Two Nat Gas Plays for the Future

Value, value everywhere, but no support in sight. That's been the lament of every bottom-fisher for months now, but I think the value argument is actually worth considering when it comes to natural gas plays.

Don't get me wrong. I fully realize that the whole concept of value is still in the process of being defined down as investors realize this recession is for real. But to heck with value based on price-to-sales, earnings, or even earnings before interest, taxes, depreciation and amortization (EBITDA).

In Chesapeake's (CHK - commentary - Cramer's Take) third-quarter conference call, Chairman Aubrey McClendon pointed out that (based on partial sales of Chesapeake's holdings) his firm's remaining stake in Louisiana's Haynesville Shale region alone is now worth more than Chesapeake's entire market capitalization. The Arkansas Fayetteville Shale stakes are worth half again as much.

The value at SandRidge Energy (SD - commentary - Cramer's Take) appears just as compelling. At present enterprise value, you can theoretically buy the firm's proven reserves of natural gas at less than the firm's all-in costs of aggregating that asset. These are the sort of value stats that can actually keep my interest these days.

Third-quarter financials for both Chesapeake and SandRidge were perfectly decent as well. But it hardly seems relevant to mention that SandRidge's cash flow from operations increased 87% year-over-year, to $137 million, or that Chesapeake's smart hedging allowed it to increase adjusted earnings per share by 47%, to 85 cents. Nobody expects this sort of financial growth next year, as rig counts are destined to decline with economic prospects in 2009.

Another negative is that natural gas prices (and related property sales prices) could fall much more if it becomes apparent that the severe recession the U.S. seems destined for turns out to be the Great Depression II.

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At the time of publication, Moreland was long Chesapeake and SandRidge Energy, although holdings can change at any time. Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.