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Strategies & Market Trends : Contrarian Investing -- Ignore unavailable to you. Want to Upgrade?

To: pcyhuang who wrote (356)	9/26/2006 11:56:39 AM
From: Art Bechhoefer	Read Replies (1) \| Respond to of 4080

pcyhuang--Regarding Chesapeake (CHK), it is also noteworthy that the company actively hedges its primarily natural gas sales in order to protect itself against a fall in gas prices. Thus, even though one would expect CHK profits to fall in the current quarter, owing to lower commodity prices, the key is NOT the actual price of natural gas but the price CHK receives as a result of its hedged positions. CHK profits for the quarter are likely to be better than they would have been without hedging. The hedging strategy worked against CHK last year, which bet on lower natural gas prices than actually occurred, and reported losses from its hedging operations, which reduced total profits. Art

To: pcyhuang who wrote (356)	9/26/2006 12:23:54 PM
From: bluesongs	Read Replies (2) \| Respond to of 4080

Pcyhuang, I like this style of investing seeing it is so unpopular. The stocks recommended here might also be good candidates for selling options against long positions if you are seeking some additional returns. An excellent thread IMO. Thanks for your efforts. Blue

To: pcyhuang who wrote (356)	10/14/2006 10:31:44 PM
From: pcyhuang	Respond to of 4080

CHK and Natural Gas Upgrade Full story:http://online.barrons.com/article/SB116069285490891218.html?mod=9_0001_b_online_exclusives_weekday_r2 WE (Prudential Equity) ARE UPGRADING Chesapeake Energy to Overweight from Neutral Weight. The recent pull back in share price offers what we believe is an attractive entry point to a high-quality company with strong production and reserve growth. Our $38 target price is roughly 30% above Chesapeake's recent closing price, providing attractive upside potential. Our upgrade is within the framework of our Favorable rating on the exploration and production (E&P) sector and our emerging bias toward the E&P sector. We believe that the E&P sector could begin to outperform other energy sector components, based on our belief that the natural gas market has bottomed and could strengthen moving into winter. As we progress through the winter heating season, we believe that the most likely outcome will be a tightening of the storage overhang that has depressed the natural gas market since the end of the last heating season. As the natural gas market begins to recover fundamentally, we would expect it to be a catalyst for E&P stocks to outperform. Within the sector, we continue to recommend quality E&P stocks that have positive fundamental company-specific factors. As such, we believe that Chesapeake has an attractive valuation and offers the following positive company-specific factors: Chesapeake has established significant positions in most of the major unconventional natural gas basins in the U.S., including the Barnett Shale, Fayetteville Shale, Woodford Shale and Delaware Basin. Through its acquisition of Columbia Natural Resource in October 2005, Chesapeake also has over 3.4 million acres in the Appalachian Basin. We believe that Chesapeake's acreage position in these basins will underpin the company's production growth multiple years into the future. We also believe that Chesapeake offers strong upside to its proved reserves, with unbooked reserve potential of 14.4 trillion cubic feet, nearly twice the company's 8.3 trillion cubic feet of proved reserves (as of June 30th). Chesapeake has built a substantial drilling inventory in repeatable natural gas plays. The company now estimates its multiyear inventory at 23,700 net drilling locations over nearly 9.7 million acres. For context, in the first half of 2006, Chesapeake drilled 613 gross operated wells and participated in an additional 801 gross wells operated by other companies. Chesapeake's successful hedging strategy should provide downside protection to earnings if the recovery in natural gas markets is more moderate than we expect. For the fourth quarter of 2006, Chesapeake has hedged roughly 87% of its natural gas production at an average New York Mercantile Exchange price of $9.50 per million cubic feet and about 85% of its oil production at an average price of $65.64/bbl. For 2007, Chesapeake has hedged 73% of its natural gas production at $9.88 per million cubic feet and 72% of its oil production at $71.42 per barrel. The company estimates that it has realized roughly $700 million in gains from its hedging strategy thus far in 2006, with additional mark-to-market gains of $1.6 billion for its hedges through 2009. Chesapeake also has the following company-specific risks: The company's cost structure has consistently been higher-than-average, primarily due to the company's acquisition activity and above-average finding and development costs. In the first half of 2006, Chesapeake replaced production organically at an average cost of $14.33 per barrel. This compares to its 2005 finding and development cost of $12.51/bbl and its three-year average from 2003-2005 of $9.92 per barrel. However, we note that the company manages its service costs through direct ownership of rigs. With the recent decline in natural gas prices, we believe that the trend of rising drilling activity and service costs have already begun to moderate. Chesapeake has been very active in the capital markets, using proceeds from transactions to finance its acquisitions. Roughly $9.2 billion of acquisitions since January 2002 have been broadly financed through the issuance of $4.9 billion of incremental debt, $2.7 billion of common stock and $2.5 billion of preferred stock. Chesapeake's balance sheet reflects high leverage. We estimate that Chesapeake will have the second highest net debt-to-capitalization ratio in our coverage universe, at 48% in 2006 versus the peer group average of 27%, behind only Anadarko Petroleum's 67%. The company is currently trading at 4.7 times mid-cycle cash flow, roughly 20% below the group average of 5.9 times, and 3.8 times peak-cycle cash flow, about 16% below the peer average of 4.5 times. While we expect that property acquisitions will continue to be prioritized over debt reduction, building equity should enable Chesapeake to achieve our net debt/cap projection of 48% by year-end 2006 versus the 60% ratio at the end of 2005 (note that we include preferred stock as a debt component in this calculation). pcyhuang