It's been a long time, but I am finally ready to make an energy-sector recommendation. And here's the surprise: it's not a crude oil producer, but a natural gas specialist. And one that, historically, I have not liked: Chesapeake Energy (CHK).
The history of Chesapeake is a history of Aubrey McClendon, the rebel CEO who built the company -- but was ultimately forced out for a variety of allegedly "questionable" ownership agreements on company wells and other alleged "perks." While all the natural gas specialists had suffered in the face of one of the longest bear markets the sector has ever seen, Chesapeake was arguably well-deserving of its bear status, with a labyrinth of overextensions in lease holdings, joint ventures and wild financing arrangements.
McClendon has gone on to form another energy holding company, American Energy Partners, and has had no problem in raising more than $14 billion for it -- despite the questionable judgment calls he made at Chesapeake. The new company appears to be under the same kind of overleveraged pressures now that McClendon saddled his old firm with.
I went on air on CNBC in 2012 -- at the height of the McClendon days at Chesapeake -- predicting a single-digit target for Chesapeake. Instead, McClendon was forced out, assets were sold and the stock barely missed reaching that target before rallying for a year.
But the long drought in natural gas prices has put them where I expected them to go originally, and shares can be bought for $8.50 -- where I am now recommending them.
Why? One is the prospect for natural gas prices, which is now, finally, looking somewhat brighter. As coal continues to get pummeled (today, with the increased emission regulations on power plants being proposed by the Obama administration), the conversion opportunity to natural gas is really accelerating. Much of the extreme pressure on Chesapeake -- as on Southwestern Energy (SWN) and Cabot Oil & Gas (COG) -- has come as a result of the deep discounting on heavy production areas of the Marcellus and Utica shale areas. Some of that basis discount is ready to be relieved by the Rockies Express Pipeline, which just opened this weekend. That pipe will triple westbound gas from the Marcellus and Utica fields -- to close to 1.8 billion cubic feet a day. Finally, by the end of the year we'll see our first real LNG exports from Cheniere Energy (LNG), with the opening of other plants on the horizon -- particularly that of Dominion (D). Although the initial export volume will be small, it is the start of the export trend that should have the strongest immediate effect on prices.
Chesapeake hasn't been standing still, either. Besides increasing efficiency and the "battle structuring" they've done since McClendon left, they've discontinued their dividend in order to preserve cash flow. Cash burn at Chesapeake is not dire: with about $1.6 billion going out the door this year and a $7 billion coffer in reserve, it gives them time to wait out the gas recovery.
I see signs that that price recovery is finally on its way in natural gas -- and will arrive far sooner than it will for crude oil. At $8.50 a share, with strong assets and no chance of an imminent bankruptcy, Chesapeake is a superb place to bank on that recovery. This is a recommended long-term hold.