Chesapeake Energy Hits Bottom
“If you look up the word ‘bottom’ in the Cramerican dictionary,” Cramer said Monday, “right next to it you will see a picture of the action in Chesapeake.”
Yes, the deal with CNOOC , where the Chinese state-owned oil company will buy a third of Chesapeake’s acreage in the South Texas Eagle Ford Shale for $1.1 billion in cash, is a good indicator of CHK’s nadir, but Cramer saw the signs as far back as Aug. 10. He highlighted the stock as part of his weekly “Off the Charts” segment, saying the technical case for a bottom looked strong.
Now, with those charts finally signaling the entry point he’d been waiting for, Cramer said, “Chesapeake’s a buy, right here, right now.”
Credit two reasons for the call: One, Chesapeake is escaping incredibly low natural-gas prices by focusing more on oil, something it has both the scale and the assets to accomplish successfully. And two, it’s cheap. “Insanely, absurdly, ridiculously cheap,” Cramer said. He cited a major gap between CHK’s “enormous” private enterprise value, which is what a potential acquirer would pay for the company, and the public enterprise value, what the market’s will to pay for the stock. The latter “simply hasn’t kept pace.”
Also on the cheap tip, consider the glaring differences between Chesapeake and its peers when looking at its proved reserves to enterprise value relationship. While CHK’s proved reserves are up 59 percent, its enterprise value has climbed just 21 percent. What about Apache? Just a 2-percent bump in proved reserves versus a 20-percent jump in enterprise value. Devon, meanwhile, has added 58 percent to its proved reserves, yet its enterprise value is up 77 percent—more than three and a half times the increase in value at Chesapeake.
Right now Chesapeake’s reserves are valued at a 15-percent discount to those of the average nat-gas outfit, Cramer said, even though CHK is “among the best, possibly the single-best player in the industry.” That’s why he thinks this is such a great opportunity to buy the stock.
The way to play CHK then is to buy it ahead of Wednesday’s analyst meeting, as long as you can get it at its present price level. Cramer expects news of “more huge transactions that could make the Chinese deal [look like] chump change,” so the time to get in just may be now.
If the “Mad Money” host is right, though, how high could CHK go? Well, he thinks the sum of Chesapeake’s parts—assets in Appalachia’s Marcellus shale, other production assets, pipeline and gathering operations, future drilling carries and the book value of everything else the company owns—is worth $73 a share before the Chinese deal.
“This stock could double and still be inexpensive,” Cramer said. In fact, “I think it could triple.”
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