Shares of Chesapeake Energy Corporation (CHK) Are Attractive

Most industry analysts believe that the long term price of LNG will not fall below $11/Mcf, the price that China is paying for Russia’s natural gas. Given a transportation fee of $3/Mcf and a liquefaction fee of $3/Mcf, a $11/Mcf floor would mean $5/Mcf for exporters, or 93% higher than the current forward month price. As more LNG terminals are built, the Henry Hub price should converge with the global price minus transportation and conversion costs. At $5/Mcf, Chesapeake Energy would be solidly profitable and its share price would be $25 a share or higher.

Many hedge funds own Chesapeake Energy Corporation (NYSE:CHK) for the long run. Carl Icahn has held Chesapeake shares since 2012, having recently added to his position last quarter. Mason Hawkins’ Southeastern Asset Management has also held shares since 2012. Following the picks of hedge funds can generate significant alpha. Our research shows that the 15 most popular small-cap stocks among hedge funds have outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward-testing the performance of these stock picks since the end of August 2012. These stocks managed to return more than 132% over the ensuing 2.5 years, and outperformed the S&P 500 index by nearly 80 percentage points (read the details here).

Because of unpredictable weather changes and sentiment shifts, natural gas prices are unpredictable in the short run. If the short run fundamentals are poor, prices will often rise due to pain trades or weather calamities. If the fundamentals are good, prices will often sell off due to institutions de-risking their positions.

Natural gas prices are more predictable in the long run, as the underlying economics of natural gas is more stable. As long as Chesapeake Energy Corporation (NYSE:CHK) doesn’t dilute its shareholders or sell off its assets below fair value, its share price will be much higher as natural gas prices rise due to LNG demand.

Disclosure: None