If you want proof that even the most iconic (and profitable) oil and gas names are still paying the price for the 2014/2015 industry-wide meltdown and are being scrutinized from every angle, you only have to look at what happened on Thursday. Chesapeake Energy Corporation (NYSE: CHK ) topped its first-quarter earnings and revenue estimates, but CHK stock fell more than 7% that day as crude oil and natural gas prices fell, and Chesapeake missed its production estimates.
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On the flipside, those same Chesapeake Energy shares bounced back on Friday - to the tune of 6% - when crude oil prices jumped and a handful of analysts came to its defense.
The erratic swings not only rattled the shorts and the longs, it was enough to sour both sides of the table from fooling with CHK stock again … it's just too unpredictable to bother with.
Thing is, the analysts who chimed after the company posted last quarter's earnings arguably had the most helpful perspective on Chesapeake Energy. Investors would be wise to look at this stock using the lens they're viewing CHK through.
CHK Stock: Yes, These Things Do Take Time
If three professional stock-pickers hadn't essentially said the same thing about CHK stock, it might be dismissible. With three notable analysis firms on the same page about a stock that has been all over the map of late, however, perhaps there's something to it.
"Slightly higher production guidance for the year comes alongside capex guidance being raised for the year as well. 1Q17 results highlight the continued focus on costs but no change to 2017 guidance is provided … Chesapeake continues to focus on costs while aiming to return to growth. Progress is being made but large changes take time."
Their take jibed with Wunderlich's analyst comments :
"While a relatively quiet quarter for CHK in terms of financial and operational moves, there were some nice positive incremental oil well results that should help drive CHK's oil weighting higher as it shifts to growth in 2H16."
The common element? Where the company is now isn't where it's apt to be in the foreseeable future, and investors can't get too distracted by one quarter - especially a quarter that's in the midst of a recovery effort. SunTrust Robinson Humphrey agreed Chesapeake Energy is positioning for a strong end to 2017, on the heels of paying down some of its debt and ramping up its liquidity.
So why the adverse reaction to an otherwise bullish earnings report from Chesapeake? Contrary to some of the chatter, Thursday's dip wasn't so much about the production shortfall. It was mostly about that day's selloff in crude oil and gas prices, proving just how subject these names remain to changes in the price of oil.
The good news is, if you can handicap crude's future, you can get a pretty good bead on what lies ahead for CHK stock.
Looking Ahead for Chesapeake Energy
Yes, Chesapeake's cost-cutting and improved efficiencies matter. As CEO Doug Lawler commented following the release of its Q1 numbers :
"Our operational momentum continues to build in our Eagle Ford, Powder River Basin and Mid-Continent oil assets, as we remain on track to reach our production target of 100,000 barrels of oil per day by year-end. We expect our production to grow significantly in the second half of 2017 as we place more wells to sales, and as a result, we have raised the bottom range of our 2017 production guidance. We remain focused on improving our balance sheet and decreasing our cash costs, while improving the capital efficiency from our operations. We look forward to reporting our results as the year progresses."
Great. But, it won't mean a thing if oil prices and natural gas prices don't firm up. The good news is, they are … or at least they should. In both cases, the fact that the U.S. dollar is falling - and is now in a confirmed downtrend - should help.
Crude oil prices were already sliding lower headed into CHK's earnings report, despite the fact that the U.S. Dollar Index has been trending lower since late last year; crude's weakness has had more to do with supply matters.
If you take a close look at the comparative chart below, however, as of Friday crude seems to have somewhat capitulated, while the dollar appears to have confirmed it's in a downtrend by virtue of a move to multi-month lows and its cross under the 200-day moving average line (red). The greenback may still be a little volatile in both directions, but the net trend is a bearish one until further notice.
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Natural gas prices, on the other hand, are mostly back in their longer-term uptrend, knocking on the door of a move to a multi-month high above a ceiling near $3.34 per mmBTU.
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And to the extent gas and oil prices are driven by the amount of supply rather than the U.S. dollar, there's bullish help from that direction as well. The supply of crude seems to have hit something of a plateau, and the summer drawdown appears to have begun. The summertime rebuild of stored natural gas is underway too, but as you can see, this year's rebound is starting the recovery from a much lower level than last year's lull, despite the mild winter.
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Better still, the EIA anticipates an average price of $3.57 per mmBTU in 2018 , with prices projected to keep rising into 2019. The agency expects crude prices to rise to an average of $55.10 per barrel in 2018 , up from 2017's projection for an average of $52.24.
From this perspective, the future looks reasonably bright for Chesapeake Energy, and by extension, for CHK stock. The toughest part is bearing in mind what more than one analyst made a point of saying … these things take time. The near-term noise is ideally ignored.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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