What happened
Shares of oil and gas producer Chesapeake Energy (CHKA.Q) dropped 28.1% in December, according to S&P Global Market Intelligence. While much of the attention will go to the decline in oil prices and the overall market, it's worth paying attention to the drastic drop in natural gas prices and some of Chesapeake Energy's recent moves.
So what
If you thought the plunge in oil prices last month was extreme, then you probably didn't take a look at natural gas prices. Henry Hub gas prices -- the U.S. benchmark price -- fell close to 30% in December and today sits at around $2.75 per thousand cubic feet. The remarkable thing is that natural gas prices are this low during the winter months when demand is the highest in North America.
Image source: Getty Images.
According to Chesapeake's investor presentations, the company's 2018 production will be about 18% oil. So any move in natural gas prices is likely going to have a much more profound impact on Chesapeake's bottom line than oil price movements.
That high reliance on natural gas is why the company elected to acquire WildHorse Resource Development. Not only would the deal help the company deleverage (it was an all-stock-and-cash deal, and WildHorse's balance sheet was in better shape than Chesapeake's), but it will also help to significantly increase Chesapeake's oil output.
Now what
Chesapeake's move to acquire WildHorse wasn't well received at the time of the acquisition because of the high price it paid for the assets. Considering Chesapeake's spotty history of acquisitions -- especially at a time when management is supposed to be focused on debt reduction -- and its value-destroying moves in recent years, investors were completely justified in questioning the decision.
Even though the company's results have been improving lately, it's probably fair to wait and see if this new acquisition can deliver as promised.
Check out the latest Chesapeake Energy earnings call transcript.
