What Factor Is Driving Chesapeake’s Stock Rally?

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Trefis
CHK: Chesapeake Energy logo
CHK
Chesapeake Energy

Chesapeake Energy (NYSE: CHK) has displayed tremendous strength since the beginning of May 2018 after the company posted notably strong first quarter results, which regained the investor confidence on the company’s stock price. Chesapeake’s stock has gained more than 70% since the beginning of May and apart from its stronger fundamental outlook, we believe that an increasing price for natural gas has resulted in the company’s stock price rising.

Natural gas prices have been gaining strength as consumer demand for the commodity has increased due to hotter than average summer temperature across the U.S. Although, natural gas has been available abundantly with the increase in oil drilling activities in the U.S. as crude oil prices recovered, an extreme and prolonged period of winter months earlier lead to a higher consumer consumption level and a decline in stockpiles. Additionally, the export volume of U.S. natural gas has been increasing as they have become more prominent in the global market, which is, in turn, putting pressure on supply. According to U.S. Energy Information Administration (EIA), export of liquefied natural gas has increased fourfold to a total of more than 700 billion cubic feet in 2017. Thus, in an enhanced demand environment, natural gas future prices have rallied despite the U.S. gas production being at a record high level.

Consequently, an environment of higher natural gas prices has remained beneficial for Chesapeake. As per Trefis estimates, natural gas contributes more than 45% to the company’s total value. Thus, an improved pricing environment for natural gas has enhanced the future prospects of the company’s performance. To illustrate the same, we have created a scenario of a 25% y-o-y increase in natural gas prices, which results in a 22% increase in our fair price estimate for the company over our base case.

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  2. Higher Oil Output And Better Pricing To Drive Chesapeake’s 3Q’18 Results
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  5. Key Takeaways From Chesapeake’s Q1
  6. What To Expect From Chesapeake’s Q1 Results

Apart from the price increase, our scenario also assumes that the improved pricing position would additionally enhance the company’s pricing multiple (P/EBITDA) to 2x in comparison to our initial estimate of 1.7x and hence amplify the resultant impact on the company’s share price. In case you have a different outlook, you can use our interactive platform to make changes to our assumptions and arrive at your own fair price estimate for the company.

Hence, we expect Chesapeake to continue and experience significant share price momentum on the backdrop of stronger natural gas prices in the near term. However, a slight hint of a decrease in demand would result in natural gas prices to decline and thus have a ripple impact on the share price of the company.

 

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