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There has been a lot of controversy surrounding Chesapeake Energy Corporation (NYSE:CHK) lately, with many views being expressed here on Seeking Alpha. This brings up one simple matter; should we buy, sell, or hold this stock?

I have taken the time these past couple of days to see what the buzz is all about and whether we should get in, get out, or sit tight. There is no doubt this stock has been very volatile considering recent news, but has a turn around finally come as we saw last month, or are we ready for another dip? What I will attempt to explain is whether its run is truly up, or if this is just a bump in the road.

The Buzz

Chesapeake Energy is a natural gas and oil exploration and production company. The company is engaged in the exploration, development and acquisition of properties for the production of natural gas and oil from underground reservoirs. It also provides substantial marketing, midstream, drilling and other oilfield services.

As of December 31, 2011, the company owned interests in approximately 45,700 producing natural gas and oil wells that produced approximately 3.5 billion cubic feet of natural gas equivalent per day, making it the second largest producer of natural gas in the U.S. The current market price is $19.80, with a general analyst consensus for a one-year price target of $23.76. This represents a 24.41% increase, not including its 1.7% dividend yield.

The Numbers:

IndexS&P 500P/E6.61EPS3.04Insider Own1.15%Shs Outstand665.41MPerf Week4.74%
Market Cap13.37BForward P/E15.23EPS next Y1.32Insider Trans-0.52%Shs Float661.33MPerf Month2.13%
Income2.17BPEG0.85EPS next Q0.09Inst Own76.89%Short Float13.87%Perf Quarter15.58%
Sales12.51BP/S1.07EPS this Y-7.81%Inst Trans4.00%Short Ratio4.68Perf Half Y-17.89%
Book/sh26.30P/B0.76EPS next Y186.96%ROA5.80%Target Price23.76Perf Year-33.60%
Cash/sh1.54P/C13.06EPS next 5Y7.78%ROE16.17%52W Range13.26 - 31.55Perf YTD-8.64%
Dividend0.35P/FCF-EPS past 5Y-11.84%ROI7.00%52W High-36.30%Beta1.27
Dividend %1.74%Quick Ratio-Sales past 5Y9.69%Gross Margin84.94%52W Low51.57%ATR0.65
Employees12600Current Ratio0.72Sales Q/Q2.14%Oper. Margin23.69%RSI (14)56.80Volatility3.53% 2.53%
OptionableYesDebt/Eq0.82EPS Q/Q90.59%Profit Margin19.52%Rel Volume0.66Prev Close19.57
ShortableYesLT Debt/Eq0.82EarningsAug 06Payout10.68%Avg Volume19.60MPrice20.10
Recom2.40SMA203.58%SMA505.85%SMA200-1.64%Volume13,024,652Change2.71%

The Competition:

Price

Market Cap

Revenue

Gross Margin

Net Income

CHK

19.57

12.57B

12.51B

0.46

2.17B

Anadarko Petroleum Corp. (NYSE:APC)

70.40

35.18B

13.54B

0.80

-1.35B

BP plc (NYSE:BP)

42.04

133.34 B

376.60B

0.13

17.26B

ConocoPhillips (NYSE:COP)

56.18

68.23B

231.56B

0.22

11.81B

Independent Oil & Gas Industry

N/A

55.51M

17.06M

0.64

n/a

Chesapeake's gross margin has been higher than the industry average for each of the past five years. Also, CHK's current Trailing P/E of 9.2 represents a 68% discount to its Oil & Gas Exploring & Prod Industry average.

The Good

In 2012, CHK plans to complete its "25/25" plan, which sets two-year production growth targets at 25% while targeting debt reduction of 25%. There is no doubt this company's fundamentals are compelling, and if it can keep this trend, the company will continue to be in great shape. Chesapeake is a deal maker with a strong track record, and has the largest leasehold and 3-D seismic inventory in the U.S. The company is optimally positioned for gas resource plays, and it is better leveraged to play natural gas prices than its competitors. This is not to mention its acquisitions that have strengthened the company's reserve, production and net acre positions.

Despite the pullback in crude oil prices since early May, analysts believe the oil & gas exploration & production (E&P) sub-industry is generating strong production growth, especially onshore U.S., which will help drive cash flow growth over the next several years. For fiscal year 2012, analysts estimated that CHK would earn $0.48. However, in the second quarter, CHK announced earnings per share of $1.29, representing 280% of the total estimate. In 2013, analysts' estimate that CHK's earnings per share will grow to $1.36, but I believe t has the potential to surprise big again.

The stock has a three-star S&P rating, with a bullish Moving Average Convergence/Divergence (MACD). The company is also trading higher than its ten-day moving average of $19.56, twenty-one day moving average of $19.37, and its fifty-day moving average of $19.01, which signals a bullish trend.

The Bad

Chesapeake has been in the news recently on growing concerns of its high debt levels, liquidity, aggressive capex and falling cash flow expectations. This is not to mention the recent high-level changes that come as current CEO and chairman Aubrey McClendon did not fully disclose loans from corporate lenders. Chesapeake's dangers also include weaker economic and operating conditions, a sustained decline in natural gas prices, funding concerns, and difficulty replacing reserves.

The company is expected to outspend cash flow by $4 billion in 2013, and if gas prices stay weak into 2013, it is likely the company will have to resort to further asset sales. Natural gas accounts for about 83% of CHK's production, therefore if the natural gas markets weaken, CHK's stock could underperform in comparison to its peers.

Further, Chesapeake's failure to create favorable joint partnerships may severely damage the company's ability to meet capital expenditure obligations, growth targets, and financial commitments. One last form of uncertainty is government policy and administration. There have been changes in the tax rates in various countries, especially in the regions where the company operates.

Conclusion

Yes, the debt and uncertainty levels are very high. However, I am still bullish on this stock and the industry as a whole. I believe natural gas is essential to the success of our future. The U.S. has large quantities of natural gas, and if the prices of oil start to rise again, pressure will mount to use other resources such as natural gas. This would place Chesapeake at an advantageous position, given that it is the second largest producer of natural gas in the U.S.

Chesapeake's EPS is expected to grow substantially next year and in the following five years. There are also bullish expectations on the industry. However, I would not recommend jumping in right away. A pullback to about $18 would set this stock up for "prime picking." I do not think Chesapeake is a stock to ignore for long-term growth.

Source: Chesapeake Energy: Buy Or Sell?