An interesting analysis of Chesapeake Energy (NYSE:CHK) has been compiled by Trefis analysts, in the context of a change in mix of the company’s production of natural gas, on the one hand, and oil and natural gas liquids on the other.
Trefis has pointed out that Chesapeake Energy (NYSE:CHK) has been seeing a steady decline in natural gas output from many shale gas properties, specifically the Haynesville and Fayetteville formations. Pennsylvania’s Marcellus formation may prove to be an exception, however.
Additionally, all-time low prices of natural gas have resulted in Chesapeake Energy (NYSE:CHK) shifting its focus to drilling in areas that are richer in oil and other liquids.
Trefis has prepared a valuation of Chesapeake Energy (NYSE:CHK) based on the following mix and prices.
Natural gas
The model envisages a fall in volumes of production of natural gas up to 2013, and rising gradually from 1.05 billion cf in 2013 to 1.15 billion cf in 2019. Gas prices are to rise from $2.79 in 2012, to $4.02 in 2019.
Supporting factors for the business are technological advancements, clean sources of energy, increasing demand for LNG, use in power generation, better drilling efficiencies, and pipeline expansions. Adverse factors include regulatory restrictions, hurricanes, and economic weakness.
Oil and NGL
On the other hand Oil and NGL net production is expected to rise from 46.3 million bbl now, to 73.2 million bbl in 2019. Oil and NGL prices assumed are $78.5 per barrel in 2012, rising to $104 per barrel in 2019.
Supporting factors: shift in capex to Oil and NGL, new discoveries and developments in deep water exploration. Adverse factors include economic uncertainty, rising costs of production, OPEC actions, alternative fuels, and geopolitical factors.
Valuation
Given these parameters, Trefis analysts see $20.99 as a reasonable stock valuation for CHK.
This price is made up as follows on a divisional basis:
Oil and NGL production 56.9%
Natural Gas Production 37.9%
Mktg, gathering etc 3%
Service operations 2.2%
Total 100%
Current price
The stock is currently trading at $19.18.
The potential for upside from this level is just shy of 10 percent.
In addition, there has been some renewed investor interest in CHK, in view of better Q2 earnings and improved corporate governance.
