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(B)(N) CHK Chesapeake Energy Corporation

May 16, 2013

Drama. Mr. Berkowitz at Fairholme Capital Management in Providence, Rhode Island, runs about $7 billion in equities and bonds, and is well-regarded in the industry as a seasoned portfolio and investment manager, and he received the Morningstar Incorporated Domestic Stock Fund Manager of the Decade Award in 2010 – it doesn’t get any better (Bloomberg News, May 16, 2013, Bruce Berkowitz bets big on Chesapeake).

But he bought 13 million shares of Chesapeake Energy over the last several months, for a stake that is currently worth $280 million and nearly 3% of his portfolio – and that’s OK, it’s none of our business – and he’s not alone because Credit Suisse Securities, J.P. Morgan Asset Management, T. Rowe Price, and Millennium Management, all think that this is OK for their customers savings and retirement plans (ibid, Bloomberg).

But why not Cabot Oil & Gas instead? Please see Exhibit 1 and 2 below.

Mr. Berkowitz invests in “value” and businesses that “he can understand”, he says, and it’s clear that Chesapeake is “good value” and unlikely to go any lower, although it could – we don’t really see anything that’s “holding” it up – and there’s not much that he can do about it for a position of that size, absent an expensive rolling “collar” that is just as likely to sell him out on the upside – some good news, like a positive earnings report – or trigger the put which would be on the “bad” news but good for him and keep him even, with a possible loss of 5% or 10% on the stock price.

For example, our indication of the downside volatility in the price is minus ($2.50) and we should, therefore, not be surprised by any price between the current $20 and $17.50 or $22.50, and if the price gets out of that range, then it’s done something right or wrong; and it’s a “surprise” that could drive the stock price to whatever and it’s only a hope that most of the future surprises will be good ones, although we also note that the stock is just beginning to trade at the price of risk, the Risk Price (SF) of $19, and that makes a difference in understanding the support for the stock price. Please see Exhibit 1 below.

Exhibit 1: (B)(N) CHK Chesapeake Energy Corporation – Risk Price Chart

(B)(N) CHK Chesapeake Energy Corporation

(B)(N) CHK Chesapeake Energy Corporation

Chesapeake Energy Corporation is a natural gas and oil exploration and production company. It explores, develops and acquires properties for the production of natural gas and crude oil from underground reservoirs.

(Please Click on the Chart to make it larger if required.)

In contrast, Cabot Oil & Gas is in the same business as Chesapeake Energy, and has about the same market value of $13 billion to $14 billion, but it is only 1/10th the “size” of Chesapeake and pays a negligible dividend of $17 million per year for a yield in the double digits only if we measure it in basis points (12), or units of 1/100th of a percent, for an actual yield of 0.12% in contrast to Chesapeake which pays $235 million per year for an honest current yield of 1.8%.

But the real difference between Chesapeake Energy Corporation and Cabot Oil & Gas, is that we started buying the latter at $20 three years ago rather than yesterday at $68 (Red Line Stock Price (SP) above the Black Line Risk Price (SF), and for no other reason). And the second big difference is we know exactly how to protect our gains at all times.

The current downside due to price volatility is minus ($10) so that it could be trading at between $58 and $78 with no surprise. We can afford that loss, but we can also buy (by taking some of our profits, if we want) the July put at $65 for $2.55 today and sell or short the July call at $70 against our long position for $2.75, so that for a net gain of $0.20 per share today ($2.55 less $2.75), we can keep the stock in our portfolio for between $65 and $70 for the next several months, regardless of surprise; and we know exactly why we’re doing that, in contrast to Chesapeake which could break either way at any time, because there’s nothing holding it up except the interest of other investors in the same stock, for the same reasons – it seems like “good value” and a “business that we understand” with a dividend yield of 1.8% – which could be good enough, at or above the price of risk, if the market continues to confirm that relationship. Please see our notes below for more information on the price of risk and what it means.

Exhibit 2: (B)(N) COG Cabot Oil & Gas Corporation – Risk Price Chart

(B)(N) COG Cabot Oil & Gas Corporation

(B)(N) COG Cabot Oil & Gas Corporation

Cabot Oil & Gas Corporation is an independent oil and gas company engaged in the development and exploration of oil and gas properties located in North America.

(Please Click on the Chart to make it larger if required.)

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.


We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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