Is Natural Gas Dying at Chesapeake Energy Corporation?
The Chesapeake Energy Corporation (NYSE: CHK) is either greatest value investment or the worst stock on the market today.
In fact, Mr. Market priced Chesapeake Energy shares at 25.72₵ on 3 March 2020. Incredibly, Chesapeake Energy’s share price is so low that the company is planning a “reverse stock split,” MarketWatch’s Tomi Kilgore claims. To clarify, in a reverse stock split a company combines shares in hopes of increasing their prices.
Therefore, Chesapeake’s management thinks the stock prices is too low. In reaction, management hopes to increase the stock price by reducing the number of shares in the market.
Is Chesapeake Energy making money?
Oddly, Chesapeake Energy is making money. Chesapeake reported a quarterly gross profit of $2.112 billion on quarterly revenues of $1.926 billion on 31 December 2019.
However, Chesapeake reported a negative common net income of -$346 million for the quarter ending on 31 December 2019. Yet, Chesapeake reported a negative operating income of -$173 million for the same period.
Moreover, Chesapeake reported an operating cash flow of $441 million and an ending cash flow of -$8 million for the quarter ending on 31 December 2019. Conversely, Chesapeake reports a $96 million financing cash flow for the same period. I think the financing cash flow indicates Chesapeake Energy is borrowing to finance some operations.
What Value Does Chesapeake Energy Have?
In the quarter ending on 31 December 2019, Chesapeake had little cash but a lot of value. For instance, Chesapeake Energy (NYSE: CHK) reported $6 million in cash and short-term investments on 31 December 2019.
However, Chesapeake reported $14.942 billion in total assets; $11.792 billion in total liabilities, and $9.73 billion in long-term debts for the same quarter. Thus, Chesapeake Energy offers a low price and a lot of potential value.
Chesapeake Energy claimed to own oil and natural gas reserves that contained 1.448 billion barrels of oil equivalents on 31 December 2018. However, Chesapeake admits it had just 496,000 barrels of oil equivalents (496 mboe/d) in production on New Year’s Eve 2018.*
The Market for Natural Gas Grows
Currently, Chesapeake owns oil and gas reserves in four American states; Texas, Oklahoma, Wyoming, and Pennsylvania. Importantly, the demand for natural gas in North America is huge.
In particular, over 47% of American households rely on natural gas as their main heating fuel, the U.S. Department of Energy estimates. In addition, natural-gas burning plants supply 42% of U.S. electricity, the U.S. Energy Information Agency estimates.
Moreover, the market for natural gas is growing because coal-fired plants are closing fast. In fact, U.S. companies closed coal-fired power plants that generated 15.1 megawatts or million watts electricity in 2019, Reuters estimates.
Coal-plant closure is good for Chesapeake because utilities need to burn something else to produce that electricity. Natural gas is many utilities’ fuel of choice because it is cheaper than coal and produces fewer greenhouse gases.
Notably, all you need to supply natural gas to a power plant is a pipe. In contrast you need a rail line, trucks, many workers, and heavy equipment to move coal.
Therefore, Chesapeake could make money, even if Elon Musk electrifies every vehicle on North America. To explain, utilities could need to burn more natural gas to make the electricity to power all those electric vehicles.
Will Warren Buffett buy Chesapeake Energy?
Predictably, Chesapeake Energy pays no dividend. However, Chesapeake Energy (NYSE: CHK) could have value as an acquisition target.
Chesapeake is cheap; it had a market capitalization of $505.346 million on 3 March 2020. However, Chesapeake had 14.942 billion in total assets on 31 December 2019. Thus, Chesapeake could be a value investment.
Consequently, Warren Buffett could look at Chesapeake. Notably, Berkshire Hathaway (NYSE: BRK.B) has not made a major acquisition since he spent $32 billion for Precision Castparts in 2016, CNN Business observes.
Meanwhile, Berkshire Hathaway had $64.175 billion in cash and short-term investments on 31 December 2019. Thus, Berkshire Hathaway (NYSE: BRK.A) could buy Chesapeake and have huge amounts of cash left over.
Remember, Buffett has a habit of buying distressed companies. Famously, Berkshire Hathaway bought underwear marker Fruit of the Loom from creditors for $835 million in 2001.
What Value Does Chesapeake Energy Stock Have?
I think Chesapeake could fit in well at Berkshire Energy. Notably, Berkshire Energy owns the natural gas pipeline companies Northern Natural Gas and the Kern River Gas Transmission Company. In addition, Berkshire Energy owns two major U.S. electric utilities MidAmerican Energy and NV Energy.
Hence, I think it makes sense for Buffett to buy some natural gas reserves. Buying Chesapeake Energy could be a cheap way to get those natural gas reserves.
In the final analysis, I think Chesapeake Energy (NYSE: CHK) only has value as a speculative stock. To explain, I believe Chesapeake Energy’s only current value is as an acquisition target by larger companies. Hence, investors could make money by buying Chesapeake shares and hoping they gain some value.
*Source: Chesapeake Energy Corporate Fact Sheet: http://www.chk.com/documents/operations/corporate-fact-sheet.pdf