Quicksilver Resources Inc (KWK), Chesapeake Energy Corporation (CHK): Why Do Investors Hate This Top-Traded Natural Gas Stock?

Natural gas exploration and production company Quicksilver Resources Inc (NYSE:KWK) is a day trader's dream. With millions of shares being traded daily, and more than 20 million shares trading hands last Friday, Quicksilver is a company the market likes to move. Not only are traders buying and selling shares of Quicksilver Resources Inc (NYSE:KWK) in rapid-fire action but many of those traders have made bearish bets on the company as evidenced by the 16.8% of its outstanding shares being sold short.

Earnings Quality Report: Chesapeake Energy Corp. (NYSE: CHK)

Those taking bearish bets have to be getting nervous considering that shares are up nearly 40% in the past week. That being said, bearish themes abound and are the force driving shares down 80% over the past two years, taking the company's market cap below $500 million. With all the heavy trading surrounding this stock let's take a look at why its both hated and loved by traders.

Why it's hated If there are two things investors hate these days its energy companies that produce a lot of natural gas and have a debt-laden balance sheet. That's a big problem for Quicksilver Resources Inc (NYSE:KWK) as 72% of its production is natural gas and the company's balance sheet is weighted down by $2.1 billion of debt. Liquidity concerns are a bigger problem for Quicksilver and are a big reason why shares hit a low of $1.67 just on March 6.

The combination of a high debt burden and a focus on natural gas production has been the downfall of another hated natural gas stock: Chesapeake Energy Corporation (NYSE:CHK). The company seems to have provided the blueprint followed by so many in the industry, including Quicksilver Resources Inc (NYSE:KWK). While there are a lot of similarities between the two, Chesapeake Energy Corporation (NYSE:CHK) seems to be a bit further along in its plan to grow its liquids production. The company is spending 85% of its 2013 capital budget to grow liquids production to 26% of total production, while Quicksilver will still be at just 18% liquids production in 2013. Still, there is a silver lining here that investors need to keep an eye on.

Why it should be loved Quicksilver is well aware of its liquidity issues. CEO Glenn Darden has said that his company's "... top priorities are to improve liquidity through asset sales, joint ventures and other measures, further reduce the overall company cost structure, and match capital spending to operational cash flow." To accomplish this, the company plans to only spend about $120 million in capital for 2013, which is a substantial cut from the $270 million it spent in 2012. The key here is that the company has resolved to limit its spending to its expected cash flow. It's also promised to reduce spending further if it needs to preserve liquidity.

One way the company will accomplish this is by concluding its advanced negotiations to monetize its Barnett Shale assets with a deal. The company is considering either an asset sale or an MLP for the assets and is hoping to unlock the value of those assets. Quicksilver is also looking for a joint venture partner of its Horn River Basin assets.

Outside of unlocking some value by shedding assets, Quicksilver Resources Inc (NYSE:KWK) is looking to grow its oil and liquids production. The most promising of its developing oil plays is its Niobrara acreage. The company just closed an acquisition and exploration agreement with Royal Dutch Shell plc (ADR) (NYSE:RDS.A) that covered 320,000 acres. The company got a small cash infusion and a world-class partner in the deal. It's also looking for another third-party joint venture partner to help further fund its development. If Quicksilver Resources Inc (NYSE:KWK) can strike oil in the Niobrara it'll really boost its liquids production and set investor's minds at ease.

My Foolish take Given that the debt to capital ratio is four-to-one, I'd be leery of going long as the company doesn't have a lot of financial flexibility. However, there are enough potential positives to quickly burn any short position. Long-term investors are better just staying away from this one and watching from the sidelines. If it can execute on its leveraging strategy, there will be plenty of upside later with much less risk.

The article Why Do Investors Hate This Top-Traded Natural Gas Stock? originally appeared on Fool.com and is written by Matt DiLallo.

Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 30 percentage points in 13 months Learn how!

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!