Chesapeake Energy (NYSE:CHK) (-16%, -0.63%), one of the largest U.S. producers of natural gas, oil, and natural gas liquids, was a detractor. Weak commodity prices impacted the oil and gas group overall, but what was most striking about Chesapeake was the stock price’s extremely high correlation to oil prices instead of natural gas prices this quarter. Although Chesapeake’s production is primarily weighted to gas, a meaningful percentage of the company’s current earnings before interest, taxes, depreciation and amortization (EBITDA) comes from oil. Additionally, oil’s importance to Chesapeake going forward has increased with much of current drilling focused on oil, especially in the Powder River Basin and Eagle Ford Shale. CEO Doug Lawler and his team will make prudent asset sales when the price and time are right, as they have done in the past, but the lack of such reported sales this quarter also weighed on the stock price.
From Longleaf Partners Fund second quarter 2017 shareholder letter.
