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Chesapeake (NYSE:CHK) received important support from several of the company's largest shareholders recently, each of which has proclaimed that the management probe was overdone. The stock has bounced off of its recent lows, but still has plenty of upside potential (I originally recommended this stock on May 14 when the stock was trading at $15.52 per share; the price fell to its low on May 17 at $13.55, and rallied last week to above $19). Despite this strong performance, the stock is still trading significantly below the $22 to $24 range, which is where it was when the initial reports of possible wrongdoing on the part of company CEO, Aubrey McClendon, were released. Of further interest is the fact that the price of natural gas has not changed appreciably since the company posted that near-term low. This means that, as the lull in natural gas passes, the company is poised to see a dramatic price spike. When that day comes, this stock should be smelling sweet.

A Rally of Support

Early last week, Southeastern Asset Management made a public statement of support for the company, despite the ongoing pall that has been cast by the government investigation. The most important thing to keep in mind about this news is that Southeastern is the company's single largest shareholder. On one hand ,the asset manager has been willing to show its support by owning a 13.9% stake in Chesapeake. This is a huge vote of confidence, particularly when one remembers that this is a company with a market capitalization of nearly $11.8 billion. This level of committed capital by a professional money manager suggests that the company is on solid footing. Also voicing support for Chesapeake was billionaire Carl Icahn, who owns 7.5% of the outstanding shares. These are two serious investors who have made significant outlays to gain exposure to this stock.

The other side of this argument that's also worth keeping in mind is that Southeastern's exposure to the stock makes talking it up a self-serving exercise. The impact to its investment is dramatic, so its claim that the investigation is overblown must be taken with the proverbial grain of salt.

Furthermore, Carl Icahn is legendary for his willingness to be outspoken to the end, regardless of the facts involved in the specific scenario. The natural question one might ask is "wouldn't these investors simply sell the stock, rather than trying to prop it up with public statements?" While this is a reasonable question on the surface, unwinding positions of this size take a significant amount of time and may move the market if not handled with care. To simply dump over $1 billion of a single stock would send shockwaves through the stock that would impact the price.

Put another way, the stock has an average daily volume of approximately 35 million shares. At $20 per share, that means that roughly $700 million of stock changes hands in a given day. Following through on the example, if Southeastern were the only seller at the average daily volume, it would still take nearly two days to sell its entire stake. A typical rule of thumb is that one cannot sell much more than 1% of a stock's average daily volume -- $7 million worth in this case -- without moving the market too much. In other words, a liquidation would take time.

Looking Toward the Future

Despite the negative press, Chesapeake has become involved in some very interesting, and potentially lucrative deals. It recently made a sizeable investment in Clean Energy Fuels (NASDAQ:CLNE), a company founded by T. Boone Pickens. Clean Energy Fuels provides natural gas as an alternative fuel for fleets of vehicles. While it is difficult to predict exactly how this type of play will impact the company over the long-term, it provides evidence of Chesapeake's forward-looking management team.

Furthermore, relative to its peers, Chesapeake is one of the best natural gas-focused plays available. The company's primary competitors -- Anadarko Petroleum (NYSE:APC), BP (NYSE:BP) and ConocoPhillips (NYSE:COP) -- are each deeply involved in oil.

What this means is that, in a highly margin-driven business, Chesapeake is able to find growth while still maintaining a reasonable valuation. The company is currently trading at a trailing twelve month price-to-earnings (P/E) ratio of 7.3, relative to negative earnings for Anadarko, a P/E of 5.5 for BP, and a P/E of 6.2 for ConocoPhillips. While this metric does not feature Chesapeake as the standout, the company has year-over-year quarterly revenue growth of 0.5%, relative to 0.06% for Anadarko, 0.10% for BP, and 0.0% for ConocoPhillips. Additionally, the company has an operating margin of 0.23%, relative to 0.2% for Anadarko, 0.10% for BP, and 0% for ConocoPhillips. In an industry that boasts an average operating margin of -0.11%, 0.23% for Chesapeake -- particularly with the growth element -- is monumental.

The Trade

Chesapeake's current price of around $17 should be seen as a solid buying opportunity for the stock. Given the fair amount of volatility in this name, there is an advantage to scaling in and being patient until good entry points present themselves. With this in mind, the stock appears to be very well positioned moving forward, and is an attractive holding near current levels.

Source: Chesapeake: A Strong Natural Gas Play At $17