Chesapeake’s Earnings Could Change Everything

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Chesapeake’s Earnings Could Change Everything

It’s been a killer year for natural gas stocks.

Companies that were laggards for the better part of this decade – like Chesapeake Energy (CHK), Encana (ECA) and Devon (DVN) – have finally begun to break out to the upside. They’re all currently within spitting distance of their 52-week highs set in April.

Of course, the upswing isn’t exactly surprising, considering that the harsh winter weather sent natural gas prices skyrocketing to over $6 per thousand cubic feet (mcf) at one point.

Now, longtime Oil & Energy Daily readers know that we’ve been strong proponents of Chesapeake since it was in the low $20s. If you took action on our recommendation, you had the chance to profit handsomely.

And there might be another opportunity to cash in tomorrow . . .

Get Ready to Buy

Chesapeake reports earnings tomorrow. And based on the way shares are trading, investors are anticipating solid numbers and stronger guidance going forward.

Granted, the company did pare back expectations after its last call. But as you know, that’s a common game on Wall Street – one that Apple (AAPL) has played again and again.

You set the bar lower – then beat it. And shares blast higher as a result.

But it’s absolutely crucial that a company beats these low-ball expectations.

Because if CHK doesn’t crush that number – or comes out with poor guidance – shares will be shellacked. In that case, you could see the stock drop by more than 10% in the after hours, back to below the $25 level.

If that happens, however, consider it a killer buying opportunity!

A Pivotal Earnings Announcement

CHK has been working to strengthen its debt-bloated balance sheet. Just last week, it refinanced a chunk of 9.5% bonds at lower rates by raising $3 billion from the debt market. The debt market loved it, and bought all it could even with the lower coupon.

The company is also moving to rebalance its liquids-to-gas ratio to take advantage of higher liquids prices.

It’s aiming to get to a point where 30% or more of its production is natural gas liquids or oil. This will provide the kind of balance needed in the event that the price of one commodity crashes – as natural gas did leading up to 2013.

CHK is also going to benefit from much stronger natural gas prices, which are up over $1 per mcf from a year ago – and have held relatively strong throughout the first quarter.

Now, the company does hedge its production – and those hedges cost money. So as the price of natural gas moves higher, there will be a negative effect on the company’s potential profits.

The good news is, that’s all priced into the stock already – along with the current expectations.

That’s why it’s critical that CHK not only beats the Street’s outlook – but also boosts guidance moving forward.

Bottom line: This quarter will determine the future direction of CHK’s share price – and likely the trajectory of the entire natural gas sector.

Until next quarter, anyway…

And “the chase” continues,

Karim Rahemtulla

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