Sometimes you have to go with your gut, and when your gut ends up being right, you get this warm and fuzzy feeling that you may actually know a thing or two.

Frequent readers of The Corner Office Blog know that I’ve been bearish of Chesapeake Energy (CHK: chart, web, Y!) due to their huge amount of debt (and the pilfering of shareholders to pay off that debt by diluting the stock) when commodity prices were at record highs.

I’ve owned CHK before and have made money off the stock, but when credit started tightening over the last year to 18 months, I knew CHK would end up with a target on its back just due to the debt alone.

Well, it seems the debt has come back to haunt Chesapeake, along with an in-house trading philosophy that ended up costing the company $1.6 billion on paper, and forced CEO Aubrey McClendon to sell all of his own companies shares involuntarily.

Here’s how it all went down.

Chesapeake was making money hand over fist when commodity prices were high, just like any other player in the field.  Then, their trading operations made the gamble that the run on oil and gas wouldn’t continue.  So the company bought options and other financial vehicles to lock in the current rates (around $120/bbl for oil at the time) to protect from what they saw as an expensive downside risk (also known as hedging).

So what happened?  Oil continued to rise to a high of just over $145/bbl in July of this year.  That’s actually a good thing for Chesapeake, right?  Not necessarily.  Since Chesapeake hedged their oil at $120, they were only getting paid $120 for every barrel they pumped, not $145 that was the current market price.  Again, they’re still making boo-coo bucks at $120 oil, but they could have been making more.

The fact that they could have been making more shows up as a loss on the balance sheet.  All in all, Chesapeake could have made as much as $1.6 billion more if they had not hedged their oil and gas at lower prices.  So this goes as a loss on the books for the second quarter.

What effect does the debt have?

Creditors typically want to see that their their loans are safe, and as such they write in certain conditions that if met, they reserve the right to call the note.  Sort of like having a margin call if you can’t maintain the margin requirements. Read more…

Energy, Investing, Oil & Gas CHK, hedging, margin, oil and gas

I’ve been perplexed by the market these last couple weeks, so much that I’ve started wondering if what we’re seeing happen right now is actually for real.

Is this a complete melt down of our financial system that would cause a collapse of the stock market, or could this be the most golden of all buying opportunities?

By in large, I think the stock market will be ok, so long as the government doesn’t try and step in and strong arm a fix for this mess that stems well beyond the stock market.  So is this a buying opportunity then?  Yes, I think so.

I thought I was doing pretty well when I bought more Provident Energy (PVX: chart, web, Y!) last week at $7.30 per share.  I felt otherwise when the price dropped below $5 per share by the end of the week.

So what’s happening here?  Obviously there is a huge demand for cash by institutions.  Normal Joe investors like you and me don’t have the pull to chop 50% off the top of any stock, let alone the entire market.  Hedge funds and institutional investors do, however.

I think what we’re seeing is a demand for cash by lenders, which is forcing those who don’t have cash to find it quickly.  So you’re seeing a run on many stocks that isn’t completely justified.  At least not to the extent they’ve been beaten down.

Consequently, this has pulled the market cap down well below what is reasonable.  For normal Joe’s like you and me, this means that there are some golden buying opportunities out there right now in companies who carry little to no debt, and are going to do just fine given enough time.

So what about my Provident?  The yield is up around 22% as of the close last Friday, and it’s been years since it’s been this cheap.  Obviously PVX is tied to the oil and gas market, which has also been beaten to a pulp lately.

But we’re on the verge of winter, which should stabilize the price of natural gas and heating oil, and should provide some stability to the natural gas players, of which PVX is one.

Honestly, I’m in the stock for the dividend, as I suspect most are.  So far, they’re holding the line at $0.12 Canadian for the October distribution, and will report Q3 operating results on November 12th.

Investing dividends, oil and gas, PVX, Stock Market

Yesterday I was able to pick up some more Provident Energy (PVX: chart, web, Y!) shares for $11.70.

Today the stock was down $0.14 to $11.77 on average volume. I suspect that Tuesdays trading (remember Monday is a holiday) will reveal another push towards $13.  Memorial Day is the official start of the driving season, and even if driving is down this summer, oil will maintain levels above $110 for the majority of the hot months.  This will leave the electrical power generation companies turning to natural gas ($natgas: chart) vs. heavy oil.

Additionally, the hurricane center predicted that this will be another active season with as many as 5 major hurricanes predicted.

The future is bright for natural gas this summer.

Energy, Investing, Royalty Trusts hurricane forecast, oil and gas, PVX