prices are at $3.584 per thousand cubic feet, or Mcf, well about Chesapeake’s breakeven point of $2.70/Mcf. Gas prices have risen, in part, due to the anticipated colder-than-usual winter in North America. However, the company may not reap the full benefits of the price increase; Chesapeake has taken on 64 percent hedges for natural gas production for the third and fourth quarters that are below the current price.

Despite Chesapeake’s hedges, Seeking Alpha said, “Still the Q4 results should still show some upside for the unhedged natural gas production.” The publication also predicted that results from the third quarter should show improvements over the second quarter. On Thursday, Chesapeake saw its stock price rise 4 percent after natural gas futures hit a new high for 2012.

Chesapeake’s oil position is also solid. While oil prices hit a near high of $100.42 per barrel in the middle of last month, they have since dropped to $91.91. For the third and fourth quarters of 2012, the company has liquids 31 percent hedged at $101.34 per barrel, giving the company a strong base for high oil production earnings.

But the company has problems. Despite revenue growth in oil and natural gas liquids, or NGLs, Chesapeake has been forced to sell $11.7 billion in assets this year; it also has plans to sell a further $4.25 billion to $5 billion in 2013 in order to pay down debt and fund drilling expenses.

However total production in 2012 is expected to grow by 18 percent. The company still has more than 15 million net acres of oil and gas properties. In liquids percentage growth, Chesapeake is the second fasting growing producer; only Continental Resources (NYSE:CLR) grew faster in 2012. But SandRidge Energy (NYSE:SD), EOG Resources (NYSE:EOG), and Pioneer Natural Resources (NYSE:PXD) are close competitors.

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