Wednesday, November 11, 2020

A Small Cap Equity holding: Chesapeake Utility (CPK, $100.10): “Baywatch” by: Logan Kreinz, AIM Student at Marquette University

Chesapeake Utility (CPK, $100.10): “Baywatch”

By: Logan Kreinz, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• Chesapeake Utilities Corporation, Inc. (NYSE:CPK) engages in the distribution and transmission of natural gas, propane and electricity; and generation of electricity and steam. It operates through the Regulated and Unregulated energy segment. The company was founded in 1947 and is headquartered in Dover, DE. 

• In 2020 Completed the Elkton Gas transaction which added 7,000 customers in Cecil County, MD.

• Completed 3 pipeline expansions in Florida, while 4 others are currently in process.

• CPK reaffirmed its long-term 2022 EPS target range of $4.70 to $4.90 per share, and its CAPEX plan to invest $750MM to $1B from 2018 through 2022.

• Net income for the six months ending on June 30, 2020 was $39.9 million, or $2.42 per share, compared to $37.0 million, or $2.25 per share, for the same period in 2019, representing an increase of 7.6 percent. 

Key points: Chesapeake Utilities is in the middle of Hurricane Michael proceeding in FL, and it is expected to conclude at the end of the year. If CPK receives a favorable outcome, they will receive a recovery on the expenses incurred due to the hurricanes impact from 2018. They requested recovery from storm related costs through a change in base rates.

The Second quarter of 2020 saw a 5.1-million-dollar increase compared to the second quarter of 2019. The largest increase to the gross margin is from the Eastern? Shore pipeline and Peninsula Pipeline service expansion, which added an additional 1.8 million. Residents and businesses along this expansion line will have the option to use environmentally beneficial and cheaper natural gas service.

Another potential increase in revenue comes from the updates on RNG. As part of its new gross margin forecast, CPK expects RNG projects to create $1M of gross margin in 2021. In June, the company announced a partnership with Bioenergy DevCo (private) to develop a new Renewable Natural Gas production facility. Additionally, in July 2020, CPK announced that it entered a partnership with CleanBay renewables, which is another company that produces Renewable Natural Gas.

CPK is expected to continue their commitment to renewables along with increased customer growth. CPK’s y/y customer growth increased 3.8% in 2Q20 from 3.4% the prior quarter. The ability to increase their customer growth stems from the company’s aggressive project development with 11 different projects expected to be completed by 2021. 

What has the stock done lately?

Since reporting their 2Q2020  earnings on August 6, CPK is up 18.74% to $100.10. The Russell 2000 is up 4.89% over the same period. This overperformance comes as investors anticipate positive news regarding the Hurricane Michael regulatory proceeding. In addition, the company’s commitment to RNG has investors on watch. 

Past Year Performance: CPK has increased 11.97% in value over the past year, compared to the Russell 2000 which is down 2.79% during the same period. During the Match sell off, CPK dropped to a low of $69.47 and has since climbed back closer to their 52-week high of $102.03. 

Source: FactSet

My Takeaway

Chesapeake’s shift to Renewable Natural Gas has been rewarded from investors in the past three months. The stock has seen tremendous growth, and I believe this momentum will continue because of the commitment to Capex. The company is budgeting to spend close to a billion dollars in the next four years to complete 11 projects. The commitment to expansion development will allow the company to expand their market share and continue to increase customer growth. Along with that, I expect the company to receive a favorable outcome and be able to raise the rate base to recover the losses incurred from the hurricanes in 2018. The company’s ability to create a plan for future growth through projects and renewables, along with paying a 1.8% dividend, is why CPK is on Baywatch. 

Source: FactSet