I wrote about Chesapeake in my RM column yesterday, and I believe (CHK) and its energy sector cohorts are the toughest names to judge in this irrationally exuberant market. In the case of Chesapeake, the stock's plunge below a dollar has put it in an investment basket that is much easier to judge: dead or alive. As I mentioned yesterday, my analysis shows that CHK is going to survive. The company would need much higher hydrocarbon prices to thrive, but CHK generates enough cash flow at current prices to service its $9.7 billion debt pile, and that's all that matters with the shares trading under a dollar. It's not something for your Grandma's retirement account, but it is a name that could easily make 20% in the case of simple mean reversion.
But what about the underlying industry fundamentals? Chesapeake's move to purchase WildHorse Resources last year was an attempt to increase its exposure to black oil, but CHK's production is still heavily weighted toward natural gas, which represented 74% of CHK's output in the most recent quarter. With oil holding $57 per barrel today - down $4.52 from the reading on this day last year - and natgas at $2.80/million cubic feet - down $0.78 from the reading on this day last year - Chesapeake's move toward oil has indeed been a wise decision.
That's the conundrum with energy stocks. Investors can choose to avoid the sector and instead purchase stocks of companies that produce smartphone handsets, promulgate social networks, manufacture automobiles, etc., but for an energy executive, there really is only one choice: oil or gas.
So, Chesapeake's "gassiness" is going to be a drag on the stock, but, as I mentioned yesterday, it will not send the company into bankruptcy. Pure natural gas plays like Marcellus Shale giants Range Resources (RRC) and Antero Resources (AR) have been absolutely eviscerated this year - RRC shares are down 74% in the past 12 months, a decline exceeded by AR's 83% decline - and those stocks may be too cheap to ignore. I have been buying Antero's related gathering and processing company, Antero Midstream (AM) , this week to capture its 20% yield, which I believe is safe.
Again, though, these stocks are not for the faint of heart and the risk-averse. If your tastes run more toward black oil, a great way to play that is via Denbury Resources (DNR) . DNR's production consists of 97% oil. That output is also represented by a long-time holding of my firm, Portfolio Guru LLC, Evolution Petroleum (EPM) , whose sole asset is a stake in Denbury's Delhi field in Louisiana. I have been buying Denbury this week at prices near a dollar per share and writing calls against my position, just as I have been doing with CHK.
These names are not for the faint of heart, and they are certainly trading names much more than long-term buy-and-holds. If you pay attention, though, their share price patterns are easily discernible and you can generate alpha by jumping in and out. Given the abysmal performance of the stocks, this week is an "in" week. I will update the status of those trades in my RM column next week.
