So now that we know why Chesapeake Energy Corporation (NYSE:CHK) is trading at one-third of its 2008 prices, let’s take a quick look at why the future may hold some promise.
Chesapeake Energy Corporation (NYSE:CHK) is the largest active driller of new wells in the USA.
Currently, 77% of proven reserves are in natural gas. In 2012, 59% of its realized revenues came from liquids, which accounted for only 21% of their production.
A price increase from $3 to $4 in natural gas could mean a 50% increase in net income. Prices of $5 would boost that to nearly 100% (given a constant of $95 oil).
Finally, completion of vital pipelines by third parties translates into sustainable demand by nearby cities and export terminals.
We’re # 4!
The name of the US’ number four natural gas producer may surprise you. Devon Energy Corp (NYSE:DVN) has been been hit recently by negative earnings. But astute readers of their financial reports have not had their confidence shaken. They know that fourth quarter 2012 financial results were impacted by a non-cash asset impairment charge of $896 million. According to Devon, these impairment charges have no impact on cash flow or cash balances and are not reflective of the fair value of oil and gas assets. Excluding the charge, Devon earned $316 million, or $0.78 per diluted share, in the fourth quarter of 2012. This translates into a “buy on the dip” scenario.
Because of this dip some valuations are looking very attractive. A price/book of 1.09 vs. an industry average of 1.90 and a forward P/E of 11.16 are just two metrics worth noting. Additionally, a 0.40 long term debt to equity ratio is also attractive.
Devon has been growing its asset base at an impressive rate. The most significant growth in oil production came from the U.S., where fourth-quarter YoY oil production increased 30 percent.
“Devon’s capital program delivered excellent drill-bit results in 2012. Our oil-focused drilling program replaced nearly 260 percent of our oil produced during the year,” said Dave Hager, executive vice president, exploration and production.
Finally, in an effort to protect itself against volatility in the natural gas market, Devon has started to hedge. For the full-year 2013, Devon now has approximately 1.3 billion cubic feet per day protected at a weighted average floor price of $3.87. This position covers approximately 60 percent of the company’s expected natural gas production in 2013.
Foolish Conclusion:
With the global recession natural gas has seen some heavy volatility. However, it appears that steady gains are now being projected for the coming years. A few companies are positioned very well. Slight increases in profitability in the natural gas market could translate into large gains due to their weighting. For safe natural gas plays try Anadarko Petroleum Corporation (NYSE:APC) and Devon. For those a bit more bold, Chesapeake Energy Corporation (NYSE:CHK) might be the stock for your portfolio.
The article Become a Drillionaire originally appeared on Fool.com and is written by James Catlin.
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