Is the Recent Natural Gas Rally Enough for Chesapeake to Recover?

The price of natural gas sharply rose in the past few weeks and could pass the $3 mark in the very near future. The low prices of natural gas were one of the reasons (according to many analysts) for the tumble of Chesapeake Energy Corporation (NYSE: CHK) stock price. Will the recent recovery of natural gas prices be enough to help rally Chesapeake’s stock price. Let’s examine the recent Macro changes in the oil and natural gas markets and the recent news that could explain the recent rise in Chesapeake’s stock price.

NG and Chesapeake

Natural gas rose in the past couple of weeks by nearly 30.8% (from June 11th up to date) and United States Natural Gas (AMEX: UNG) also rose by a very similar rate.  Chesapeake’s stock price rose during the same time by nearly 11.5%. Chesapeake’s officials blamed the low price of natural gas for the company’s financial troubles. From the stand point of the company’s stock price the linear correlation between the stock price and natural gas (spot) daily percent change was 0.26. This means that nearly 7% of Chesapeake’s volatility could be explained by the movement of natural gas.

The chart below shows the relation between Chesapeake, U.S’s second largest natural gas company, and Henry Hub during the year (up to date).

Chesapeake and natural gas prices 2012 jULY

Despite the recent rally of natural gas, they are still very low for the season and are currently nearly $1.6 lower than last year. This means that at the current low rates of NG aren’t helping the company and the recent rally won’t be enough for Chesapeake to recover.

Oil and Chesapeake

During the last couple of weeks the prices of oil shifted very promptly. Despite the sharp gains and losses in the price of oil it has managed to rise by 5.5% during the last few weeks and by extension United States Oil (NYSEMKT:USO) rose by 6.3%. One of the main factors pulling the price of the company’s stock is oil price. During 2012 the linear correlation between the stock price and oil (spot) daily percent reached 0.35. This means that nearly 12% of Chesapeake’s volatility could be explained by the movement of oil.  Therefore the rise in Chesapeake’s stock price could be partially explained by the rise in oil prices.

S&P500 and Chesapeake

The S&P500 also rallied in recent weeks by 4.5%.  Despite the concerns over the economic progress of the U.S, China and Europe the recent rise in the stock market may have contributed to the rise in Chesapeake’s stock rate. The linear between the stock price and S&P500 daily percent reached 0.46 (during 2012). This means that nearly 21% of Chesapeake’s volatility could be explained by the movement of S&P500.

All these correlations point out to one thing: despite the recent rally in the company’s stock, the rise in stocks, oil and natural gas may have had a large role in Chesapeake’s recent recovery.

Let’s examine the company’s recent news to see if the condition of the company has improved in any way:

Chesapeake’s Micro View

According the recent reports the company has recently sold its subsidiary company Chesapeake Midstream Partners for nearly $2 billion to Global Infrastructure Partners (GIP). This means, the company continues to get rid of assets in order to pay its debt. Thus the company is still not out of the woods and as long as the uncertainty regarding its future will remain high, the company’s financial situation won’t improve. The dire conditions of the company are extremely surprising since it was recently revealed the company had paid in the last two decades only 1% tax rate. Nonetheless, I suspect if not for the recent rally in oil, NG and stocks, the company’s stock might not have risen at all. Therefore don’t be impressed by the recent rise in the stock price; it might be short lived especially since it’s not backed by an improvement in the company’s condition.

For further Reading:  Why the Recent Rally in Natural Gas won’t help XOM