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Investment Overview for Chesapeake (NYSE:CHK)
Chesapeake Energy is the second largest producer of natural gas and the most active driller of new wells in the U.S. The company's operations are focused on discovering and developing unconventional natural gas and oil fields onshore in the U.S. It owns positions in the Barnett, Fayetteville, Haynesville, Marcellus and Bossier natural gas shale plays and in the Eagle Ford, Granite Wash, Niobrara and various other conventional and unconventional liquid-rich plays across the U.S. The firm has interests in over 44,000 producing natural gas and oil wells that produce over 2 billion cubic feet equivalent per day, 93% of which is natural gas.
The natural gas assets that the company built over the years are very lucrative. However, of late, the company's operations have taken a beating due to low natural gas prices. As a result, it has shifted its focus toward a balanced mix of gas and oil, spending heavily on building liquid-rich or oil assets. Meanwhile, the company has been grappling with liquidity issues. In 2012, the firm divested around $11 billion in assets and intends to divest a significant portion in 2013 as well.
The company has also vertically integrated its operations and owns substantial midstream, compression, drilling and oilfield service assets.
High margins for natural gas and oil divisions
Prior to the recent economic downturn, which impacted EBITDA margins across all divisions, natural gas and oil EBITDA margins averaged around 85%. Margins declined to 76% in 2011 as natural gas priced dropped substantially. However, the division is so valuable because even during times of near-record low prices it was able to maintain margins in excess of 75%. This is because the low prices were offset by higher volumes.
Increasing costs associated with upstream / downstream activities
The costs associated with constructing new oil and gas upstream facilities have reached a new record high, according an analysis by Cambridge Energy Research Associates (CERA). According to the analysis, costs related to the extraction of oil & gas have doubled since 2005.
This has been primarily due to several reasons:
Increasing commodity prices:Prices of key inputs such as fuel, chemicals and steel have risen as demand grew in emerging markets. Some refineries typically use 5-7% of their feedstock as fuel to run refineries. Firms are increasing their focus on energy efficiency to drive this down
Complexity of projects:Various oil companies have embarked on different projects to extract oil such as deepwater, GTL and oil sands. This has led to longer development timelines which have in turn resulted in higher costs.
Coal as an alternative to gas
Coal and natural gas are the closest substitutes as a fuel for power generation. Surges in coal demand are generally associated with a drop in gas demand and vice-versa. Recently, the attractiveness of gas in U.S. power generation due to low prices has impacted coal demand. However, when gas prices eventually recover, coal demand will likely increase and cannibalize gas demand.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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