The U.S. natural gas market has been slumping of late – with prices trading around $3.50 per million BTUs – but don't be fooled: one hot summer and a recovering U.S. economy will turn that sector around in a hurry. And with this in mind, Chesapeake Energy (NYSE: CHK) is worth a look. Chesapeake concentrates on increasing natural gas reserves via acquisition and field development. CHK has proved reserves of 12 trillion cubic feet of natural gas equivalent, mostly in the mid-continent U.S. region.
Further, although analysts only see modest production growth for F2009 after production zoomed 18% in F2008, debt reduction and excess cash will create an improved financial position and liquidity position – which will work to CHK's advantage when the U.S. economy and natural gas demand begin to rebound in late F2009. Hence, this is a get-ahead-of-the-pack play. The First Call F2009 / F2010 EPS estimates for CHK are $1.94 / $2.58.
Stock Analysis: Chesapeake Energy is a moderate-risk stock. Consider buying a 25% position in CHK now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your CHK position in the first half of 2009. Sell / Stop Loss if you were to buy shares in this company: $8.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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