Chesapeake Energy Corporation’s (NYSE:CHK) Performance To Improve On Back Of Improved Natural Gas Market Fundamentals

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How natural gas prices are benefitting Chesapeake Energy

Chesapeake Energy Corporation (NYSE:CHK) has had a shaky stock performance this year. In the past three months of trading, the stock appreciated by around 120%. However, in the recent past, stock has started to lose momentum as it has declined by around 4.50%. We believe stock to rally soon on the back of following reasons.

Chesapeake has taken major actions to lower its debt burden and lower its cost base which is preparing itself for lower price environment. Apart from the management’s decisions, economic factors are also favoring the company, especially the natural gas prices.

Natural gas prices are on positive momentum, as it has gained about 28% since start of March. The spike in natural gas prices is attributed to better demand for natural gas, increased level of exports subsequently resulting in lower inventory levels.

Natural Gas inventory is still increasing but on a decreasing trend. According to Energy Information Administration (EIA), natural gas stock piles in the US soared by 56 billion cubic feet for week ending May 06. This increase was much lower than 68 billion cubic feet increase the previous week, and much lower than 101 billion cubic feet on Year-over-Year (YoY) basis.

Due to ongoing summer season, the demand is much better and is expected to increase further. Also because of better demand for cooling, electric sector’s demand for natural gas can be expected to be higher this year.

According to EIA, on the back of higher demand, natural gas demand would jump by about 1.6%, while increase in production would be on the lower side at around 0.9% because of lower production activity. Owing to better demand accompanied by reduced production, natural gas prices can be expected to be higher in future, which would be beneficial for Chesapeake.

The additional factor contributing towards better natural gas prices in the future is the natural gas exports which are also helping to reduce the bulk inventory pileup. EIA expects Liquefied Natural Gas (LNG) exports to increase by 0.9% this year, but increase of hefty 2.2% the next year.

Hence, LNG exports also are presenting better future for natural gas prices and future growth potential in revenues and margins for companies like Chesapeake. On the back of management’s proactive decisions to lower its cost base and debt burden, along with better future expected for natural gas prices, Chesapeake’s future performance is expected to be better, hence significant upside is potentially inherent for the stock.

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