Will Chesapeake Continue to Rise? It Depends on Natural Gas

The price of natural gas rose in recent weeks. Furthermore the stock price of Chesapeake Energy Corporation (NYSE: CHK) also started to pick up in recent days. Will this rally last? Let’s examine the latest news related to Chesapeake and examine the effect of the recent rise in natural gas prices on the stock.

Natural gas increased during June by nearly 4.1% (up to date) and United States Natural Gas (AMEX: UNG) that follows the price of natural also rose by the same rate. If this rally will continue and won’t be short lived it could pull up the stock price of Chesapeake. But this will hold up only if the price of NG will sharply rise. As I have listed in the past, there is a mid-strong relation between the price of natural gas and Chesapeake: during 2012 the linear correlation between UNG and Chesapeake (daily percent change) was 0.28. This means that nearly 8% of Chesapeake’s volatility could be explained by the movement of natural gas. This isn’t a high rate but it could be because the price of natural gas is very low compared to recent years. If natural gas will shoot up, I suspect the relation between Chesapeake and UNG will pick up.

The chart below shows the relation between Chesapeake and Henry Hub during the year (up to date).

natural gas prices and CHK 2012 June

Despite the recent rally of natural gas, its price is still very low and these low prices continue to adversely affect Chesapeake: it was reported that the company will cut 70 jobs in North Texas as it reflects a reduction in the company’s drilling operations. The company is in the midst of asset disposal program in order to get out of its liquidity problem it faces. Chesapeake had already managed to sell its pipeline asset for an estimated amount of $4 billion to Global Infrastructure Partners (GIP). Now Sinopec, the Chinese oil and gas group, might bid for other assets owned by Chesapeake. This process in which Chesapeake cuts its operations in natural gas by reducing staff and selling assets might help the company to stay afloat in the short term, but won’t necessarily help it in the long term. Without potential growth in oil and gas operations the company won’t go anywhere. Last month’s downgrade of the company’s rating after the company had taken a sizable short term loan of $4 billion is another symptom for the company’s troubles.

Further, the recent drop in oil prices by almost $20 in less than two months (during May and June United States Oil (AMEX: USO) fell by nearly 23%) also doesn’t help Chesapeake’s oil related operations.

The bottom line is that the ongoing cash problem of Chesapeake, the low natural gas prices, the decline in oil rates and the company’s asset disposal program is likely to keep the company’s stock price low. Finally, unless natural gas will start to pick up (and I mean really pick up), I suspect the company’s stock will continue to dwindle.

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