(By Street Authority) Quite often in the stock market
, the share price of a hot company can suddenly fall out of favor, causing investors to dump the stock. The trick is to find out whether the negative sentiment is in fact warranted. If not, then this oversold stock can represent a compelling buying opportunity.
In the energy industry, sudden price changes in commodities can change the underlying economics of companies that operate in the space. When prices of oil, coal or natural gas are too low, exploration activities can become uneconomical. Alternatively, rapidly-rising prices can cause a frenzy for extracting as much supply out of the ground to quickly bring it to market.
And lately, one commodity in particular perfectly fits this out-of-favor vs. buying opportunity scenario: natural gas, whose prices have plummeted by more than 50% in recent months. To put things into perspective, a little more than a year ago, gas prices hovered closer to $5 per million British thermal units (BTUs) and touched below $2 BTUs just a few weeks ago.
Seeing as how it is one of a small handful of pure plays in the natural gas industry, Chesapeake Energy (NYSE: CHK) is seeing the negative effects of this price drop.
To add insult to injury, news outlets have recently reported that Chesapeake's CEO Aubrey McClendon has personally invested more than $1 billion in wells (up to 2.5% in each well) developed by Chesapeake, a move that market observers see as a serious conflict of interest. Chesapeake's board of directors quickly moved into damage-control mode and worked with McClendon to end the well co-investment program more than a year earlier. McClendon -- who has been hailed as a visionary in the natural gas space -- also agreed to give up his role as company chairman, but will remain CEO.
The strange thing is, this agreement wasn't a secret and had been openly disclosed to shareholders. McClendon has spent most of his time since the 1990s acquiring wells across the United States and employing modern drilling techniques, including horizontal drilling and the increasingly popular hydraulic fracturing, or "fracking" techniques that have revolutionized the industry.