Chesapeake Energy Corporation (NYSE: CHK) has shown an impressive rise in stock price over the past three weeks. The stock has gained almost 20%, and the rise in price is expected to continue on the back of an increase in the demand for natural gas. I have always been a believer, and my view is that in the long-term Chesapeake will prove to be a good investment. At the time of declining stock price, I suggested to some of my friends that the fall in price was temporary, and Chesapeake will make a turnaround soon. I still believe the stock is undervalued, and it has substantial upside potential.
My friends were obviously skeptical, like many other investors, and blamed me of having a blinkered view about the company. The market has put too much focus on the corporate governance situation and the funding gap of the company. As a result, investors have ignored the true potential of the asset base that Chesapeake possesses. Unlike these investors, I look at the future of the company and see a prospering organization. Chesapeake was betting on a colder winter instead of hedging its position, which scared some investors. However, after the recent increase in demand, it looks like the bet has paid off. Furthermore, the company has been selling assets to bridge the gap and improve its balance sheet, which has also played an important role in restoring investor confidence.
However, an increase in stock price does not suggest that the company is completely out of the mire. There are still some issues to be resolved, and Chesapeake has to go a long way before it can be called a trouble-free company. Nonetheless, the company is on the right track and the board is taking all the necessary steps to restore the position of this energy giant.
Corporate Governance Issues Finally over?
Corporate governance issues played a big role in the downfall of the company. Some suspect dealings by the co-founder, Aubrey McClendon, led to a shareholder revolt. As a result, there were some significant changes at the board level and among management. Changes at the top are still underway, and the decision of Aubrey McClendon to step down as CEO may prove to be the final piece in the puzzle. McClendon will leave his position as CEO of Chesapeake on April 1. The news was taken positively by the market, and the stock price went up by almost 10%.
Aubrey McClendon made massive investments during the boom of Shale gas. However, investment in new wells were structured in a way which benefited McClendon personally. The company also had to borrow heavily to fund the expansion. In fact, Chesapeake is still suffering due to the heavy borrowing. Although recent sales of assets have helped the company improve its balance sheet, there is still a lot to do. McClendon will be paid $11.7 million in cash compensation over four years. Furthermore, McClendon is also entitled to restricted stock options worth $33.5 million, which will take the total compensation package to $47 million.
Chesapeake to Benefit from Exports?
There is a great opportunity for the U.S. to export natural gas to Europe and Asia. Demand for natural gas a gone up substantially in Asia due to an increase in economic activity. On the other hand, Europe is still showing little signs of recovery. The United States can build facilities to convert natural gas into liquid natural gas and export it. I believe Chesapeake will benefit from the export potential of the natural gas. Exporting natural gas will also help eliminate the issue of oversupply and support the companies operating in the domestic market. However, Chesapeake will have to move fast to take advantage of this opportunity.