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by Renee O'Farrell

Chesapeake Energy (CHK) is trading at just $18 a share right now, down from a high of nearly $36 in August last year. Plus, news just broke that the company's CEO Aubrey McClendon, borrowed as much as $1.1 billion from the company using his stake in the company's many wells as collateral. There is also the issue of natural gas prices - they are at an all time low and Chesapeake is responsible for 8% of the gas production in the US. So, why am I recommending it as a buy?

I've got 2 big reasons - strategy and price.

Chesapeake recently announced its strategic and financial plans for 2011-2012. It is trying to preserve shareholder value by instituting what it calls a "30/25" plan. Under this strategic direction, the company is shooting for a two-year production growth of 30% while attempting to reduce its debt by 25%. The move came in response to low natural gas prices and heavy reserves.

Chesapeake is also cutting back on natural gas drilling, keeping its operations at a bare minimum. It will cut the number of gas rigs down to 24 from 75 in 2011 and reduce its spending on gas to $900 million from $3.1 billion in 2011. At the same time, the company is boosting its operations in liquids production, which is where the money is at right now. For the time being, the company is looking to grow its liquids business by 78% and ultimately increase the proportion of liquids in its operations mix to about 30% of production by 2013 (currently around 17%).

I don't think it is ever a good idea to chase the money. Oil may be up now, and natural gas down, but they are both commodities and neither stays down (or up) for very long. The price distribution of oil versus gas could shift tomorrow. Realistically, all it takes is one macro event and a little trading momentum to turn the tides. But, while some companies are going full out for crude, I think that Chesapeake is taking a "conservatively aggressive" stance - yes, it is chasing the money, but no, it is not foregoing the bulk of its natural gas operations to do so.

Chesapeake Energy has a number of strategic alliances in place that are also looking pretty good. In the first quarter, the company announced an agreement with 3M (MMM) to design, manufacture and market tanks for the transportation of Compressed Natural Gas (CNG) as well as a collaboration with General Electric (GE) to deploy fueling systems across the US in an effort to speed the adoption of natural gas as a transportation fuel.

It is also priced low. Chesapeake is trading at just $18 a share with a mean one-year target estimate of $28 a share. That makes for an upside of almost 56%, plus the company pays a 35 cents dividend (1.80% yield). At this rate, even if the analysts are a little off the mark, there is still a bundle to be made.

Analysts are expecting the company's earnings to fall from $2.80 a share last year to $1.57 a share this year, but they are forecasting that Chesapeake's earnings will swell to $2.83 a share in 2013 and $3.80 in 2014. This means that Chesapeake is priced at just 6.36 times its 2013 earnings. Its peers average 11.25.

Looking at competitors in Chesapeake's industry that are close in size, the $13.27 billion market cap Valero Energy (VLO) is trading at $24 a share with a one-year target of $30 - an upside of 25% - plus it pays a 2.50% dividend. It is priced even lower at 5.32 times its forward earnings but it clearly lacks the upside Chesapeake has. Moreover though, Valero has not been nearly as aggressive in positioning itself for future growth. The last major key development in Valero was its purchase of Murphy Oil USA's Meraux, LA refinery - and that was back in September. Its share price illustrates its passiveness - the stock is still trading in roughly the same range now as it was when it announced the deal 8 months ago.

Rival Noble Gas (NBL) has a $16.58 billion market cap and is trading at $94 a share on a one-year target of $119 - an upside of almost 27% - and pays a 0.90% dividend. Noble is priced higher than Chesapeake or Valero, at 11.27 times its forward earnings. Noble has been much more aggressive - for instance, it recently inked a 15-year gas sales agreement with Israel Electric (ISECO) to sell natural gas from its Tamar field. Noble estimates the deal to be worth as much as $23 billion over the 15-year period - but it is also priced higher.

The $20.70 billion market cap Marathon Oil (MRO) is trading at over $29 a share and has a mean one-year target of $38, which makes for 31% upside, plus its 2.30% dividend. Marathon is also priced low at 6.71 times its forward earnings. Marathon Oil has been going in an entirely different direction lately, actually selling many of its assets. In April, the company announced that it was selling all of its Alaska assets to Hilcorp Alaska and in January it sold its interests in several crude oil pipeline systems in the Gulf of Mexico. And, of course, there was the spin off of the company's refining segment last year. Marathon may be focusing its direction but I think investors should see how well the company is making the change before anteing up.

Lastly, there is Devon Energy (DVN). It has a $26.63 billion market cap and recently traded at $66 a share. It carries a one-year target of $90, making for over 36% upside. Devon also pays a 1.20% dividend. Devon recently increased its dividend, up from a quarterly dividend of just 17 cents a share. It also signed an agreement with Sinopec International (NYSE:SHI). Under the terms, Sinopec will invest $2.2 billion in exchange for one-third of Devon's interest in five new venture plays. Devon also recently announced its intention to spend more than $1 billion on acreage acquisition and exploration in shale basins with an eye towards oil production and natural gas with a high liquids content. It all sounds good, but I prefer the strong strategic placement and super low cost of Chesapeake.

Source: 2 Big Reasons To Be Bullish On Chesapeake Today