The EIA released a web page yesterday on natural gas demand. Below are the highlight I took from this page:
The annual U.S. consumption of natural gas is projected to rise 34 Trillion cubic feet by 2040. The industrial and electric power sectors make up 50% of the growth.
The current price of natural gas in a very low 1.92 per MMBtu (british thermal units). There is 1 MMBtu in one thousand cubic feet (1Mcf) of natural gas so the current price of natural gas is about 1.92 per 1,000 cubic feet.
Last year's revenue was $11.5 Billion, down 40% from 2014. Let's assume revenue growth returns to normal. Revenue will be 16.3 billion.
They owe ~$9 billion with 4 years to pay so they must pay back $2 billion per year including interest to be debt free in 4 years.
Do you think they can pay 11.2% of their gross Revenue for the next 4 years? If so, they will emerge debt free by 2020. This is why CEO Lawler is preaching about controlling expenses.
He has about 400 million allocated shares he can swap for debt or hang on to until share prices rises much higher. These shares are money in the bank! Suppose we get the $10 price target I,m preaching by January 2016 and Chesapeake sells the shares on the open market, the company will take in $4 billion and reduce debt by 50% in 6 months. It will dilute the shares but with debt cut is half, the price per share will rise far enough to offset any dilution.
There is also an additional safety net to support this! Chesapeake controls 8 million acres of undeveloped oil and gas property. This could be worth up to $25,000 per acre. Lets suppose it is worth only $2,500 per acre. The value of the land alone is more than the debt.
There are lots of variables.
The Henry Hub spot price averaged $2.62 for 1,000 cubic feet in 2015, the lowest annual average price since 1995. Let's suppose it bounces up to $3 and production rises as everyone expects. A little luck and Chesapeake share prices could hit $30 in 3-4 years.
The reason I see $10 by January 2016 is based solely on the way investors will view the future of the second largest natural gas producer in the US. What the hell, the share price was $15 only a year ago. $10 is not a lot of money to pay for the second largest gas producer in the the US when gas demand will soon skyrocket.
I also think that Chesapeake is a strong takeover candidate!
Think with your head... not you ass.
