I'm more bearish on natural gas prices. Unless North America has a very cold winter in 2012-2013 I think NG prices will struggle to get back over $3.00. I sure hope I'm wrong.
Below is summary of Citi report on Chesapeake (CHK):
CHK: Downgrading To Neutral with Near-Term Natural Gas Headwinds
Natural Gas Prices In The Doldrums… – Following the recent reduction in our natural gas price outlook (see our March 21st note: Natural Gas Winter Wrap-Up; Price Outlook - Lowering ‘12 Gas Price To $2.40/MMBtu; ’13 To $3.85/MMBtu ; ) and the company’s announcement of the initial tranche of its planned asset monetizations (see our April 9th note: Chesapeake Energy Corp (CHK) - $2.6bn Down And As Promised, $7.4-9.4bn To Go ), we are reducing our rating on CHK’s shares to Hold from Buy and lowering our price target to $22 from $28 per share.
…With Chesapeake By Far The Most Exposed – While we recently lowered our 2012 composite spot natural gas price forecast to $2.40/MMBtu, we believe the risk is more skewed to the downside rather than the upside. Similarly, we believe the same holds true for our 2013 forecast of $3.85/MMBtu, particularly in light of perhaps more upside to our domestic natural gas production projections given the continued success from new and emerging liquids-rich plays which are precluding any sharp drop in overall dry natural gas production. Every $0.10/MMBtu change in our 2012 natural gas price forecast impacts our CFPS estimate for CHK by ~2.3%, which is the highest sensitivity in our coverage group wherein the average is a 0.8% change. Importantly, the 2012 Street consensus still stands at $3.10/MMBtu and thus we believe a significant reduction in consensus estimates lies ahead near term.
Funding Gap Remains Substantial – We give the highest marks to Chesapeake management for its success in creatively monetizing assets and we are not doubting its ability to continue to do so. However, the remaining funding gap this year stands at ~$5.8bn and for 2013 at $4.4bn but this could grow to $5.7bn if natural gas prices were to average $2.50/MMBtu next year. But the risk to filling such a large funding gap in a downside scenario over the next two years is growing and by far greater for CHK than for any other company in our coverage group.
Need To Step Back For Now – Thus, despite being relatively inexpensive on NAV, we see no compelling reason to step up aggressively on CHK’s shares at this juncture with nothing, in our view, to revitalize natural gas prices any time soon and many hurdles yet ahead for Chesapeake to meet its objectives.