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My investing philosophy mostly centers around the Value discipline and GARP- Growth at a Reasonable Price. This blog includes commentary on market conditions as well as fundamental analysis of specific companies. Graduated from Rhodes College with a degree in Business with concentration in Finance & Marketing. Currently working on obtaining the CFA designation. Previously worked in Mortgage Trading for a major bank. Use MS Excel extensively for developing investment models, notably valuation models based on DCF methods.

Monday, July 9, 2007

Chesapeake Energy: Follow the Smart Money

Chesapeake Energy (NYSE: CHK) appears to be attractively valued @ $35/share, and apparently, I am not the only one thinking that. The CEO, Aubrey McClendon has been pouring his own money into the stock for some time now. Other insiders have been doing the same, according to shares bought / shares sold ratio has been 9.6x last 3 months and 5.5x in the last year.
Additionally, Southeastern Asset Management, with a solid long-term record with their Long Leaf Funds, has been a huge acquirer of CHK stock in the past year. The group’s manager, Mason Hawkins, follows a value investing approach- seeking great companies currently out of favor in the market, thus providing a good purchase price.

Currently, CHK trades 11.5x current years EPS estimates and the average analyst 5yr projected growth rate is 18% resulting in an attractive price to growth ratio (PEG) of .6. It also should be noted that those figures are probably even conservative given the fact CHK has beaten consensus estimates the past 18 quarters by an average of 15%.
Chesapeake went on an acquisition binge the last few years and now it appears they are focusing on developing the newly acquired leaseholds and ramping up total firm production. Declining gas prices allowed CHK to purchase leaseholds at attractive prices raising the level of potential profit.

So here is the story: CHK has tons of land yet to be developed but known to hold tons of natural gas. These fields are all inland; CHK doesn’t face the risk of hurricanes, yet would benefit from price increases due to any hurricane related capacity reductions. Chesapeake owns its drilling fleet and coupled with industry leading technology, its operating costs are relatively low. Historically, Chesapeake’s success rate has been very high and proved reserves continue to expand. According to management, Net Asset Value (share) is $50 @ $7.50 gas price and $56 @ $8.00 gas price.

Additionally management does a terrific job with transparency and keeping shareholders informed. CHK has limited gas price exposure significantly via successful hedging endeavors. This allows CHK to focus on the development and conversion of its competitive advantages, and not be subjected to the whims of the commodity market which are beyond its control.

Trading at a discount to its industry peers CHK is very attractive, especially given its limited risk profile and substantial growth prospects. Those who know best, “the smart money” are believers in Chesapeake shares. Insider purchases can be a powerful indicator, and nobody better knows the true intrinsic value of CHK than the CEO, Aubrey McClendon, thus it’s probably a smart move to follow his lead.


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