Stop Dumping on Chesapeake Energy

NEW YORK ( TheStreet) -- These days whenever the name Chesapeake Energy ( CHK) comes up it causes many to shift in their seats and brace themselves for a pounding.

Good news associated with the stock has not come in sufficient quantities while it has had more than its share of controversy.

While the negativity have come fast and furious it is far from a death sentence and the company should be able to maneuver through it. It is going through some rough times due to some regrettable decisions but its reputation for being in a good business as well as its fundamentals remain intact.

However, many investors don't see it that way.

The stock has suffered a considerable amount of punishment over the past several quarters. While some of it has been self-inflicted, it seems the majority of the concerns centers on the health of the overall sector, and in particular natural gas, which has had some challenges this year due to fallen shale demand.

So Chesapeake has not been alone in its struggles . Some of its rivals have also experienced similar headwinds -- namely EOG Resources ( EOG), Range Resources ( RRC) as well as Console Energy ( CNX). However, Chesapeake has shown an ability to make the best out of a bad situation, as it demonstrated in its most recent earnings report.

The Quarter That Was

For the quarter, Chesapeake reported a net loss of $71 million, or 11 cents a share. The loss was a disappointment because it came after an increase of 50% in revenue for the first quarter, $2.5 billion, but short of analysts' estimates of $2.75 billion. Adjusted earnings were 18 cents a share, missing Street estimates of 29 cents.

On the bright side, it was able to increase daily production to 3.658 billion cubic feet equivalent, or by 18%. Overall, things could have been a lot worse, and this is something investors need to understand. When the company announced plans back in January to help improve the fundamentals of the natural gas market, it said then it would reduce the number of rigs it had operating -- representing a cut of 50% by the second quarter.

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.