Chesapeake Energy's Bullish Case for Natural Gas ($CHK)

In their November 2011 investor presentation, Chesapeake Energy offered "many reasons to be bullish on intermediate and long-term natural gas prices." (p13)

• "U.S. natural gas producers are rapidly moving to an oilier production base." Natural gas production in the U.S. increased about 28 percent over the past decade. Nearly half of this growth came from CHK alone. However, CHK continues to reduce drilling of natural gas wells, except where required to hold leases or use drilling carries. In 2012 and 2013, CHK plans to spend ~75 percent of capital expenditures drilling in liquid-rich plays.
• CHK argues that the shift to liquid-rich wells will occur industry wide, as producers convert to drilling wells that produce $10-17/mcfe, and finish drilling enough wells to hold their shale gas shale leases. Once that conversion happens, it may take much more than "4,5,6, or 7" dollars per mcf to incentivise the industry to drill gas wells again. And the shale gas output has steep decline curves!
• "Conversion of U.S. liquefaction import facilities to LNG export facilities." For example, the Sabine Pass LNG terminal, owned by Cheniere in Lousiana.
• "Growing industrial demand: U.S. natural gas prices are lowest in the industrialized world and well below oil-based naphtha prices."
• "Shift from coal to natural gas for U.S. electrical generation." Right now, lots of utilities are making decisions about whether to replace obsolete coal plants with more coal or natural gas. Low prices are encouraging the use of natural gas.
• Construction of gas-to-liquid (GTL) plants. This is very cool - you can make a barrel of gasoline with natural gas feedstock, and at the current crude oil:natural gas ratio, it is incredibly profitable. Buffett should be buying CHK and building GTL plaints. South African company Sasol is building a plant in Louisiana.
• CNG and LNG vehicles. CHK has made a small investment in LNG fueling infrastructure for trucks along interstate highways. Focusing on trucking is a very clever way of bootstrapping to solve the chicken-egg problem in fueling infrastructure. According to CHK, the "8 million American heavy duty trucks consume ~3 million barrels of diesel every day, that’s equivalent to >6 tcf of incremental natural gas demand per year." If fully converted to natural gas, that would be 16 bcf/d of incremental demand, compared to only 10 bcf/d of incremental natural gas supply in the U.S. between 2000 and 2011!

This is a pretty good supply/demand situation. Things look grim and the price is low, but there are imminent catalysts that will decrease supply and increase demand. By buying the convertible preferred stocks, we get paid to wait.

Why would you buy a noncumulative preferred stock in a European bank when you could buy a convertible preferred stock with safety and a free call option on natural gas? It takes all kinds...