Chesapeake and Valero: Running Out of Gas?
June 30th, 2006 by Grant in: Stock Thoughts
A few days ago I bought back into Chesapeake Energy (CHK: chart) when it was at $29 per share on June 27. The stock has been down a bumpy road for the last two months as natural gas futures ($NatGas: chart) started to reflect the warm temperatures through last winter and increasing natural gas reserves.
Just after I purchased the stock, the company stated it would issue 25 million more shares at $29.05 to pay for Barnett Shale Acquisitions, repay debt, and for other general corporate purposes.
As I mentioned in a previous post, I have no idea why the company continues to offer up more shares to the float to pay off debt. Acquisitions? I can see a case for that, but it seems that they always bundle a “repay indebtedness” clause into the offering right after “funding a new acquisition”. This is never very attractive, as repaying debt with shares does not necessarily mean an increase in value for the shares outstanding.
On the other hand, CEO Aubrey McClendon has been buying shares by the truck load lately, which is obviously a good thing. Insiders sell their stock positions for a bunch of different reasons, but they buy shares for only one.
Even with this in mind, I’m worried about the recent activity of co-founder Tom Ward, who just resigned in February as President, has been unloading shares by the boat load for the last two months. When I say a “boat load” of shares, I mean just over $260 million dollars worth! While he may have one reason or another to sell off a few shares, dumping your whole portfolio when you resign sends a signal to the market: the insider has lost confidence in the future of the company.
Ironically, Jim Cramer wrote an article what the resignation of top-level executives should really tell you, and while I’m not sure if Tom Ward falls into this category, it certainly leaves some suspicion in the market place.
At any rate, I sold my CHK shares at the end of trading today for a modest 3% gain on fear that future fluctuations in the market may not swing my direction. I’ll take the gain anytime I can get it.
For stock plays for next week, I’m heavily considering taking a short position in Valero Energy (VLO: chart). The stock has been looking strong for the last ten trading days, but it’s starting to show signs of fizzling. Many of the technical indicators are showing signs of being over bought, and the stock closed today up just 4 cents.
Conveniently, the Valero chart is nearly identical to the unleaded gas chart ($Gaso: chart) in both the price pattern and technical indicators.
So my thinking is that Valero might be a good short sale candidate for about 3 points (notice the gap in the chart on about June 28th).
On the other hand, July 4th marks the start of driving season, meaning unleaded gas prices may continue to rise through the rest of the month, and if VLO follows suit, my short sale could be a flop.
In consulting with my brother (who has a superior understanding of markets than I), he reminded me that the volume in the markets tends to dry up till the end of July, in reflection of traders taking vacations…
I’ll see how the trading goes on Monday.
To be continued…
Disclosure: Grant owns no CHK or VLO at the time of posting
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July 1st, 2006 at 8:06 pm
Hi Owen, thanks for your thoughts.
To clarify, I’m not trying to spin Chesapeake to short it at all, and with the recent short term trading pattern, there is no telling what the stock will do in the next week or two. You’d be crazy to short the stock just based on the pettern alone.
I do like Chesapeake in the long run, especially towards the late summer months and into fall/winter. Let’s face it, it’s the most pure natural gas play out there.
I also like Valero in the long term, but I’m speaking from a pure short term perspective (i.e. a week) for a possible short play. I can see Valero breaking the $89 price target sometime next year, and then offering up a split (again), a scenario I made some good money on the last time it happened.
So in effect, I’m a long term bull on both CHK AND VLO, however I also believe that if CHK could utilize it’s cash flow in its acquisitions (rather than offering up shares), the shareholders would reap the benefits much like they are doing with Valero.
As for Tom Ward, I’ll look into his options package and see what he’s really up to. On the surface, it looks as though Mr. Ward is really cashing in, but thanks for the info, I’ll do some more digging.
-Grant
July 24th, 2006 at 12:33 pm
Valero is a much stronger company, both financially and from a management point of view. Chesapeake has been dumping too many shares into the market for the price of stock to appreciate.
I’m not sure what Chesapeake has in mind, but they sure aren’t doing their investors any favors by buying assets and paying off debt through public offerings. Just my opinion. JC
September 8th, 2006 at 7:23 am
[…] For the stock players, natural gas companies like Southwestern Energy (SWN: chart, web) and XTO Energy (XTO: chart, web) are good pure gas plays. Chesapeake Energy (CHK: chart, web) is a good pure natural gas play, but as I’ve said before, I’m not a fan of their way of doing business. Offering up shares to pay off debt when you’re rolling in the cash from hedge positions is no way to make friends in the investment community. […]
May 3rd, 2007 at 8:53 pm
[…] I’ve mentioned before in posts about Chesapeake Energy, I’m not a fan of oil companies taking on debt to finance purchases. I’m more in favor […]