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Stop Dumping on Chesapeake Energy

Stocks in this article: CHK EOG RRC CNX

At the time, it seemed a bit aggressive. However, looking at the results it appears not only did the company have the right idea, but it might have been a bit underestimated. So while the company's management has been under a considerable amount of scrutiny for some poor decisions, in this case it deserves some credit for having anticipated the problem in order to lessen its impact.

But it has not stopped there. The company has been doing a more than an adequate job to help mitigate the situation, an example being investing in oil fields in an attempt to increase crude production, as well as diversifying its offerings.

Renewable Energy?

The earnings results as well as its outlook demonstrated that Chesapeake has not lost its focus. The fact of the matter is, as dire as the situation appears today Chesapeake is in a business that presents a critical need and costs will eventually normalize.

Though the numbers were not great, they were certainly far from horrible, all things considered. It is clear the company is working to maintain its status as one of the country's top natural gas producers.

To that end, Chesapeake plans to deliver an average output of 250,000 barrels per day, representing an increase of 70% above its 2011 output. It has begun to do that by investing heavily for the development of its holdings in Mississippi Lime, Granite Wash as well as Eagle Ford Shale.

While there is short-term volatility, the natural gas industry and in particular stocks such as Chesapeake will continue to be important players on the market. Investors would be wise to become greedy on this weakness as Chesapeake may prove to be an excellent recovery play.

Bottom Line

As it stands, the stock is down almost 50% from its 52-week high of $35.75. It is unlikely that its fundamentals have changed that drastically to justify this level of punishment. Instead, investors have been driven by fear.

To top it all off, in terms of profitability, Chesapeake offers both higher profits and operating margins than most of its peers that carries much higher multiples.

Patient investors should consider giving Chesapeake a long look at current levels as there is an opportunity for at least gains of 20% in the next six months, reaching my fair market value of $22.







At the time of publication, the author help no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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