Despite the well-documented adversity facing beleaguered fossil fuel producer Chesapeake Energy (NYSE:CHK), CHK stock could very well break out soon.
The company recently got a break that could prove to be important. Specifically, on Feb. 7. White House economic adviser Larry Kudlow told Bloomberg that Chinese President Xi Jinping had reaffirmed Beijing’s commitment to make the purchases required by its trade deal with the U.S., despite the coronavirus from China outbreak.
Under the terms of the deal, China agreed to buy $52.4 billion of U.S. energy exports, primarily consisting of oil and gas. Kudlow did, however, say that some of the purchases could be delayed.
I think Beijing will follow through on its promise sooner rather than later because it wants and needs relief from the tariffs President Donald Trump has imposed. In addition to Kudlow’s report, another sign that the purchases are on the way was Beijing’s recent decision to slash its tariffs on oil and gas.
Further, I believe that the oil and gas markets are currently ignoring the pending Chinese purchases. But when Beijing actually starts to buy tremendous amounts of American oil and gas, I think prices will begin to climb meaningfully.
Upsides of Being a Chesapeake Investor
As I noted in my previous column on CHK stock, the company is primarily known as a natural gas producer, but oil actually accounts for much more of its revenue now than natural gas. Specifically, I reported that “in the third quarter of last year, (CHK) reported $613 million of revenue from oil and just $390 million from natural gas.”
Over the last five years or so, I’ve noticed that oil prices typically surge significantly from February to April, ahead of the summer driving season. For example, last year, the United States Oil Fund (NYSEArca:USO), which closely tracks West Texas Intermediate Oil Prices, went from slightly over $11 on Feb. 4 to $13.30 on Apr. 8.
In 2018, USO jumped from $11.86 on Feb. 5 to $13.73 on Apr. 23. In 2017, the play didn’t work, as USO was little changed between February and April. But in 2016, it worked very well, with USO jumping from $8.55 on Feb. 15 to $11.30 on Apr. 25. In 2015, USO gained about 10% between early February and early April.
This year, the trend may be a bit delayed because of the coronavirus outbreak. But given the current, low price of oil, I’m pretty confident that oil prices will be higher in April than they are in February.
Coronavirus Appears to Be Slowing
Oil prices have declined in recent weeks due to fears about the coronavirus from China hurting the global economy. But nCoV may be slowing. On Feb.11, “China reported its lowest daily number of new coronavirus cases since late January,” CNBC reported. On the morning of Feb. 12, West Texas Intermediate oil prices climbed well over 1%.
Further, multiple experts have said that nCoV’s strength is likely to drop meaningfully during spring’s warmer weather, and the virus has not spread a great deal in countries other than China. Finally, as I pointed out in a previous column, there’s a good chance that a drug from Gilead (NASDAQ:GILD) will cure nCoV. Given all of these points, there’s a good chance that the rally of oil prices will continue, boosting CHK stock in the process.
The Bottom Line on CHK Stock
Multiple factors, including China’s coming purchases of oil, the slowing of coronavirus, and seasonality look poised to meaningfully boost oil prices in the coming weeks and months.
Meanwhile, as I pointed out in my previous column on Chesapeake, the company can sell assets to stay in business. As investors realize that and oil prices climb, there’s a very good chance of the shares undergoing a significant relief rally.
As of this writing, the author did not own shares of any of the aforementioned companies.