Categories
Stocks

Analyze CHK hedging strategy: I

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Chesepeake Energy logo

Chesapeake Energy (NYSE: CHK) is a stock I have known for a while. I traded it in year 2006, I did not hold it for long term partly because I usually don’t hold a stock for more than a year (until Mindray), more importantly I did not understand all the natural gas price volatility, CHK’s hedging strategy etc. Fast forward two years, the natural gas and CHK stock have been doing very well until last week, and I have studied the CFA a bit.

Chesepeake is a natural gas (plus a bit oil) explorer and producer, it’s No. 2 US natural gas according to its investor presentation (click its July 16 presentation here). Natural gas is nothing new, it’s mainly being used in power generation, industrial and residential (heat) use. Exploring and producing natural gas is not a sexy thing either, except CHK claims it has the best geo-scientists and engineering team in the industry. The ultimate differentiator of CHK, compared to its peers, is its large hedging strategy. Using hedging, basically it tries to get a predetermined fair price of its product (natural gas), or in other words, it tries to get a fair profit from exploring and producing the natural gas. It lays out its hedging positions in its quarterly report, and it regularly put updates.

How about its hedging results? Here are some articles I saw from seekingalpha.

Article one, article two.

Why hedging?

Categories
401k and Personal Finance

401k, oil and gas

Reading Time: < 1 minute

401k
Last week my old 401k at Vanguard was merged to my new 401k. I don’t know if you paid attention to your 401k or IRA lately, not a fun thing to do. I did a quick calculation, my old 401k portfolio lost 7.56% of its value from Dec 31 2007 to July 7 2008 when it was transferred into new account. It appears I did ok considering the market dropped quite a bit in 1st half of the year.

Oil and gas
The relief at gas pump is coming. Not from federal goverment. The crude oil price has been dropping 3 days in a row in the futures market (refer to Bloomberg energy price here). Natural gas also goes lower with the oil pullback. Notice I used the word pullback. I don’t think we are going to see $50 oil or $2 a gallon gas. So, I was buying oil and natural gas stocks 3 days in a row. I bought Marathon Oil (NYSE:MRO) on Tuesday, Devon Energy (NYSE:DVN) yesterday, and Chesapeake Energy (NYSE:CHK) today, all in small amounts. Because I know the oil and gas could drop more, so as the stocks. But long term, 6 months or a year from now, I am quite bullish on them.