Comments on: Attractive Entry Point for Chesapeake Energy http://www.peridotcapitalist.com/2006/09/attractive-entry-point-for-chesapeake.html Stock market and investing blog published by Chad Brand, Founder/President of Peridot Capital Sat, 11 Feb 2012 23:26:23 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Chad Brand http://www.peridotcapitalist.com/2006/09/attractive-entry-point-for-chesapeake.html/comment-page-1#comment-432 Chad Brand Tue, 12 Sep 2006 22:04:00 +0000 http://www.peridotcapitalist.com/?p=315#comment-432 Adam,<br/><br/>In the short term, CHK shares track NG prices very closely. This is due to the fact that traders use it as a vehicle to speculate on daily movements in the spot price for the commodity.<br/><br/>However, in the intermediate to longer term, CHK's value to shareholders isn't entirely based on NG prices. The company hedges the majority of its future production, so the actual spot price in the market today only impacts a small portion of CHK's total NG production.<br/><br/>The key for investors really is the conmpany's ability to continue to grow production and lock in a certain return on capital. This is what allows CHK to boost shareholder value.<br/><br/>If you look at the company's growth in tangible book value over the last couple of years, it is clear the stock price is not reflecting the value they have created, rather the stock just changes based on trends in NG prices. This is a main reason CHK shares look so attractive to me. <br/><br/>In the long run, share prices will ultimately reflect the value of the company's assets and the cash flow they will generate in the future. If NG fell to $2 or $3 again, clearly their assets would be worth less, but based on the supply/demand situation domestically, I don't think prices will go back to those levels.<br/><br/>CHK is likely worth $45-$50 per share in a buyout. I don't think they will sell anytime soon, but once they exhaust their growth opportunities, that will be the eventual end game for management and other large investors in the company, in my view. Adam,

In the short term, CHK shares track NG prices very closely. This is due to the fact that traders use it as a vehicle to speculate on daily movements in the spot price for the commodity.

However, in the intermediate to longer term, CHK’s value to shareholders isn’t entirely based on NG prices. The company hedges the majority of its future production, so the actual spot price in the market today only impacts a small portion of CHK’s total NG production.

The key for investors really is the conmpany’s ability to continue to grow production and lock in a certain return on capital. This is what allows CHK to boost shareholder value.

If you look at the company’s growth in tangible book value over the last couple of years, it is clear the stock price is not reflecting the value they have created, rather the stock just changes based on trends in NG prices. This is a main reason CHK shares look so attractive to me.

In the long run, share prices will ultimately reflect the value of the company’s assets and the cash flow they will generate in the future. If NG fell to $2 or $3 again, clearly their assets would be worth less, but based on the supply/demand situation domestically, I don’t think prices will go back to those levels.

CHK is likely worth $45-$50 per share in a buyout. I don’t think they will sell anytime soon, but once they exhaust their growth opportunities, that will be the eventual end game for management and other large investors in the company, in my view.

]]> By: adam http://www.peridotcapitalist.com/2006/09/attractive-entry-point-for-chesapeake.html/comment-page-1#comment-431 adam Tue, 12 Sep 2006 21:43:00 +0000 http://www.peridotcapitalist.com/?p=315#comment-431 Chad, <br/>I couldnt agree with you more. After your reco to me a few weeks back that I look into CHK, I did some homework before I picked up a few shares. Although revenues are down significantly from Q1 of 06, CHK's new exposure in the Appalachian region (from a recent acquisition), combined with increased efficiency of drilling technologies making it cheaper to seek out smaller sites makes CHK look pretty well positioned. Plus as you mentioned, multiple-wise its a cheap stock & the fundies dont look too shabby. So... when you look at a stock like this, in the NG sector, does the outlook for CHK depend mostly on the price of NG? Is that the definitive factor here? Forgive me if I sound like a simpleton here, not that familiar with energy stocks. Chad,
I couldnt agree with you more. After your reco to me a few weeks back that I look into CHK, I did some homework before I picked up a few shares. Although revenues are down significantly from Q1 of 06, CHK’s new exposure in the Appalachian region (from a recent acquisition), combined with increased efficiency of drilling technologies making it cheaper to seek out smaller sites makes CHK look pretty well positioned. Plus as you mentioned, multiple-wise its a cheap stock & the fundies dont look too shabby. So… when you look at a stock like this, in the NG sector, does the outlook for CHK depend mostly on the price of NG? Is that the definitive factor here? Forgive me if I sound like a simpleton here, not that familiar with energy stocks.

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