This article hurts to write because I listen to Mad Money every morning on the subway. Jim Cramer has great interviews with prominent CEOs and his show can be a useful source of information. I continue to disagree with Mr. Cramer on Chesapeake Energy (NYSE:CHK). On the June 12th, 2018, edition of Mad Money, Mr. Cramer said “natural gas is breaking out here which means you get a chance to sell Chesapeake.” To his credit, Chesapeake has had a nice run climbing from $2.63 on Feb. 21st, 2018, to $4.81 on June 12th, 2018. For the short-term investor that is a healthy profit, but for longs, this $4.81 is a long way off from where we are going.
On January 1st, 2017, Chesapeake Energy’s share price closed at $6.45. Today, the company is in a much better position than it was a year and a half ago. CHK is a play on the future of the world’s energy mix which Natural Gas (NG) and Liquefied Natural Gas (LNG) exports/imports will play a key role in. I previously wrote an article titled Chesapeake Energy: A True Turnaround Story With Exceptional Upside Potential which outlined why I believe the company was a compelling buy, and I have not changed my position. I am not going to restate all of those facts as this article is going to be strictly about the future of natural gas and why Chesapeake will be an important player in this space.
The Federal Energy Regulatory Commission (FERC) has approved nine additional U.S. “LNG” export facilities
FERC is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil. FERC also reviews proposals to build liquefied natural gas terminals and interstate natural gas pipelines. According to the FERC website, the United States currently has three export terminals for LNG amounting to a total export capacity of 3.82 Bcfd (billion cubic feet per day).
- Cove Point, MD, .82 Bcfd – Dominion Energy (NYSE:D)
- Sabine, LA, 2.8 Bcfd – Cheniere (NYSEMKT:LNG)
- Kenai, AK, .2 Bcfd – ConocoPhillips (NYSE:COP)
The FERC has also green-lit nine additional export facilities for liquefied natural gas in the United States. Five facilities are currently under construction with a total of 8.13 Bcfd in export capacity and four are approved but not yet under construction with a total of 6.79 Bcfd exporting capabilities.
U.S. Approved – Under Construction
- Hackberry, LA, 2.1 Bcfd – Sempra (NYSE:SRE)
- Freeport, TX, 2.14 Bcfd – Freeport LNG
- Corpus Christi, TX, 2.14 Bcfd – Cheniere
- Sabine Pass, LA, 1.40 Bcfd – Sabine Pass
- Elba Island, GA, .35 Bcfd – Southern LNG Company, a Kinder Morgan (NYSE:KMI) company
U.S. Approved but not under construction
- Lake Charles, LA, 2.2 Bcfd – Southern Union
- Lake Charles, LA, 1.08 Bcfd – Magnolia LNG
- Hackberry, LA, 1.41 Bcfd – Sempra
- Sabine Pass, TX, 2.1 Bcfd – Exxon Mobil (NYSE:XOM)
Once these nine facilities become operational, a total of 18.74 Bcfd of LNG exports will be flowing from U.S. shores. There is no question these organizations are viewing LNG exports as the next frontier to generate profits and increase their bottom lines. Chesapeake will stand to benefit from the exporting of natural gas for the simple reason you need to produce natural gas in order to export it.
Chesapeake Energy is the second-largest producer of natural gas and the 13th largest producer of oil and natural gas liquids in the United States. Its operations are set up well for these export facilities as it currently produces 1,854,800,000 MCF of gas production and 374,600,000 gas – barrels of oil equivalent. In January of 2018, Chesapeake placed an Upper Marcellus well online which has produced approximately 18 million cubic feet of gas per day. Its Louisiana operation in the Bossier Shale, which is in a prime location to the new export facilities, completed Chesapeake’s first 10,000 foot lateral. This is exciting as it has a cumulative production of 4 billion cubic feet in its first 150 days of production, which is an average of just over 27 million cubic feet per day of natural gas. Within the Haynesville location, Chesapeake drilled and completed its first 15,000 foot lateral well which was placed into production on May 1st, 2018, according to the 2018 Q1 report.
Chesapeake is truly a pioneer in drilling wells and utilizing its expertise to become more efficient with the capabilities to boost production. Through innovation, Chesapeake has deployed a four-rig program in the Eagle Ford location which replaced the previous 7-10 rigs needed for the same production. This is critical to its capital discipline which will increase margins and drive profits to the bottom line.
Look at where the current under-construction and pending construction export facilities are in the previous two slides. Now look at the slide below showing Chesapeake’s Gas Operations and think about the positioning of these assets.
(Source: Chesapeake Energy 2018 Shareholder Presentation)
Two of Chesapeake’s “world-class gas assets” are positioned close to Dominion Energy’s operational Cove Point facility which has .82 Bcfd of export capability. Its other “world-class gas asset” is positioned close to Cheniere’s operational Sabine, LA, facility which has 2.8 BCFD of exporting capabilities. The facilities from Sempra, Freeport LNG, Cheniere and Sabine Pass which are under construction in the Gulf of Mexico will add a combined 7.78 Bcfd in export capability to the region. Chesapeake’s Eagle Ford Shale, Haynesville Shale and Mid-Continent properties are in a hotbed of activity with more than enough pipeline to transport their natural gas to these export facilities.
