Peabody Energy Vs. Chesapeake Energy: Best Near Cap-Gainer

Investment Thesis

The “fundamentals” of evolving energy technology and competition makes staying current in these fields an intensive, full-time job. That leaves bored individual investors often excluded from that necessary part of the value analysis.

Instead, competent and experienced full-time employee analysts at big-$ investment “institutions” keep track of those developments while others at the firm integrate the investment industry moving parts into capital-commitments of desired share-holding trades. Then Wall Street Market-Makers take over to find “other side of the trade” balancing partners at other institutions with their own reasons for actions.

In the process risks must be taken and protected against, where predictive markets by their hedging-deal pricing translate expectations into bounds of coming share prices, both to the upside and the down. The market’s subsequent actions put win vs. lose odds on those expectations.

One widely owned stock is Peabody Energy Corporation (NYSE:BTU). Another is Chesapeake Energy Corporation (CHK).

Descriptions of the Companies with involved securities

“Peabody Energy Corporation engages in coal mining business in the United States, Japan, Taiwan, Australia, India, Indonesia, China, Vietnam, South Korea, and internationally. The company supplies coal primarily to electricity generators, industrial facilities, and steel manufacturers. As of December 31, 2021, it owned interests in 17 coal mining operations located in the United States and Australia; and had approximately 2.5 billion tons of proven and probable coal reserves and approximately 450,000 acres of surface property through ownership and lease agreements. The company also engages in direct and brokered trading of coal and freight-related contracts, as well as provides transportation-related services. Peabody Energy Corporation was founded in 1883 and is headquartered in St. Louis, Missouri.”

Source: Yahoo Finance

“Chesapeake Energy Corporation, an independent exploration and production company, engages in the acquisition, exploration, and development of properties for the production of oil, natural gas, and natural gas liquids from underground reservoirs in the United States. The company holds interests in natural gas resource plays in the Marcellus Shale in the northern Appalachian Basin in Pennsylvania and the Haynesville/Bossier Shales in northwestern Louisiana; and the liquids-rich resource play in the Eagle Ford Shale in South Texas. As of December 31, 2021, it owned interests in approximately 8,200 gross productive wells, including 6,500 wells with working interest and 1,700 wells with an overriding or royalty interest; and had estimated proved reserves of 661 million barrels of oil equivalent. The company was founded in 1989 and is headquartered in Oklahoma City, Oklahoma.”

Source: Yahoo Finance

These growth estimates have been made by and are collected from Wall Street analysts to suggest what conventional methodology currently produces. The typical variations across forecast horizons of different time periods illustrate the difficulty of making value comparisons when the forecast horizon is not clearly defined.

Risk and Reward Balances Among Energy Fuels Providers

Let’s consider selections from at an “Opportunity Set” of comparable companies ranging from most to least attractive to examine in one particular area of Energy – the fuels – longer-term sources. Among the many active participants are two in which we have an interest, BTU and CHK.

Here in Figure 1 is how the markets currently appraise their Reward ~ Risk trade-offs among competitors, based on behavioral analysis (of what investing systems require to be done, not of emotional investor errors) of actions by Market-Makers [MMs] as they protect their at-risk capital from possible damaging future market-price moves.

Figure 1

(used with permission)

Their actions are essential to the conduct of irregular large-volume “block trades” which are the frequent movers of stock prices, rather than the continual small-volume traffic of the “investing public” individuals. Upside price rewards are from their potential reward forecasts, measured by the green horizontal scale.

The risk dimension is of actual price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. They are measured on the red vertical scale.

Both scales are of percent change from zero to 25%. Any stock or ETF whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line. Capital-gain attractive to-buy issues are in the directions down and to the right.

Our principal interest is in BTU at location [7], high near the diagonal dotted line separating profitable from losing forecast outcomes. Down in the green area of forecast outcomes with five times as much gain as loss is CHK at [1]. A “market index” norm of reward~risk tradeoffs is offered by SPY at [9]. Most appealing by this Figure 1 view might be is CNXC at [5]. The negatives of CNXC are clarified in Figure 2.

