Chesapeake Energy Corporation (NYSE:CHK) is a producer of oil and natural gas. CHK is a competitor of MDU’s Fidelity subsidiary and is one of a very large number of producers competing for a finite amount of resources. Chesapeake is invested heavily in the natural gas industry and was hurt badly by the decline of natural gas prices. Although Chesapeake is making efforts to shift a portion of its focus into other areas such as natural gas liquids, they will continue to be heavily involved in the natural gas markets. Natural gas has more than likely bottomed, and although Chesapeake has a long way to go it is evident that they will be around for the duration. However, CHK is currently involved in an SEC investigation, and as a result I recommend that you consider opening or adding to a long position in CHK after this situation is resolved.
The Bottom Line
MDU has been through a rough period over the last five years, as revenues and earnings have been relatively flat. The tumbling of oil prices in 2007 followed by historically low natural gas prices created challenges for the Exploration and Production segment. In addition, the Construction Materials segment was adversely affected by the great recession and the bursting of the real estate bubble.
However, due to it’s diverse group of businesses, MDU has made it through this tough period better than most companies that lack MDU’s diversity. MDU’s utility businesses provide stable earnings that allow MDU to ride out circumstances that it cannot control, such as recessions and the volatility of the commodity markets. I believe that MDU’s fortunes are finally starting to turn and that it’s future is brighter than ever. The following points illustrate why:
- Natural gas prices are near historical lows when adjusting for inflation and are projected to remain low for the foreseeable future due to recent domestic discoveries. The demand for natural gas is very high because of these low prices, which bodes well for natural gas utilities. MDU is well positioned to take advantage of the high demand for natural gas due to their expanded customer base from the acquisitions mentioned above.
- Although oil prices will continue to be volatile, they are projected to increase significantly over the next 5 to 10 years. MDU has made it a priority to shift a large portion of it’s exploration and production activities from natural gas to oil. This strategic move will boost earnings significantly in the upcoming years. Also, MDU has made it a priority to produce natural gas containing a high liquid content, resulting in more BTU’s and a more valuable product.
- MDU’s Construction segment should perform well as the economy and housing improves. Infrastructure improvements should also continue to ramp up and MDU is ready to shine in this area.
For these reasons, I recommend that you consider building a position in MDU as part of a diversified, well managed portfolio.
The article Get to Know this Rock Solid, Diversified Utility Company originally appeared on Fool.com and is written by Greg Williamson.
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