weiwentg (98.29)

Chesapeake: fast money moving out but long term prospects strong

October 10, 2008 – Comments (1) | RELATED TICKERS: CHK

The Wall Street Journal has an article out whose title is "Credit crunch and sinking energy prices threaten Chesapeake Energy's growth". The synopsis is that Chesapeake's near term growth is up in the air; the company has been cutting sharply back on land leasing arrangements and isn't able to sell assets or tap the capital markets. Chesapeake had previously been aggressively leasing land, selling properties and tapping the capital markets.

  WSJ quotes Charles Maxwell, an energy analyst who sits on Chesapeake's board, who said the company suffered from "an excess of enthusiasm" when prices were rising earlier this year. He also said "I didn't think it would come to this." Additionally, Streetinsider.com summarizes this article and shortens the title to "Credit crunch and sinking energy prices threaten Chesapeake Energy".

While there are genuine concerns over Chesapeake's near term growth prospects, this is NOT a company that is in financial distress. Chesapeake generates a lot of cash, being one of the country's biggest natural gas producers. The WSJ article says that Maxwell feels the company's long term prospects are good. It also says that the company has hedged 75% of its expected 2009 and 2010 production at $9.25 per million BTUs. One mBTU is about one thousand cubic feet (mcf). Today's NYMEX contracts are around $7.18/mcf for April 09. Additionally, you can expect natural gas prices to rise in the winter.

In addition, Chesapeake has no immediate refinancing needs. Cemex, a pick I recently ended,  does havea chunk of debt due in early 2009. Chesapeake doesn't. Chesapeake is also generating significant free cash flow. 

I emailed Justin Perucki, the Morningstar analyst who covers Chesapeake. Although Morningstar seems to prefer the more conservative XTO Energy (which is also plummeting), Perucki maintained that Chesapeake wasn't a distressed firm. He said this had always been a hot money stock, and that the hot money is now vanishing. I don't intend to follow suit and will be holding my shares.