I always like reading contrary opinions on stocks I like and, for Chesapeake Energy Corporation (NYSE:CHK), the counterarguments are numerous. The biggest of which continues to be the firm’s high debt load. However, as I said before, bankruptcy is well off the table.
The second biggest argument against CHK seems to be that stocks like Tesla (NASDAQ:TSLA) are going to disrupt the oil and gas sector and drop demand like a stone. Renewable energy and electric cars will crater prices, leaving firms like CHK twisting in the wind.
Now, I like renewable energy as much as the next guy, but the reality is these naysayers are forgetting that Chesapeake has less to do with power cars than it does in fueling America’s plastic revolution. And, because of that, CHK is major buy under $5 per share.
CHK Is All About Natural Gas
While Chesapeake has made significant strides in adding some much-needed shale oil production to its arsenal of land holdings, the name of the game is still natural gas. As of the end of last year, CHK managed to produce 2.867 billion cubic feet (bcf) of natural gas and 66,700 barrels of natural gas liquids (NGL). That number has only gone up in subsequent quarters as the firm has focused on better drilling locations.
That’s pretty significant. The reason why is natural gas is what the shale boom is really all about.
Oil is pretty much used as a transportation fuel. And from that standpoint the TSLA argument against energy stocks makes sense. Electric vehicle adoption is starting to finally hit the early stages of critical mass. That’s a problem for producers of strictly oil. But powering those electric vehicles requires a hefty dose of natural gas.
As production has continued to rise, utilities have switched in spades from other sources of fuel to natural gas. According to consultancy group Deloitte, consumption of natural gas for electricity generation has risen from about 18.7 billion cubic feet in 2007 to over 27.4 billion feet in 2016 — that’s about 4% growth per year.
And while renewable energy sources have continued to be added to the grid in record numbers, the problems of peak-versus-base-load and storage will prevent them from being top generation fuels. This means low-cost natural gas will be the prevailing winner for the foreseeable future.
The second piece of the natural gas puzzle for CHK comes down to plastics production.
Again, thanks to lower prices, CHK and other natural gas producers have continued to see their product go towards new plastics production in the U.S. Ethylene can be cracked into a variety of things and one of them is plastic resin. Plastics producers are expected to inject more than $50 billion into expanded and new capacity here in the U.S. to take advantage of the natural gas abundance. That should help turn the nation into a net exporter of resin and plastic base materials to the rest of the world.
CHK Is the Deep Value Power & Plastics Play
For CHK, the future is actually quite rosy. The continued growth in natural gas demand for power generation and plastics production will keep its wells humming for years. And, yet, investors continue to value it like an oil stock. Shares have pretty much followed the trajectory of oil prices over the last few years. Threats like TSLA have only exacerbated the situation further at CHK.
However, this doesn’t reflect reality. In truth, Chesapeake is about natural gas — and natural gas is about growth.
With CHK overcoming its debt woes, moving into more profitable fields and reducing CAPEX needs, it’ll be a dominant force in the upcoming natural gas expansion in power generation and plastics production. At $4 per share, it seems like a steal for the long-term.
There is some risk, of course. Big price swings have become commonplace with CHK stock. But Chesapeake remains one the unsung values in the energy sector. The key is to focus on the long-term and its continued debt reduction.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
