NEW YORK (
is suddenly the savior of stocks in the natural gas vehicle space with its plan to invest $1 billion in the sector over the next decade, but the news hasn't heated up interest in the company's own shares.
Natural gas engine maker
has hit a new 52-week high this week, thanks to optimism about the infusion. Natural gas vehicle refueling station company
Clean Energy Fuels
has gained 28% over the past two days, as Chesapeake is directly funding the build out of its refueling stations.
Chesapeake Energy shares, on the other hand, are up just 0.5% this week.
There's a simple reason why Chesapeake Energy's announcement did so much for Clean Energy and Westport and so little for the company itself. The news came out of nowhere for the natural gas vehicle companies, and more importantly, it came amid the backdrop of a
to increase the subsidy for the purchase of natural gas powered long-haul vehicles.
For Clean Energy Fuels specifically, the initial $150 million investment from Chesapeake takes a load off its funding needs in a sector where companies are yet to be profitable.
For Chesapeake, though, there's really only one major potential benefit from supporting the natural gas vehicle market: Impacting the supply/demand balance in the natural gas market to such a degree that natural gas prices finally break out of the doldrums. That's not going to happen as a result of Chesapeake's $1 billion investment, according to several analysts in the energy markets, and that leaves the Chesapeake move as a yawner for investors.
Chesapeake investor relations official John Kilgallon disagreed, saying the company is looking for a return on investment, and when it comes to Clean Energy, it has preferred shares and will receive a dividend.
Simply putting the refueling station infrastructure in place, though, doesn't equate to a profitable industry. For a company like Clean Energy to have sustained profitability, the refueling stations will have to be handling a significant amount of long haul trucking business, and it's an open question whether there will be broad adoption by the transportation market.
It doesn't mean the natural gas vehicle investment isn't a great PR move though, and it came at a good time.
The New York Times
stopped just short of describing Chesapeake as a Ponzi scheme in a recent article, prompting CEO Aubrey McClendon to write an letter to employees defending the company.
Energy analysts pointed to the first sentence of the Chesapeake announcement as the first sign that the $1 billion investment was more PR than IRR
internal rate of return for Chesapeake shareholders, and from a CEO, Aubrey McClendon, who has never been shy about marketing: "In an effort to help break OPEC's 38-year stranglehold on the U.S. economy and to lower energy costs to American consumers, enhance national security, stimulate economic growth, create hundreds of thousands of high-paying jobs and improve the environment..." Chesapeake began its press release.
Why create value for shareholders when Chesapeake CEO Aubrey McClendon can break OPEC, save the U.S. consumer, ensure national security, and solve the unemployment riddle?
"It's PR more than anything else," said Phil Weiss, analyst at Argus Research and a constant critic of Chesapeake management. "The T. Boone Pickens supported NatGas Act has lost steam and so the ball was tossed to Aubrey and he wrote a big check," Weiss said.
T. Boone Pickens serves on the board of directors of Clean Energy Fuels and along with Clean Energy CEO Andrew Littlefair has been among the most prominent backers of the NatGas Act in Washington.
Several other energy analysts didn't want to be quoted on Chesapeake's motivation but echoed Weiss's sentiment.
"It's Aubrey's ego at work here," said one analyst. "It doesn't impact Chesapeake shares or the way any investor thinks about the company."
In fact, analysts said if Chesapeake's aim is to impact natural gas pricing, it's probably a fool's errand. The move won't make a dent in natural gas market pricing dynamics because it would take mass adoption of natural gas passenger vehicles, as opposed the long haul trucking corridors targeted by Clean Energy and Westport, for the natural gas market pricing to be influenced.
Analysts looking for signs of a demand shift are focusing on industrial demand and power generation, not transportation. At the same time, natural gas production is still on an upward trajectory, even as some companies holding sizable natural gas assets have stopped drilling and refocused on oil.
"You'd have to get individuals buying natural gas cars and we just don't have it," said an energy market analyst.
One securities firm's analysis showed that if new vehicles (excluding trucks) sales by 2020 showed a 3% penetration rate by natural gas vehicles, the increase in natural gas demand would be no more than 2% to 3%.
Chesapeake's Kilgallon remains more optimistic about the potential for a pricing dynamic shift. "We're the second-largest producer of gas in the U.S. any larger uplift in demand will help us out. We have the most at stake in terms of risk and unrisked reserves, so there's enormous upside for us," he said.
Nevertheless, Kilgallon allowed that the upside the company envisions in natural gas demand won't change the pricing dynamic overnight, but the company wants to get movement toward what America can do to source its own fuel. He noted two aspects of the natural gas vehicle market that give the company confidence, even without passenger vehicle adoption:
Trucking is always the first to make the change as the largest consumer of transportation fuel. Already in the waste removal trucking market, natural gas vehicle use has grown from single-digit use to 30%
Companies like Home Depot are paying significant surcharges for freight based on diesel costs and can play a major role in pressuring the transportation sector to change.
Most analysts agreed that Chesapeake had successfully walked a fine line in providing support for the natural gas vehicle market, even if it likely won't result in much bang for the buck of the Chesapeake shareholder. Investing $1 billion over the course of 10 years, an amount that's roughly 1% to 2% of the company's annual drilling budget, also shouldn't have a material negative impact on earnings.
Chesapeake's Kilgallon said, "It's certainly not a near-term catalyst for us as a company. When you look at our financials, and getting to an investment grade rating or finding future partners for projects, this won't hold a candle to those, but the beauty is that we are trying to get awareness across the country, whether it's with our shareholders or other exploration and production companies. There's a lot to be gained if we as a group embrace natural gas fuel and start ordering pumping trucks that use CNG."
While the news isn't making much of an impact on Chesapeake's stock this week, the shares have done well so far in 2011, and over the course of the past year. The stock is up almost 15% year-to-date, and nearly 40% over the past 52 weeks, though the high for the year of $35.95 dates back to late February.
The stock was up 1.5% to $$30.22 in recent trades. \
-- Written by Eric Rosenbaum from New York.
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