"If there was ever a stock we can hold for a few years, natural gas company Chesapeake Energy (NYSE: CHK) is it," says Ian Wyatt. Here's the latest from his Top Stock Insights.
"Chesapeake Energy is the largest independent natural gas company and most active driller of wells in the US. Its operating activities include the onshore exploration and production of natural gas.
"The Obama administration is keen on achieving energy independence for the US. Natural gas is a good option for energy, since it is inexpensive, clean and domestic. I believe the administration will continue to push natural gas as an alternative to oil, and create incentives for the industry.
"Chesapeake's natural gas assets are first class. The company has proven its ability to successfully drill for natural gas and bring production online.
"Although proven and probable reserves continue to add to the balance sheet the company remains deep in debt. At the end of June, long-term debt stood at $13.7 billion, compared with a minuscule cash equivalents balance of $554 million. This adds risk to the stock price.
"The price of oil and natural gas fell in 2008 and remains low as global demand has not yet picked up again. However, global growth will return, and the price of oil will return to 2008 levels.
"The price of natural gas tends to move similarly to the price of a barrel of oil. The balance sheet remains a risk, but as long as oil and natural gas prices continue to trade higher Chesapeake should be fine in the long term.
"The stock has recovered nicely this year, primarily due to rising oil prices. For the remainder of this year the company is expected to earn $2.29 per share on 7.8 billion dollars in revenues.
"Although growth into next year remains uncertain, the speedy declines in EPS recorded in 2008 have stalled. As a result, shares looked attractively priced at just 10 times EPS and should find their way to $27.75 in 2009."
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