Is Natural Gas Going to Rally Forever?
On Monday morning, natural gas spiked higher by about 5%. Naturally, traders were curious as to why the commodity was rallying so suddenly. Apparently, Chesapeake Energy Corporation (NYSE: CHK) announced that it plans to reduce dry gas drilling by 50%, promptly pushing the associated securities upwards.
Investors were primarily nervous about the possibility of decreased supply of natural gas and naturally moved the stock higher. Although Chesapeake is a large player in the natural gas industry, are there any companies that could pick up the slack and harvest the energy?
PetroQuest (NYSE: PQ) is a small-cap oil and gas company that primarily operates in the southern US. Chesapeake announced that it has already wound down operations in Louisiana and Mississippi, and may continue to wind down drilling in Pennsylvania. Although PetroQuest does not venture in these areas, it may be able to expand operations and develop activities in those locations.
PetroQuest has been able to increase its assets year over year, and may be able to afford expanded operations. To put things in perspective, it has managed to maintain its debt loads while increasing current operations. While its cash has been dwindling slightly over the last few quarters, PetroQuest may see significant opportunities in Chesapeake's leftover drilling zones.
Panhandle Oil and Gas
Panhandle Oil and Gas (NYSE: PHX) is a small-cap acquirer and developer of natural gas. Like PetroQuest, it operates in a few states in the Southern US. According to the company profile, around 80% of its revenues are created by producing and selling natural gas. As such, Panhandle may be able to benefit immensely from expansion.
Fortunately for the company, its debt profile is very limited. On the same token, it has a limited amount of cash and may have to resort to debt financing in order to pursue options in different regions in the US. Over the long-run, Panhandle has managed to sustain healthy debt and payables accounts, meaning that debt investors may be willing to finance the company for clearly strategic options.
RAM Energy Resources
RAM Energy (NASDAQ: RAM) is a small-cap oil and gas firm that operates in Texas, Louisiana, and Oklahoma. Unlike the aforementioned companies, it is already located in the state that Chesapeake will be leaving, and may be able to quickly mobilize and take over the vacant space. Given this strategic advantage, RAM may be specially poised to make moves in the natural gas industry.
RAM is one of those companies that investors are a bit wary of. It has almost 0 cash on hand and is laden with debt. Although it is already positioned in Louisiana, it may not be able to relocate a significant amount of equipment or purchase more equipment in order to capitalize on Chesapeake's former drilling ground. As such, investors should consider if RAM is truly capable of realizing the potential in its own backyard.
The Bottom Line:
Chesapeake Energy has already influenced the natural gas markets, but investors may be able to arbitrate the situation in a different way. By identifying companies that could pick up Chesapeake's slack, investors may be able to key in on a fundamental oil and gas play. The primary trick is to identify which firms will be nimble enough to take over the vacant operations.
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Traders who believe that small-cap firms could take over Chesapeake's operations might want to consider the following trades:
- Long the aforementioned companies via shares or call options. Long plays will most likely have to be long-term holds for investors.
- Long natural gas in the short-term, which is likely to rally as investors are nervous about the natural gas supply in the future.
- Long a large-cap refiner such as Linn Energy (NASDAQ: LINE), which may be quicker to take over Chesapeake's space.
Traders who believe that small-cap companies will not successfully take over Chesapeake's operations may consider an alternate position:
- Long natural gas in the long-term. If the supply is permanently affected, the commodity will become more valuable and the price may go up.
- Short the aforementioned companies. They may not be able to expand themselves aggressively enough to prove to shareholders that they are making moves for the future.
- Short Chesapeake, which may not react positively in the long-term with decreased revenue streams.
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