Chesapeake Energy Corporation (CHK) plans to form a $1 billion fund to invest in companies that build infrastructure or technology to increase the application of natural gas as a replacement to conventional gasoline and diesel.
Chesapeake, the second largest natural gas producer in the U.S. after Exxon Mobil Corporation (XOM), has chalked out an extensive investment plan in varied natural gas ventures. All current and future investments will be routed through the newly formed Chesapeake NG Ventures (CNGV) over a period of 10 years. To encourage demand for natural gas, the company will redirect 1% to 2% of its estimated annual drilling budget toward projects.
Initially, Chesapeake intends to fund two transactions worth $305 million from its $1 billion venture capital fund. Firstly, it plans to invest $155 million in Sundrop Fuels Inc. for a 50% stake. Sundrop plans to build a plant to make transportation fuel from plant fiber and agricultural waste. The new plant with a capacity of 40 million gallons of fuel a year is slated to open in 2013.
In the second deal, Chesapeake will spend $150 million over three years on bonds issued by Clean Energy Fuels Corp., a company that builds fueling stations for heavy trucks running on gas instead of diesel fuel. This is to gain from the development of new truck engines that burn natural gas.
Chesapeake is also introducing the usage of natural gas by converting its fleet of 4,500 light duty and 400 heavy duty vehicles to run on compressed gas, which will cut costs by a projected $15-$20 million annually. The company also plans to convert at least 100 of its drilling rigs and all of its planned hydraulic fracturing equipment to run on liquefied natural gas.
The demand supply imbalance of natural gas in the U.S. has led natural gas producers to look for various other usages and replacements. The breakthrough technology of gas extraction from shale rock is economical and has increased the availability of gas, which in turn has decreased prices significantly. The oversupply of gas has directed producers toward export.
Chesapeake has a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We remain Neutral on the stock for the long term.
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
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