On Friday, Chesapeake Energy shares fell 7.9% after the company admitted its debt reduction targets for 2012 may be pushed into 2013, along with some deal closings.
This drove unusually high put trading volume in the stock on Friday. The biggest trade of the day was the purchase of 7,000 November 19-strike puts for $0.67 each, and the sale of 7,000 December 17-strike puts for $0.40 each. By buying a short-dated put, this trader is making a bet that the stock will continue its slide into November expiration next week. However, by selling a December put, this trader is picking a level at which he is willing to buy the stock. This may sound confusing, but the trader's thesis is actually quite simple: He is bullish in the long term, but expects weakness in the short term.
The bearish case for this stock revolves around Chesapeake's increasing debt, and its list of unfulfilled promises to investors. The company currently has about $16 billion in long-term debt, which is up from $11 billion last quarter. On Thursday, Chesapeake reported a net loss of $2.1 billion, after having to write down the value of some assets due to depressed natural gas prices. The company had previously announced it would reduce its debt to no more than $9.5 billion by December 31st, 2012, but recently announced this was more likely to be accomplished in early 2013. To achieve its debt reduction goals, the company had planned to sell up to $14 billion in assets this year, but it has consistently failed to close the deals on the timeline that they gave investors.
So that might be why this trader is bearish in the short-term – but why be bullish on the long-term prospects?
Well, the longer-term bullish case for Chesapeake shares is that the company will rebound quickly if natural gas prices continue to come off their recent lows. The company's profits are highly correlated with natural gas prices, and an increase in energy prices will not only increase revenue and EPS, but also allow them sell their oil and gas fields at higher prices. If the company begins to deliver on its debt reduction promises and closes some deals in early 2013, the stock is likely to draw the interest of value investors seeking to profit from rising energy prices.
Indeed, Chesapeake is already on the radars of a few high-profile investors. Carl Icahn owns over 50 million shares, and Mason Hawkins, whose company, Southeastern Asset Management, owns 13.9% of Chesapeake, has said that the company is 70% undervalued.
Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."
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