Chesapeak Energy's Investment in Gastar Exploration Gives Investors Reason to Speculate

This past spring Chesapeake Energy (CHK) increased its stake in small oil driller and exploration firm Gastar Exploration (GST) to more than 16%. It capped off its stock buying spree by purchasing nearly 1.8 million shares this past month, at approximately $2/share.

This development was met with a mere yawn by most investors. The stock remained flat on the news. Investor apathy could pose a possible opportunity for those hearty traders who are willing to speculate in the high risk world of oil and gas exploration.

If it would have been any other company investing in GST, I probably would not give GST another glance. However, the man running CHK is one of the greatest natural gas gurus of our time. CHK CEO, Aubrey McClendon knows the oil and natural gas business. This is evident by the performance of his company's stock which has rocketed in price nearly 8-fold over the past five years.

In assuming this latest large investment, CHK became a working interest partner in one of GST's highest risk/reward operations - the East Texas Bossier development play. Both CHK and GST expect great things from this venture.

GST predicts 350 Bcfe of net potential in natural gas from this particular region and at a $6.75 realized price for natural gas that would generate nearly 40% internal rate of return for the company. If natural gas prices rise, GST and CHK will benefit even more. Early drilling in the project has proven extremely successful as only one hole out of the first 16 drilled came up dry.

Outside of the East Texas Bossier project, GST has natural gas operations in the Powder River Basin in Wyoming, and a coal bed methane play in Australia. Therefore, the company is not leveraged to just one project.

GST is not profitable and has a large float of nearly 140 million shares. So it's not an ideal value play. However, smart money usually provides value, and CHK's investment in GST, and its East Texas Bossier play should give investors a reason to speculate.

CHK vs GST 1-yr chart: