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Why Chesapeake Energy’s Correlation with Crude Oil Has Increased

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CHK and crude oil

Chesapeake Energy’s (CHK) correlation with crude oil has increased in recent months. The three-month correlation between CHK and crude oil was 0.53 as of August 27. That’s higher than the six-month and one-year correlations of 0.52 and 0.48, respectively.

CHK’s peers EQT (EQT) and Cabot Oil & Gas (COG) have lower three-month correlations with crude oil of 0.25 and 0.08, respectively, while Noble Energy (NBL) has a higher correlation of 0.56.

The increase in Chesapeake Energy’s correlation with crude oil could be mainly attributed to its increased crude oil focus and stagnation in natural gas prices. US natural gas prices have stayed at $2.60–$3 per MMBtu (million British thermal unit) over the past six months.

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Oil mix

The weight of crude oil in Chesapeake Energy’s total production has increased gradually in recent quarters. Crude oil comprised 16.9% of its average daily production in the second quarter of 2018, while the share of liquids, including natural gas liquids, was 27.4%. Natural gas comprised the remaining 72.6%. Crude oil comprised 36.7% and 1.8% of Noble Energy’s and Southwestern Energy’s (SWN) total production mix, respectively, in Q2 2018.

The share of crude oil in the production mix in Q2 2018 was 20 basis points higher than Q2 2017. The share of crude oil is expected to increase further with the company’s sale of its natural gas–focused Utica assets and a strong focus on increasing crude oil production in the Eagle Ford region and the emerging Powder River Basin.

The company now considers the Powder River Basin its upcoming growth engine. It has four rigs operating in the region as of the end of the second quarter of 2018. It deployed an additional rig in July. It placed nine wells in the basin in the second quarter of 2018 and expects to bring online 28 additional wells in the second half of 2018.

In the next part, we’ll look at Chesapeake Energy’s technical indicators.

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