Cooling Down in the Chesapeake Play
Last week, Cramer warned you a day before oil and gas stocks suffered a severe beatdown -- nat gas dropped 11.6% from $23.57 to $12. But he still thinks this is the year for nat gas -- it's the clean alt fuel that will lessen dependence on coal and oil -- at least temporarily until more viable solutions become affordable. He still pins its target at $16.
Today's rally in nat gas and crude may be an indication of this, though last week things got too hot. It's like the old Holland Tunnel Diner, a favorite haunt of Cramer, back in the day. They made the tastiest egg sandwich -- the best "sop up" after a long night out -- but if they left it on the grill one second too long, it was an inedible crisp. That's what happened with nat gas and crude: things got too hot, you sold. Perfectly natural and it happens occasionally with groups that work for the long term -- a bit too long on the griddle and you get smoke for miles. It's cooled off now, a week later, and Cramer says it's time to buy "egg sandwich" again.
As he's mentioned a few times this week, Chesapeake Energy is looking good -- and for a reason that might seem illogical at first. Last night, they had a secondary offering of 25 million shares, priced to sell at $57.25 -- today it surged 6.7% and closed at 61.58. The fire sale was the company's way to pay off debt from its leasing program to ramp up drilling. Usually, secondaries are bad -- they reduce the value of existing stocks.
With any other company, a secondary offering would be a clear "Stay Away!" sign. But this is an exception. CHK is a winner -- in the last two years, every time it's offered a secondary offering, it's made tons o' money. Of the last five Chesapeake secondary offerings, four have held at the price of the offering, making quick short-term money for those that got in on the sales. Look at the figures:
Mar 27 2008 - 26% below current price
Sep 8 2006 - 80% below current price
Jun 27 2006 - 89% below current price
Sep 8 2005 - the one time the stock failed to hold at print value, yet still 84% below current price
Sep 9 2005 - 76% below current price
All were larger than the 4.27% gain of today, so you didn't miss anything. And there are other nat gas firms besides CHK that are also priced low at the moment, but haven't moved up much. For example, Cramer's been buying Devon for his charity, ActionAlertsPlus.com and it's now the cheapest in the group. If you got in on every one of those offerings, you made an enormous amount of money. When they do it again, like now, it's a definite opportunity to make money. "This stock traded as high as $74 last week, it's now at $60 -- I say the price is right."
Forget the Wall of Shame, CEO Aubrey McClendon is at the top of Jim's "Wall of Fame." He's bought over three million of his company's own stocks -- at between 36-59 a share. Even with it closing at 61.58 today, he's probably still dying to buy more. When asked if he'd be doing any more buying of his own stock, they replied "he has frequently stated he believes our shares are worth more than what they trade for." Whenever he's bought, shareholders have also profited. "He may be the most bankable CEO in America."
Chesapeake has an additional advantage -- it's a great nat gas company in the year of the nat gas, and now that the "griddle" has cooled down, it's a great buy based on that alone. It owns 9.7M acres -- 1.2M in the Marcellus shale, 585K in Fayetteville shale, 500K in Haynesville and 260K in Barnett. It's all over the place with conventional and unconventional plays, spending $7-8B while "drilling like mad."
Bottom line: this one's going higher -- the griddle has cooled, eggs aren't being burned and the entire group is finally worth buying again. Devon is a close second, but Chesapeake is the leader of the pack.
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