Is it Time to Buy Chesapeake Energy?

by Tim Biggam | April 25, 2012 8:51 am

[1]Chesapeake Energy Corporation (NYSE:CHK[2]) engages in the acquisition, exploration, development, and production of natural gas and oil properties in the United States. The company also offers marketing, midstream, drilling, and other oilfield services.

As of December 31, 2011, it had interests in approximately 45,700 gross productive wells. The company’s proven reserves comprise approximately 18.789 trillion cubic feet of natural gas equivalents.

The recent scandal surrounding Aubrey McClendon and his loans[3] has been a huge negative for the stock, with CHK falling over 25% last month. The stock is now trading at levels not seen since the height of the financial crisis in 2009. Natural gas prices have been a negative as well, with natural gas prices at multi-year lows[4].

Yesterday’s action in natural gas prices may signal a short-term low, with the commodity showing its biggest rise in nearly a year. CHK followed suit, putting in its first positive day in a week.

With CHK trading at its lowest valuation on a P/E multiple basis (8 times), and with the company selling assets to pay down debt, we think CHK represents a decent bargain at these levels, with all the negative news more than fully reflected in the share price.

Combined with a 2% dividend yield, we look for CHK to find a floor and grind higher to the 20 level by July expiration.

Based on CHK’s closing market price of $17.77 for April 24, 2012 and using a target price of $2 and and a target date of July 20, 2012, option strategies to consider include buying a July call spread[5], selling a put spread[6], buying a call butterfly[7], or using another options strategy that best fits your trading style and risk/return objectives.

For the full details on this trade, visit TradingBlock.com, create a free Instant Login and try the TradeBuilder feature, where you’ll see several ways to trade this name. Best of all, you can see a potential profit-and-loss outline for each strategy.

Create your free login, and get access to the details about these CHK options trading strategies[8] by visiting TradeBuilder. 

As of this writing, Tim Biggam does not own any shares mentioned here.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.

Endnotes:

  1. [Image]: https://investorplace.com/wp-content/uploads/2011/11/Chesapeake-Energy-truck-630.jpg
  2. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  3. Aubrey McClendon and his loans: https://investorplace.com/2012/04/aubrey-mcclendon-borrows-chesapeake-energy-chk/
  4. natural gas prices at multi-year lows: https://investorplace.com/2012/04/4-winners-from-2-dollar-natural-gas/
  5. buying a July call spread: https://investorplace.com/resources/trading-strategy-in-a-bull-market/
  6. selling a put spread: https://investorplace.com/2011/05/3-advantages-spread-trading/
  7. buying a call butterfly: https://investorplace.com/2010/02/butterfly-spreads-call-butterfly-spread/
  8. get access to the details about these CHK options trading strategies: https://www.tradingblock.com/Marketing/Marketing.aspx?utm_source=KIT96&utm_medium=email&utm_campaign=POTD?&Price=20.00&TargetDate=20120720&Symbol=CHK&Amount=1000&Dest=TradeBuilder

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