Oil prices have skyrocketed over the last few weeks following political turbulence in the Middle East and persistently growing demand for oil. The supply-demand discrepancy calls for an alternative energy that could compensate for the expensive lubricate. In this regard, Chesapeake Energy Corporation’s (CHK) mission to convert its entire 4,200 vehicle fleet to compressed natural gas (CNG) is indeed commendable.
Last year in May, the company announced its plan to run its entire fleet by CNG through 2014. Phase one under this agenda, involving conversion of Chesapeake’s Oklahoma truck fleet to natural gas, is over. The natural gas-powered truck fleet will be used by field operation teams to control drilling programs at the Anadarko Basin, in western Oklahoma.
The switch over to CNG makes sense in Oklahoma where gasoline and diesel prices are nearing $4.00 per gallon. On the other hand, CNG comes at an approximately 50% lesser price. The price of CNG has remained steady at $1.39 per gallon of gasoline equivalent in Oklahoma, despite the volatility in gasoline and diesel prices, which resulted from the recent turmoil in the Middle East.
Moreover, CNG is more environment friendly, utilizing 30% less carbon dioxide, 97% less carbon monoxide, 99% less Particulate Matter and 100% less evaporative emissions than gasoline.
Considering the above factors, we expect the CNG drive to gain momentum in the U.S. In fact, the U.S. president has also asked federal agencies to make sure that all new vehicles added to the country’s public transport fleet through 2015 are run on electricity or alternative fuels.
Phase two of the company’s CNG conversion program will comprise its fleets in North Texas and Louisiana. Chesapeake also plans to continue partnering with local fuel retailers to build CNG fueling stations. Other operating areas of the company in Pennsylvania, West Virginia, Colorado, Wyoming and South Texas will be covered in two subsequent phases.
Last year, Chesapeake and its retail fuel partners opened 14 public CNG stations throughout Oklahoma, bringing the state’s total to 42.
Oklahoma City-based Chesapeake is an independent oil and gas company engaged in the acquisition, development and production of onshore U.S. natural gas resources. The company has grown rapidly and is now the second-largest producer of natural gas. Chesapeake competes with Anadarko Petroleum Corporation (APC), Devon Energy (DVN) and EOG Resources Inc (EOG).
However, given our fears of challenging natural gas fundamentals in the near term, we believe that the stock will perform in line with the group. We are maintaining our long-term “Neutral” recommendation on the stock. Chesapeake currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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