Chesapeake Energy (CHK), the nation’s second largest natural gas company, is embroiled in a soap opera-like management crisis at a time when management’s focus needs to be on maintaining profitability in light of historically low natural gas prices. I thought it time to take a closer look — not so much at the soap opera, but more at the fundamentals — to see why the company’s stock is trading at its 52-week low and what its future prospects are likely to be.
Chesapeake’s stock touched $74 per share as recently as mid-2008, at a time when natural gas prices on the NYMEX were generally between $8 and $9 per mmBTU. Of course, natural gas is struggling to stay over $2 per mmBTU. There are a variety of factors at work that have both increased supply of natural gas and decreased demand for it. Supplies have been increased because natural gas is plentiful in this country, is environmentally more acceptable than oil or coal, and the proliferation of new hydraulic fracturing has made natural gas supplies easier to extract. Suppliers have found the going so easy that America’s ability to warehouse additional quantities of natural gas is very limited.
Demand for natural gas, as T. Boone Pickens has said, is off due to a lack of an American energy plan. Natural gas is an excellent transportation fuel, yet we have virtually no transportation platform that uses it. Factor in a very mild winter throughout much of the country this year and demand for natural gas is well below its peak.To continue reading, click here.