Chesapeake Peak? The Answer Is Not As Clear Anymore

As crude oil has sold off over $16 (approximately 11%) in the last four days, natural gas, and the natural gas companies have also taken a hit. As of last week, natural gas prices are down over 20% since July 4, and fell over 8% last Thursday alone. Not surprisingly, Chesapeake Energy sold off with the corrections in both crude oil and natural gas, falling almost $10, or over 15% in the last week.

Source: StockCharts.com

A little over a week ago I wrote an article about whether Chesapeake had reached a peak when it recently announced a common stock offering of 25 million shares at $57.25 per share. The news of the offering on July 8 had put some pressure on the stock. I argued at the time that the stock had probably not peaked, in part because of the link between crude oil and natural gas, and the recent bullish moves in crude. Furthermore, the CEO of Chesapeake, Aubrey McClendon, was buying stock in the open market like there was no tomorrow, purchasing over 3.5 million shares since the first of the year. Natural gas was also trading below it historical multiple to crude oil, somewhere between a 6-8 multiple. As long as crude oil did not fall below $100 per barrel anytime soon, historical multiples stay in place, and demand for natural gas stays strong, Chesapeake should be fine.

Well, what a difference a week can make. While Aubrey McClendon continues to buy shares, purchasing another 750,000 shares at $57.25, many of the other parameters and assumptions have changed (guess who bought into the offering at $57.25? - one could speculate that the CEO purchases have been holding the stock up short-term). While crude oil has not fallen below $100 a barrel, it has had a historic one week sell-off. Furthermore, the sell-off in natural gas has been just as bad, if not worse than expected. Natural gas in underground storage increased to 2,312 Bcf, registering an increase of 104 Bcf.

Given the recent price action in crude oil and natural gas, the sell-off in Chesapeake's stock, the dilution from the recent stock offering, and the historical pressure on natural gas prices in late July and early August, it would be easy to sell the stock at current levels and wait for more clarity. In fact, this may be the smart move, even at the risk of selling at a near-term bottom. Nonetheless, for now I will continue to hold what is left of my position, but look to either add or sell in the low 50s as the stock tries to find support in this area. While the recent uptrend appears broken, there is some support in the low $50s, and it will be important for the stock to hold at these levels. Otherwise, there may be a fall to the $40 or even $35 per share level, with some weaker support at $45 per share along the way.

Given his recent purchases, I would expect the CEO to continue to accumulate stock at these levels, but even his buying may be not be enough to support the stock if crude oil continues to break support and suffer the kinds of sell-offs it has recently experienced. A number of funds ratcheted up their exposure to crude oil over the last year and are now beginning to unload their positions and lock into any remaining gains. The right (or wrong) news could once again begin the selling in earnest. Nonetheless, I am still bullish on natural gas long-term. I also still believe in the story and management at Chesapeake, and I still feel that crude oil is not going back to 1990 levels anytime soon, even if the current sell-off continues. Any weather related disruptions to crude oil and natural gas would also be bullish for prices. Yet, I am not as confident in this view as I was just a little over a week ago, and will certainly be watching the price action closely.