The spike in shares of Chesapeake Energy Corporation (NYSE:CHK) might suggest the company is slowly regaining investors’ confidence. The sharp rise in the price of oil and the high price of natural gas compared to last year may have contributed to this company’s recovery. But other leading oil and gas producers such as Exxon Mobil Corporation (NYSE:XOM) haven’t done as well in the stock market as Chesapeake has. Thus, I think that other factors pulled up Chesapeake Energy Corporation (NYSE:CHK) ’s stock in recent weeks. Let’s examine these factors that contributed to Chesapeake Energy Corporation (NYSE:CHK)’s stock and also analyze if this company is on the right course.
Natural-gas market is cooling down
The price of natural gas is much higher than last year’s price, which may have contributed to the rise in Chesapeake Energy Corporation (NYSE:CHK)’s profit margin and revenue growth during the first quarter of 2013. The high price of natural gas is also likely to keep this trend in the coming quarters.
During the second quarter of 2013, the average price of natural gas was $4.02/mcf compared to an average sales price of $2.36/mcf last year. This means, the average price in 2013 was more than 70% higher than last year’s price. Even if the ratio of realized-price-to-market-price is 60% — Chesapeake Energy Corporation (NYSE:CHK)’s natural-gas sale price could be around $2.41/mcf, which is higher than last year’s price by 22%.
Nonetheless, Chesapeake Energy Corporation (NYSE:CHK)’s natural-gas operations account for less than 40% of its oil and gas revenue – last year this percentage was nearly 50%. The drop in natural gas’ share from total revenue is related to the company’s sales of natural- gas-related companies and operations and the sharp rise in sales from marketing and gathering. Therefore, natural gas will have a diminished effect on revenue in the coming quarters.
The rise in natural gas prices is likely to also slightly positively affect the bottom line of Exxon Mobil Corporation (NYSE:XOM). But ExxonMobil had a drop in its natural-gas production in the first quarter by 1.5%. If this trend persists, it could cancel out the rise in the price of natural gas. Moreover, the natural-gas operations account for only 5% of the company’s total revenue. Therefore, the impact of natural gas will be insignificant.
According to the U.S Energy Information Administration, natural-gas consumption in the residential/commercial sector slightly increased in recent weeks even though the weather continues to heat up. The demand for natural gas in the power sector is lower than last year most likely because the price of natural gas is higher this year compared to the low price in 2012. The total demand for natural gas in the first four months of 2013 was up 5.7% compared to the same time last year.
This rise should also pull up the revenue of natural-gas companies such Northeast Utilities System (NYSE:NU) . The company’s revenue grew by more than 81% in the first quarter of 2013. Moreover, the company’s operating profit margin rose from 19.5% to 21%. Part of the growth in revenue was related to the company’s merger with NSTAR. But the main reason for the rise in revenue was related to the spike in sales in natural-gas distribution and electric distribution and generation segments. The ongoing rise in natural-gas consumption in the residential/commercial sector and high natural-gas price (compared to last year) are likely to keep fueling this company’s rise in revenue and profit margins in the coming quarters.
Oil market continues to heat up
The spike in oil prices in recent weeks is likely to pull up the revenue of Chesapeake and Exxon Mobil Corporation (NYSE:XOM) in the coming quarters: If the price of oil remains at its current level of around $107, the quarterly price will be roughly 17% higher than the price of oil in the third quarter of 2012. Therefore, the quarterly revenue of Exxon Mobil Corporation (NYSE:XOM) and Chesapeake could sharply rise in the third quarter of 2013.