Last Tuesday I said that “this quarter will determine the future direction of CHK’s share price – and likely the trajectory of the entire natural gas sector.”
Well, Chesapeake (CHK) reported a blowout quarter last Wednesday.
Revenue and earnings didn’t just grow… they exploded higher!
Quarterly revenue increased by 21% year over year to $1.76 billion, and earnings doubled to $456 million.
Oil production grew by 2%. And natural gas liquids – which, as I mentioned last week, will help balance the company’s resource output – rose by a whopping 55%!
To top it off, the company raised guidance for growth from 8-10% to 9-12%.
As a result, shares rallied to a new 52-week high – a move that certainly signals a continued uptrend in the natural gas industry as a whole.
A New Stage of Growth
Indeed, CHK’s numbers tell us something that Wall Street still won’t understand for a while…
Natural gas demand has reached a new stage of growth. We’re on the cusp of reaching “critical mass” in the industry, where demand is finally strong enough to balance supply.
Inventory shortages, which we saw after the cold winter, woke up a lot of analysts.
If we have another “global warming” type of summer, gas demand will skyrocket even more. And prices may once again trade into the $5 range, and stay there for a while.
At that point, companies like Chesapeake, Encana (ECA) and Devon (DVN) will post even better numbers than expected, and we should see a bull run in this sector.
Gas prices have more than doubled in the past two years. And they could triple if prices reach the high $5s and the outperformance of natural gas continues to beat every other asset class.
However, before you start typing in buy orders like they’re going out of style, consider this caveat.
Two Crucial Questions
Chesapeake was only able to report higher numbers because it was able to get that extra gas out of the ground. It just wasn’t that hard.
Here’s why that should give you pause…
There’s no question that there’s an ample amount of natural gas in the ground, and it can be accessed quickly, easily and cheaply.
Plus, as long as companies are still flaring natural gas (burning it and not storing it) in places like the Bakken, where it’s a natural by-product of the oil drilling process, natural gas will still be in an oversupply position.
These factors will put a ceiling on natural gas prices for a few years – likely around $6.
What’s more, one normal winter or summer season could send prices back to the low $4s or high $3s.
To be clear, I’m still bullish on the natural gas industry as a whole. But we’re still in the very early innings of growth.
And while companies like CHK will make a lot of money in the quarters ahead, always ask yourself if they are 1) increasing volume and 2) selling profitably at current levels. Because we won’t have the luxury of seeing a lack of supply and increased demand in the industry anytime soon.
And “the chase” continues,
Karim Rahemtulla
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Original Article: Chesapeake Results Point to Unstoppable Trend
