Thursday, June 14, 2012

Chesapeake Energy (CHK) - Governance Questions and Vol Term Structure

--- SUMMARY ---
CHK is trading $17.00, up 0.4% with IV30™ up 2.2% as of ~10:30am EST. The LIVEVOL® Pro Summary is below.


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Chesapeake Energy Corporation (Chesapeake) is a natural gas and oil exploration and production company. Chesapeake is engaged in the exploration, development and acquisition of properties for the production of natural gas and oil from underground reservoirs.

--- ANALYSIS ---
This is a vol note focused on an interesting term structure. Let’s start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see a fairly long-term move down from late Mar to Mid may. The stock fell from $25.58 (3-20-2012) to $13.55 (5-17-2012), or 47% in ~two months. Since that low, the stock is up 25% to $17. I’ve highlighted the one-day move on 5-11-2012 from $17.18 to $14.81 (14% drop). Here’s the news snippet from that day:

Chesapeake Energy Corp. lost more than $1 billion in stock-market value in 46 minutes of trading on Friday after the company disclosed it might be forced to delay plans to sell assets to fund its operations this year.

The beleaguered natural-gas producer spooked investors by discussing the potential delay in a quarterly regulatory filing, which had been expected to be filed a day earlier. The filing included new warnings about the possible need to delay asset deals to comply with terms of a key line of credit.

Source: via Yahoo! Finance; Chesapeake Falls on Cash Worries, written by DANIEL GILBERT AND BEN CASSELMAN.

Later in the day Reuters broke a story that eased some of those fears. Here’s that snippet.

The company, which has been embroiled in a corporate governance crisis that prompted its move to replace co-founder Aubrey McClendon as chairman, said the new unsecured loan will be used to repay money borrowed under its existing $4 billion revolving credit facility.

"This short-term loan from Goldman and Jefferies provides us with significant additional financial flexibility as we execute our asset sales during the remainder of 2012," McClendon, who will remain as chief executive officer, said in a statement.

The company, the nation's second largest natural gas producer, said it plans to sell $9.0 billion to $11.5 billion in assets this year.

Source: Reuters via Yahoo! Finance; Chesapeake wins breathing space with $3 billion loan, written by Carrick Mollenkamp and Matt Daily.

Needless to say, there have been some issues with the firm – selling assets, securing loans to pay off other loans and corporate governance questions. The 52 wk range in the stock is [$13.32, $35.34].

On the vol side, I’ve highlighted two things. First, the vol spike on that loan news – just a reminder of how quickly volatility can rise when governance, liquidity and solvency issues are present. I’ve also highlighted the rising vol right now, which shows IV30™ a touch above the short-term historical realized vol and considerably above the long-term historical realized trend. Specifically:

IV30™: 67.76%
HV20™: 62.73%
HV180™: 53.24%

Let’s turn to the Skew Tab to examine the line-by-line and month-to-month vols.

Note that the yellow curve represents the Jun22 weekly options. What I noticed here is that the back two expirations are essentially right on top of each other. Why would I notice such a thing? Earnings are due out after Jul expiry (probably) and, the next expiration is Oct, a month known for volatile returns. So, in this case, the two vols being the same(ish), is in fact, attention grabbing. Looking back to the Charts Tab (above), we can see how CHK gapped up off of the last earnings report (the “E” icon represents earnings). In other words, the stock can move on that earnings news.

Finally, let’s turn to the Options Tab, for completeness.

I wrote about this one for TheStreet (OptionsProfits) so no specific trade analysis here.  We can see the vols across the top for each expiry are 73.08%, 67.76% and 69.60% for Jun22 weeklies, Jul and Oct, respectively.

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