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Chesapeake Energy: Buy or Sell?

Updated on June 21, 2012

Chesapeake Energy: Buy or Sell?

by Robb Hoff

June 21. 2012

Beware the brash predictions of anyone heavily invested in a company, especially if the barker runs an asset management fund.

So when you hear claims that Chesapeake Energy stock should climb to $50 a share or more from its recent sledding under $20 a share.....don't bite.

But don't necessarily balk either.

Chesapeake Energy is a tricky stock to figure out. As natural gas price and demand rises, so does the revenues of the company. Their oil interests in the Unites States also make them an intriguing player in the development of domestic resources to meet the demand for oil in the future.

But the future is not now, as we are now hearing oil could fall to $50 a barrel. And all of the problems that have put Chesapeake Energy under the microscope recently would not have happened had natural gas prices not collapsed.

The future for natural gas looks bright as an alternative to oil for everything from heavy machinery to cars, in addition to its use as an alternative to coal for plant energy production.

But once again, the future is not now.

Chesapeake Energy has had to sell assets to cover debt and will likely have to continue to do so at an increasing rate: whether it's a couple billion dollars for rights to a nat gas or oil play here or there among the company's vast land holdings or $4 billion for the rest of its stake in a partnership for a natural gas pipeline.

The bottom line is this: will the bottom line remain?

Chesapeake Energy might be forced to sell everything instead of attempting to wait out collapses in prices and the arrival of infrastructure and manufacturing development that would open up new markets for their fuels.

A faster hemorrhage of assets would steadily drain the price whereas a total buyout would cause the price to easily double.

So is $18 a share a good price to buy this stock?

Yes. They can survive the debacle of the past few months and debt that has forced their cash-on-hand hand. Chesapeake Energy has the reserves to play out their plays one way or the other: buyout or bide time.

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