Even an Analyst Long on Chesapeake Energy Can't Say 'Buy'
Morris is long shares of Chesapeake Energy, but in moving to neutral from buy on Monday (and we all know on Wall Street that a neutral rating is just a sell rating by another name), the Citigroup analyst is not willing to tell any other investor to buy Chesapeake Energy shares here, even as the shares sit at a four-year low in tune with the historical slide in the price of natural gas.
The outlook for natural gas has not necessarily improved just because it hit the psychological threshold of $2. The fundamentals in the natural gas production market suggest the price pressure could get worse before it improves.
It's one of the reasons why Chesapeake Energy shares aren't trading like they did in days past. Historically, an announcement from Chesapeake Energy about monetizing assets typically led to a rally in the stock. But, last week, when the company announced $2.6 billion in asset deals, the stock fizzled.
The breaching of the $2 natural gas barrier was a big part of the market yawn in reaction to the Chesapeake deal.
Citigroup's downgrade reinforces the idea that as Chesapeake looks to monetize as much as $10 billion to $12 billion in assets, the company is merely doing what it takes to avoid more pessimism from the sell side. Its ability to sell more from its asset collection shouldn't excite investors.
"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," Morris wrote. "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."
One of the classic bull cases for Chesapeake Energy has been that its "great collection of assets" implies that the stock trades at a huge discount to net asset value. Morris notes this argument, but as a way of saying that if it's a fact, it's still not a reason to buy Chesapeake shares.
"Thus, despite being relatively inexpensive on NAV