Chesapeake Energy stock

Chesapeake stock has flourished within the past week. Since the sudden death of Chesapeake founder and ex ceo, Aubrey McCledon, Chesapeake’s shares have nearly doubled over the past week. The death of Chesapeake’s ceo could have played a role in the sudden rise of the share price.

Chesapeake Energy saw rise in share price, other stocks rose also last week. Chesapeake surged to a peak of $5.57 on Monday (7^th of March), although on Tuesday Chesapeake Energy dropped by about 18% as oil prices pulled backwards. Other Energy stocks followed suit to. There might be a change imminent as crude oil prices slightly rebounded to as much as 4% on Wednesday following the news of a big draw in U.S. gasoline and possible agreement by top producers to an output freeze. Brent crude was slightly above $40 within this period.

The amazing thing about Chesapeake is that the stock was just about $1.50 in February 2016 and as at today (Wednesday 9^th of March), it is $4.57. Some of the factors that influenced the sudden surge in its stock price include:

• Granting of immunity to Chesapeake Energy by the US Justice Department on the investigation against the former CEO Aubrey McCledon. Aubrey McCledon the late ceo of Chesapeake was charged with conspiring to rig bids to buy oil and natural gas leases in Oklahoma.  It was revealed that McCledon orchestrated a conspiracy between two large oil and gas companies to not bid against each other for the purchase of certain oil and natural gas leases in northwest Oklahoma. During this conspiracy, which ran from December 2007 to March 2012, the conspirators would decide ahead of time who would win the leases.The winning bidder would then allocate an interest in the leases to the other company.  McClendon instructed his subordinates to execute the conspiratorial agreement, which included, among other things, withdrawing bids for certain leases and agreeing on the allocation of interests in the leases between the conspiring companies. The leases talked about here are leases for land to be used for extracting oil and natural gas. The leasehold gives the lessee the right to develop the land and extract oil and natural gas from the land for a time period typically lasting three to five years. Chesapeake recently reported that it received immunity under a justice department leniency program that shields companies from criminal charges if they are first to report anti thrust violations.

• Oil prices rebounded sharply last week with brent crude surging above $40 per barrel at a point within the period. Oil prices pulled back briefly on Tuesday, causing a retreat in the price of energy stocks. As at Wednesday, oil prices rose by around 4% and Brent crude is back above $40 per barrel. This presents an opportunity for energy stocks to rally and rise further, but this rise might be short lived because the increase in oil prices is based on speculations that energy demand as increased after the big draw in U.S gasoline (gasoline inventories USOILG=ECI fell 4.5 million barrels, much more than the polled number of 1.4 million barrels. That was also the largest weekly draw in almost two years for gasoline.[EIA/S]), and also on the speculation that top producers might soon agree to an output freeze.

• Increase in demand for the stock: There was shortage in supply of CHK stocks, and an increase in demand. This short squeeze aided the rise in the price of the stock because they were panic buy’s by investors as a result of the huge short squeeze.

Chesapeake Energy Outlook

Investors were of the opinion that this unbelievable price could not be sustained, especially with the recent retreating crude oil prices. So investors decided to capitalize on their buy and sell the stock now when they can still profit before it plummets.  It is only rational for an investor to think this way because from February to early march of 2016, Chesapeake stock has risen by 284% from a low of $1.50 on February 8 2016 to a high of $5.76 on March 7, 2016. With this enormous increase and unstable oil prices, it is only rational for investors to want to sell their holdings now. Chesapeake stock might seem a great buy now, but its long term success is largely dependent on where oil prices are heading.

OPEC (Oil Producing Exporting Countries) seems to target new oil price equilibrium of $50 a barrel. Is this possible, you ask? Well it is dependent on the other major oil producers outside the OPEC, producers like Russia and U.S.  With the supply Glut and recent entrant into the market (USA), OPEC doesn’t have any solitary power on oil prices. The best they can do is to reduce production so that oil is a little scarce and demand exceeds supply; this would therefore push the price up a bit. The danger with this strategy is that the other major oil producers may capitalize on this and steal market share from OPEC by increasing production. So OPEC loses both ways, first they lose part of their market share, and the oil price remains the same because the other countries would have produced what OPEC cut from its production.

I think that the recent surge in the stock price of Chesapeake   is highly speculative, and the company’s success would depend largely on what oil prices are in the nearest future. If OPEC can reach an agreement with other major oil producers, then that would help the cause of Chesapeake; but if crude oil prices weaken, that would trigger a sell -off of energy stocks, and this would be detrimental to Chesapeake stocks. Early buyers would have profited from the stock by now; it might just be a little too late for new investors because there is a high likelihood that in a couple of days, Chesapeake would eventually lose impetus.

Recommended Reading

Andrea Roconcoroni, Gianluca Fusai., Mark Cummins., Handbook of multi commodity markets and products

Benjamin Graham., David Dodd., and Warren Buffet., Security Analysis: Sixth Edition, Foreword by Warren Buffett.

Micheal Shearn., The Investment Checklist: The Art of In-Depth Research.