Chesapeake’s Market Price Justified Given Optimistic Natural Gas Price Outlook

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Trefis
CHK: Chesapeake Energy logo
CHK
Chesapeake Energy

Chesapeake’s (NYSE:CHK) natural gas price per million cubic feet is slowly rising again after witnessing a steep decline, from $7.74 in 2008 to $3.16 in 2009, as a result of weak consumer demand during the economic downturn. As crude oil prices continue to rise and the oversupply of gas declines, we expect Chesapeake’s natural gas price to increase to around $6.2 per million cubic feet by the end of our forecast period. Chesapeake competes with other oil and gas producers like Exxon (NYSE:XOM), ConocoPhillips (NYSE:COP), Anadarko (NYSE:APC), BP (NYSE:BP) and Chevron (NYSE:CVX).

Trefis members anticipate that Chesapeake’s natural gas price will reach $7.3 per million cubic feet by the end of our forecast period (vs. our $6.2 per million cubic feet projection), representing a potential upside of 26% to our price estimate for CHK stock. By our estimates, natural gas production accounts for more than 75% of Chesapeake’s stock value. Consequently, CHK’s stock value is highly sensitive to this metric.

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We currently maintain a price estimate of $25.01 for Chesapeake’s stock, roughly 20% below market price.

Prices of Natural Gas and Crude Oil Linked

Although demand for gas is high in emerging markets like Asia, gas sold in these markets is priced differently than in Europe and the United States. Given the lack of significant gas production in emerging markets, gas prices have often been linked to those of oil in order to attract gas away from the U.S. and Europe. A spike in oil prices will likely lead to higher natural gas prices even if natural gas demand does not pick up. With improving economic indicators, crude oil prices are expected to rise, thereby benefiting natural gas price as well.

Controlled Production to Spike Natural Gas Price

Global natural gas production declined from around 295 billion cubic feet per day in 2008 to 289 billion cubic feet per day in 2009. Natural gas producers that are unable to sell or store their gases either cap their wells, burn the gas or provide it for free. As production decreases because of low prices, the oversupply in gas is not expected to last long and prices are likely to rise.

See our full analysis and $25.01 price estimate for Chesapeake

Trefis Community Forecast

Trefis members forecast that Chesapeake’s natural gas price will increase from $3.9 per million cubic feet in 2010 to $7.3 by the end of our forecast period, compared to the baseline Trefis estimate of an increase to $6.2 per million cubic feet during the same period. The member estimates imply a roughly 26% upside to our $25.01 price estimate for Chesapeake’s stock, putting our number in line with market price.