Source: Chesapeake Energy Corporation. 

Chesapeake Energy Corporation's (NYSE:CHK) stock has had its ups and downs over the years. Just take a look at the company's stock price chart, which is filled with peaks and valleys.

CHK Chart

CHK data by YCharts

The company's new management team is working on a plan to help ease the downside volatility of the company's stock price. However, there are a few areas that investors still need to watch, and they have the potential to drive Chesapeake Energy's stock down again in the future.

Exposure to natural gas prices

Despite a focus on growing its oil and natural gas liquids production, Chesapeake Energy is still America's second largest natural gas producer behind ExxonMobil (NYSE:XOM). As such, the company's stock continues to be tied to the price of natural gas. Take a look at the following chart and note the correlation between the two.

CHK Chart

CHK data by YCharts

One of the reasons for this is that liquids like oil and NGLs still only make up 28% of the company's production. While that's up from 25% in the second quarter of 2013, it's nowhere near its independent oil and gas peers: EOG Resources' (NYSE:EOG) production is 89% liquids while Devon Energy's (NYSE:DVN) production is 57% liquids. Both have seen a dramatic shift in liquids production over the past few years as EOG Resources' production was 79% natural gas less than a decade ago, while more than half of Devon Energy's production was natural gas just a short time ago.

Because most of Chesapeake Energy's production is still natural gas, the company's stock price is still tied to that commodity. So, if the price of natural gas falls it could take Chesapeake Energy's stock price down with it.

NGL oversupply

In order to break the chains that natural gas has on its stock price, Chesapeake Energy is focused on growing its oil and NGL production. Of the two, NGLs are growing faster as production is up 72% year over year and now represents 42% of the company's liquids production. However, surging NGL production, especially for ethane and LPG could be a problem as U.S. demand is expected to be less than supply as noted on the following chart.

Source: Enterprise Products Partners Investor Presentation 

The slide, from a recent investor presentation by Enterprise Products Partners L.P. (NYSE:EPD), shows that the projected supply of U.S. ethane and propane are expected to outstrip demand through the end of the decade. While Enterprise Products Partners and others are building NGL export facilities to send some of the oversupply overseas, these exports might not be enough to keep NGL supplies balanced. This oversupply could put a lid on or even depress prices, which could have an impact on Chesapeake Energy's stock as NGLs become a larger portion of its production.

Emerging oil play might not emerge

What Chesapeake Energy needs to do in an effort to offset these potential issues is grow its oil production. Last quarter the company did just that as oil production was up 12% over last year's second-quarter. Most of its oil growth is coming from the Eagle Ford shale; however, Chesapeake Energy is also pinning future oil production growth hopes on the Utica shale and the Powder River Basin plays. The concern is that these plays might not emerge to be the growth driver the company is hoping as the Utica really has never lived up to its billing as the next Eagle Ford.

A pump jack in the Powder River Basin. Source: Devon Energy Corp.

That's why investors need to be cautious when we see the company calling the Powder River Basin a world class oil play. It's certainly not alone in its enthusiasm for the basin as both Devon Energy and EOG Resources see the stacked shale plays there having the potential to deliver strong oil production growth in the years ahead. However, the play is still early in its development and because of that there is always the risk that the play won't pan out. Should that happen it could cause Chesapeake Energy's stock to slide, as it would have to keep looking for a new driver of oil production growth.

Investor takeaway

Chesapeake Energy's turnaround is well underway, and the company is making good progress. However, there are some areas that could still cause the stock to fall. That's not to say the stock will fall, but investors do need to be aware of the issues that could impact the stock price over the next few years. 


Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool owns shares of Devon Energy and EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.