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What follows is a list of energy companies that have varying degrees of risk and upside. I find that Chesapeake (CHK), which the bears seem to be obsessed about, is actually the most undervalued and is led by exceptional management. The inappropriate amount of risk that the market is factoring into the stock price has set the bar low for higher returns. Exxon Mobil (XOM), on the other hand, is recognized as a strong company and thus has less of a discount to intrinsic value. Between these two is Marathon Oil (MRO), which doesn't receive much criticism, but is nevertheless meaningfully undervalued like Chesapeake.

Chesapeake Energy

Chesapeake trades at a respective 10.3x and 7.7x past and forward earnings, with a dividend yield of 1.5%. Consensus estimates for its EPS forecast that it will decline by 37.9% to $1.74 in 2012, and then grow by 69% and 30.6% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS of $2.87, the rough intrinsic value of the stock is $30.14, implying 34.4% upside.

There has been an unreasonably uproar about CEO compensation. In retrospect, I don't think the CEO was paid enough for building the second leading natural gas producer - topped only by a giant that has been in business for nearly a century and a half. Natural gas prices are at a low, but have strong secular trends, given environmental, diplomatic, and efficiency concerns. I find a similar price target to my exit multiple calculation through a DCF model. I model COGS eating 53% of revenue versus 4.7% for SG&A and capex normalizing to 10% over time. Taking a perpetual growth rate of 2% and discounting backwards by a WACC of 9% yields a fair value figure of $29.50.

Exxon Mobil

Exxon trades at a respective 10.2x and 9.6x past and forward earnings, with a dividend yield of 2.2%. Consensus estimates for Exxon's EPS forecast that it will decline by 2.3% to $8.23 in 2012, and then grow by 8.4% and 0.2% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS Of $8.89, the rough intrinsic value of the stock is $93.35, implying 9.7% upside.

I expect the XTO energy acquisition to be dilutive this year, but to then start adding value in subsequent years. Vertical integration and energy diversification enables the company to appropriately hedge against uncertain prices. Operational streamlining would also go a long way in expanding the "Buy Now" story considering that the law of big numbers is certainly working against growth. Accordingly, I rate the stock a "hold".

Marathon Oil

Marathon trades at a respective 13.2x and 7.1x past and forward earnings with a dividend yield of 2.2%. Consensus estimates for Marathon's EPS forecast that it will grow by 16.5% to $3.74 in 2012, grow by 19% in 2013, and then decline by 9% in 2014. Assuming a multiple of 10.5x and a conservative 2014 EPS of $4, the rough intrinsic value of the stock is $42, implying 34.3% upside.

Eagle Ford, Bakken, Noiobrara, Anadarka all have excellent production momentum as management increasingly commits itself to returning free cash flow to shareholders. The low bar that management sets for guidance also allows for higher risk-adjusted returns, which should be particularly magnified when the global economy hits full employment. Greater efficiency at onshore plays will drive those gains as the recovery progresses.

Source: Energy Stocks: 2 To Buy For 34% Upside, 1 To Hold

Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.