Comparing competitive features of Energy Fuels Stocks

The Figure 1 map provides a good visual comparison of the two most important aspects of every equity investment in the short term. There are other aspects of comparison which this map sometimes does not communicate well, particularly when general market perspectives like those of SPY are involved. Where questions of “how likely’ are present other comparative tables, like Figure 2, may be useful.

Yellow highlighting of the table’s cells emphasizes factors important to securities valuations and the security CHK of most promising of near capital gain as ranked in column [R]. The pink highlighting identifies the less-favored CNXC.

Figure 2

(used with permission)

Why do all this math?

Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the prospective price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how SOON it may happen, and d) what price drawdown RISK may be encountered during its holding period.

Readers familiar with our analysis methods after quick examination of Figure 2 may wish to skip to the next section viewing price range forecast trends for BTU and CHK.

Column headers for Figure 2 define investment-choice preference elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with yellow fills are of data for the stocks of principal interest and of all issues at the ranking column, [R]. Cells with pink fills, like column [L], [M] row CNXC warn of deficiencies from minimum standards. In this case, fewer than 20 of prior forecasts history at today’s Range Index [G], a number regarded as insufficient to be statistically significant. The deficiencies in [M] similarly are of fewer forecasts than 3 years history of 252 days, or 756.

The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients.

[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are emotionally most likely to accept losses.

The Range Index [G] tells where today’s price lies relative to the MM community’s forecast of upper and lower limits of coming prices. Its numeric is the percentage proportion of the full low to high forecast seen below the current market price.

[H] tells what proportion of the [L] sample of prior like-balance forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [I] gives the net gains-losses of those [L] experiences.

What makes CHK most attractive in the group at this point in time is its ability to produce earnings most consistently at its present operating balance between share price risk and reward, the Range Index [G]. Credibility of the [E] upside prospect as evidenced in the [I] payoff is shown in [N]. For CHK it is .92

Further Reward~Risk tradeoffs involve using the [H] odds for gains with the 100 – H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among alternative candidate securities, with CHK in top rank below the deficient BTU and CNXC.

Along with the candidate-specific stocks these selection considerations are provided for the averages of some 2900 stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for S&P500 Index ETF (SPY) as an equity-market proxy.

As shown in column [T] of figure 2, those levels vary significantly between stocks. What matters is the net gain between investment gains and losses actually achieved following the forecasts, shown in column [I]. The Win Odds of [H] tells what proportion of the Sample RIs of each stock were profitable. Odds below 80% often have proven to lack reliability.

Recent Forecast Trends of Primary Subjects

Figure 3

(used with permission)

Figure 4

(used with permission)

Many investors confuse any picture of time-repeating stock prices with typical “technical analysis charts” of past stock price history. Instead, Figures 3 and 4’s vertical lines are a daily-updated visual record of price range forecast limits expected in the coming few weeks and months. The heavy dot in each vertical is the stock’s closing price on the day the forecast was made.

That market price point makes an explicit definition of the price reward and risk exposure expectations which were held by market participants at the time, with a visual display of their vertical balance between risk and reward.

The measure of that balance is the Range Index (RI). Here in CHK, only 23% of the full forecast range of $78 to $98 lies between the current price of $80 and $98. With today’s RI there is three times as much upside price change in prospect as downside. Of the prior 53 forecasts like today’s RI, 51 have been profitable. The expected potential of +22% upsides became accomplishments of +31% gains in 40 market days, or about two months. So, history’s advantage could be repeated six times a year, which compounds into a CAGR of +450% which compares to only a loss from BTU.

Also please note the smaller pictures in Figures 3 and 4. They show the past 5-year distribution of Range Indexes with the current level visually marked. For CHK the larger proportion of history has been evaluations with higher prices and Range Indexes.

Conclusion

Based on direct comparisons with BTU and other Energy Fuels producers, there are several clear reasons to prefer a capital-gain seeking buy in Chesapeake Energy Corporation.

An active investment response would be to swap capital out of BTU into CHK, anywhere the principal is sheltered from taxation by its portfolio circumstances.