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Recommendation: Buy Chesapeake Energy (CHK). Green&Gold Fund. Energy/Utilities Holdings. Macro Summary. Fracking technology and low prices, increasing the appeal for consumers going forward. Gas is a big step toward energy independence; US is world’s largest producer

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Macro Summary

Fracking technology and low prices, increasing the appeal for consumers going forward.

Gas is a big step toward energy independence; US is world’s largest producer

Interest growing for utilities, transportation, and industry.

LNG infrastructure beginning development.

Higher oil prices inducing demand.


Why Chesapeake?

  • US 2nd behind XOM in nat. gas

  • Plan to reduce LTD by 25% while maintain 25% production growth over next two years.

    • Hedged 96% of 2011 gas production at $5.84/Mcf ($3.78 current).

    • Asset sales to BHP ($4.7B), CNOOC ($1.3B).

  • Aims to double EV within 5 years by targeting oil production.

    • Oil production up 55% in 2010 to 60,000 bbl./day in 4Q.




The numbers
The Numbers

Target price calculated by taking the top 20 peers by market cap and weighted averaging their P/E’s, excluding P/E’s >25% the peer average.

Multiplied the result (14.66) times 2010 earnings plus ½ the projected growth rate of 18%.



Investment Thesis

Chesapeake is positioned well between their current production of natural gas and the ability to transfer the technology to oil to benefit from rising prices.

Natural gas fulfills desires for a cleaner burning fuel and energy independence for the U.S. As well, the proven stability of its price lends itself to industry and utility usage.

CHK has outlined strategy to reduce their debt burden while increasing production growth. Their ability to raise cash by selling assets has been proven by over 6B in recent sales.


Portfolio Placement / Recommendation

  • Sector : Energy

  • Industry Group: Oil/Gas E&P

  • Current Holdings: DO, FEN, HES, PBR, PXJ, SU

  • Target Sector Allocation: 5.84%, $28,817

  • Current Sector Allocation: 8.43% , $41,615

  • Remaining Allocation: -2.59%, ($12,797)

  • BUY 100 shares of CHK at Limit Price of $34 ($3400; <1% of portfolio)

  • BUY 50 shares of CHK at Limit Price of $32.6 ($1630 )

  • Holding Period/Exit Strategy: 4-5 years; watch for technological development and goal fulfillment.


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