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Chesapeake Energy: More Reasons To Buy

Summary

Chesapeake will benefit from a possible rise in oil prices, as 60% of the oil decline is related to weak demand, which should get corrected as China imports more oil.

An increase in Chinese demand will might induce a rally of as much as $35/barrel in oil prices, indicating that there are positives to consider in the oil patch.

The company might also benefit from a probable lifting of the oil export ban in the U.S., with two Senate subcommittees approving of ending the ban.

Chesapeake has increased its production guidance for the year despite lowering its capital expenditure guidance, indicating that the operating improvements that it has implemented are working.

In a recent article on Chesapeake Energy (NYSE:CHK), I had focused on how the company is preparing itself for a low oil & gas pricing environment by reducing the cost base on the back of improved drilling efficiencies. In fact, we had seen that most of Chesapeake's oil & gas assets are now capable of achieving breakeven at oil prices of less than $50 a barrel, as a result of which its gross margin has been better off as compared to the drop in revenue.

But apart from these operational improvements, there are some more macroeconomic points that could help Chesapeake improve its financial performance going forward. Let's check them out.

The oil patch might improve

WTI oil prices are once again flirting with $40 a barrel, but I think investors should not lose hope. This is because the demand-supply imbalance in the oil industry should get better going into the second half of 2016. In fact, the Bank of England is of the opinion that "60% of the recent decline in oil prices could be related to demand factors - not excess supply."

Now, along with the weakness in demand, an increase in supply has weighed tremendously on oil pricing. However, the probability that demand will improve from countries such as China is strong. Bank of England points out that China's economy...


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