This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Jumpin' Jack Flash (it's all gas, gas, gas)
With natural gas prices near record lows, and far off from their recent highs of 2008, you wouldn't expect to see many smiles on gas investors' faces. But they sure are grinning today.

The reason, as we're about to discuss, is a pair of upgrades for the industry. This morning, news that No. 2 American gas producer Chesapeake Energy (NYSE: CHK  ) is finally addressing its debt issues prompted a pullback in negative sentiment from analysts at Argus Research. Chesapeake, so the story goes, is now in talks to sell off its stake in Chesapeake Midstream Partners (NYSE: CHKM  ) , along with many pipeline assets. The deal, which is said to be worth $4 billion, could be signed "in days," according to StreetInsider.com. And if it does go through, this could make a sizable dent in Chesapeake's debt load, and significantly boost liquidity at the gas giant.

Meanwhile, just downstream from Chesapeake on the nat-gas supply chain, Clean Energy Fuels (Nasdaq: CLNE  ) is reaping the benefit of improved sentiment about the use of natural gas as a source of automotive fuel. Caterpillar (NYSE: CAT  ) is said to be in talks with Westport Energy (Nasdaq: WPRT  ) about licensing technology for use in fueling heavy machinery -- a development that could significantly boost demand for the alt-fuel. No sooner had the news broke than out came analyst Northland Securities, announcing it was upgrading Clean Energy to "outperform."

Curb your enthusiasm
So, good news all around, right? Well, yes, actually. I have to say that, given how Chesapeake Energy has dismissed worries about its debt problems in the past, seeing management actually take concrete steps to shore up its balance sheet does warm the cockles of my heart just a bit. Likewise, getting a vote of support from Caterpillar, and presumably a paycheck as well, is good news for Westport, and perhaps for Clean Energy as well.

But let's not break out the Champagne bottles just yet, Fools. There are still pretty significant issues with these stocks. Both Clean Energy and Westport, for example, remain both GAAP-unprofitable and free cash flow negative. On the plus side, Westport managed to eke out a (small) operating cash flow balance in Q4 of last year, but then it plunged right back into the red in Q1 of this year. Meanwhile, Clean Energy hasn't seen positive operating cash flow in more than a year.

I don't mean to sound all doom and gloom. Clean Energy isn't too deeply in hock considering the scale of the infrastructure project it's embarked upon, and Westport even has a bit of cash left in its bank account. But time is running out -- if these firms don't figure out how to make a buck off their businesses, and soon, it could be curtains for both.

As for Chesapeake, the last time this company booked a positive free cash flow year, there was still a Republican in the White House ... with two years left in office. While it's true that record-low nat-gas prices haven't done Chesapeake any favors lately, the plain fact of the matter is that Chesapeake has been burning cash for about as long as anyone can remember, regardless of how much it cost. Yes, $4 billion in asset sales can make a debt in Chessie's debt load. But there will be another $9 billion in debt to contend with, even after this job is done.

Foolish takeaway
There's no doubt that natural gas has a future in American energy policy. Here at the Fool, however, as natural gas prices are unusually low, we've got several stock ideas that we think will do well if oil goes back over $100 a barrel. (Click through and we'll tell you all about them). But if cheap natural gas turns out to be the future, then "story stocks" like Westport, Clean Energy, and Chesapeake certainly have roles to play. Just make sure that you don't get so sucked into the "story," and so intent on trying to get in on the ground floor, that you forget to keep an eye on the financials.

When the time is right to buy, the numbers will tell you -- plain as day.

Fool contributor Rich Smith does not own shares of, or short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 325 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Chesapeake Energy and Westport Innovations. Motley Fool newsletter services have recommended buying shares of Clean Energy Fuels, Westport Innovations, and Chesapeake Energy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (1) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2012, at 7:12 PM, bebop111 wrote:

    "There are still pretty significant issues with these stocks. Both Clean Energy and Westport, for example, remain both GAAP-unprofitable and free cash flow negative. ...Westport managed to eke out a (small) operating cash flow balance in Q4 of last year, but then it plunged right back into the red in Q1 of this year. Meanwhile, Clean Energy hasn't seen positive operating cash flow in more than a year...if these firms don't figure out how to make a buck off their businesses, and soon, it could be curtains for both."

    I bought both of these Stock Advisor recommendations, and NOW I'm hearing this. What I'd really like to hear about is how this news holds up against the "When We'd Sell" Section of these two stocks, especially CLNE. Tom, Dave-- the floor is yours, we''re listening....

Add your comment.

DocumentId: 1905006, ~/Articles/ArticleHandler.aspx, 4/18/2014 2:53:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement