This is a trader moment -- when you can see everyone run for cover and the opportunity is great. On Wednesday, Chesapeake Energy (CHK) CEO Robert Lawler single-handedly collapsed the energy market with his comments on the company's second-quarter results, driving Chesapeake shares, and others in the space, viciously lower.
Wake up, traders. Now's the time to strike.
I love it when a plan comes together, and my plan on the energy markets has been following almost to the letter the outline I laid out in my book "Shale Boom, Shale Bust." We knew that the Band-Aid approaches of the independent producers here in the U.S. -- of driving down capex while throttling up production -- were never going to yield any kind of long-term solution. We were waiting for the inevitable "production wall" to be slammed into at rocket-force speed, driving the production down -- finally -- and clearing the markets of the gluts that have plagued pricing for the last year.
We're not there quite yet -- not hardly, don't get me wrong. But the point of trading is to be ahead of the trend, not reacting to it. By the time you've reacted to it, you're late.
One great example of this is in the report and comments of Lawler yesterday on Chesapeake. Yes, I'm singling out a natural gas company here instead of a shale oil company, because I'm now starting to believe that the natural gas glut might actually clear up a bit quicker than the oil one. And with prices having been so low for so long, the better value right now might be where investors have all but given up: in natural gas.
But look at the beauty of this Chesapeake setup. We did not bother trying to catch a falling knife. We allowed Chesapeake shares to go into mere single digits before committing any capital, even though you could argue that the Anadarko Basin sales the company made value its production at a share price in the mid-$20s. I could argue natural gas being at the end of its bear market, with discounts in the Marcellus and Utica shales about to disintegrate in light of new pipelines and the oncoming export of liquefied natural gas (LNG).
But, moreover, we got an investment gift in the Chesapeake results and CEO comments. Year-over-year realizations in natural gas got pummeled because of the disasterous basis price, the company finally decided to sequester some production, lowering guidance, and Lawler, God love him, opined that natural gas prices would stay low for a very long time yet. This sent the shares down to $7 -- with analysts ready to give a $5 price target.
I call this trading opportunity "lovely pessimism." Let's look at all of this.
Realization drops are news only to the most uninitiated. We've known about the basis disaster that was brewing and it was one of the reasons we ignored recommendations to buy the shares in the $20s. Sales of non-core assets not only deliver cash, they shore up our ideas of what the company is really worth and drop implied debt load in the process. In this light, the share price decline that accompanied the dividend slash earlier last week was another good sign of a company getting its stuff together.
And Lawler, he's finally figured out that you can't just continue to increase production, hoping to outrun the price war that's been going on for the past year Hurrah, this is what everyone in the industry is starting to finally perceive, with results from several E&Ps finally guiding for lowered production targets for 2016, both in shale oil and natural gas.
And finally, most sparkling of all: When was the last time that a CEO of a major oil company correctly predicted prices? Thank you, Harold Hamm, for believing that oil couldn't break $82 and removing all your short hedges. Continental Resources (CLR) stock is now trading at $35 instead of $50. Great oilmen do not make great traders. When they get bearish, I get excited.
I started a position in Chesapeake on Monday at $8.50 and bought more at $7.00. If the shares actually do get down to $5, as some analysts now predict, and the company doesn't receive a takeout offer from a major at that price, something much more fundamentally wrong than I can see is going on there. I can't imagine.
But for right now, this is a grand opportunity, even if it won't be a fast one.