The export facilities pending construction from Southern Union, Magnolia LNG, Sempra and Exxon Mobil will add an additional 6.79 Bcfd of exporting capabilities. When the projects are complete, there will be a total of 17.37 Bcfd in exporting capabilities from the export facilities situated in the Gulf of Mexico.
So will exporting LNG be profitable?
I am going to recycle something that I used previously which BP plc (NYSE:BP) published in its Energy Outlook 2018. On slide 88 of the Energy Outlook, BP discusses its projections for LNG exports and imports. Currently, North America exports roughly 2-3 Bcfd of LNG and this is expected to double by 2020. In the year 2040, North America’s LNG exports are projected by BP to increase tenfold to roughly 20 Bcfd. On the import side, China, Asia, India and Europe are expected to increase the amount of LNG they import by around 71%, jumping from about 35 Bcfd to roughly 60 Bcfd.
(Source: BP 2018 Energy Outlook slide 88)
European Union Natural Gas Import Price
European Union Natural Gas Import Price: $7.19 USD/MMBtu for May 2018
Unit of Measure
Price for per MMBTU
1,000,000 = 1 Bcf
(Source: Steven Fiorillo)
Japan Liquefied Natural Gas Import Price
Japan Liquefied Natural Gas Import Price: $9.40 USD/MMBtu for May 2018
Unit of Measure
Price for per MMBTU
1,000,000 = 1 Bcf
(Source: Steven Fiorillo)
While the United States has an abundance of natural gas, the rest of the world is importing this energy source at a much higher cost than it fetches in the domestic markets. With all of the export facilities in the works and the projections from BP, I think that there is a tremendous amount of money to be made in the production and reselling of natural gas and Chesapeake’s best days are ahead of it.
How the rest of the world is ramping up its importing capabilities as the U.S. ramps up exporting facilities
From 2013 to 2017, the U.S. has ramped up its exports of LNG significantly, as well as Australia.
Over the same period, many countries such as China, India, Taiwan, Spain, France, Turkey, and Italy have increased their LNG imports. Japan has tapered off a bit, but it is still the largest importer of LNG.
Connecting the U.S. from coast to coast
Companies such as Enbridge (NYSE:ENB) and Energy Product Partners (NYSE:EPD) have a tremendous infrastructure to move natural gas and liquefied natural gas across the U.S. Enbridge has an ownership stake in 77,389 miles of gathering lines, 27,403 miles of transmission lines, and 100,632 miles of distribution lines, a total of 205,424 miles of natural gas and NGL pipelines across North America and the Gulf of Mexico.
Enterprise Product Partners has 6,500 miles of natural gas pipelines and 28,500 miles of liquefied natural gas pipelines in its portfolio. These are two of the many companies that help transport these commodities.
(Source: Enterprise Product Partners)
Enbridge and Enterprise Product Partners have massive infrastructures, and these are just two of the players in this space.
Others that recognize the long-term play in Chesapeake Energy
In the 2018 CNBC stock draft is a competition which runs for nine months. Eight teams each pick three stocks and the team which has the highest percentage return between the average of its three picks is the champion. In this year’s event, five of the twenty four stocks/commodities picked were in the energy sector. In the first found, Kevin O’Leary picked Chevron (CVX) while Eric Dickerson took Exxon Mobil. In the second round, Eric Dickerson took another energy stock with Anadarko Petroleum Corporation (APC). In the last and final round, Dickerson went for the trifecta in energy taking oil as a commodity while Tim Seymour took the pony express, Chesapeake Energy.
I love what Mr. Seymour said:
“I can’t get away from my roots, which is to pick companies that are broken down and balance sheets that, I think, are in the repair mode. They actually are spending less on cap ex, they’re free cash flow positive in the fourth quarter, and they’re going to be spinning-off assets. All it will take is some small recovery in their balance sheet for this thing to double.”
I couldn’t agree more with that statement. Chesapeake in my opinion is doing all of the right things from becoming more efficient in its operations to becoming cash flow positive. At the time of the stock draft, Chesapeake was trading at $3.02 per share. Tim’s analysis was that a small recovery in its balance sheet should send the stock to $6.04. I think shareholders who are patient will be rewarded handsomely because management has delivered quarter after quarter and it has given us no reason to doubt it.
I have been long on Chesapeake Energy for about a year now. In my opinion, coal will decline while natural gas and renewables will fill the void. I believe Chesapeake has done enough to prove that it is turning the ship around. It is in a prime position to capitalize on the next energy boom which will most likely be caused by natural gas. Many companies are betting on this, and as we have seen, many countries are gearing up for this. I wouldn’t look at the current share price of Chesapeake as an opportunity to get out. As Mr. Cramer says natural gas is heating up.
Many analysts on CNBC have been stating that we will see more M&A activity in the second half of the year. AT&T (NYSE:T) just won its court battle to purchase Time Warner (NYSE:TWX) which in my opinion could be a catalyst for M&A activities. Whether another player looks at Chesapeake or not, the company will be just fine on its own. Chesapeake has stated it is committed to conducting an asset sale this year to reduce debt. Who knows maybe a larger player ends up buying all its assets. I think the rest of the year will be very interesting and will play out well for Chesapeake Energy. I am long and strong on Chesapeake Energy, a true turnaround!
Disclosure: I am/we are long CHK, BP, D, ENB, EPD, XOM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.