Chesapeake Energy Corp (CHK)

Why I like Chesapeake Energy:
1) Price increases. For natural gas prices to remain as low as they have been, producers would have to continue to pump out gas at costs that exceed the price it can be sold at, not counting hedges already in place.
2) Write ups. Last quarter's write downs on the value of reserves turned an operating profit into an operating loss of $9 billion. For scale, the company's largest ever annual operating income was $3.4 billion in 2006. Yesterday's write down sets the stage for tomorrow's write up as natural gas prices move up.
4) Joint Ventures. The company has joint ventures where the partners are on the hook to pay $4 billion of drilling costs. The company gives up some gas for that, but gets that much more drilling done without having to worry about cash flow.
3) Hedges. The vast majority of 2009 production and about half of 2010 production is hedged to sell at more than double today's market rate.

Concerns:
1) Cash is near zero. Liquidity is provided almost exclusively by short-term derivative instruments, which were purchased for hedging. Volumetric production payment deals are likely to provide a quick boost for cash, but if they fail to come through, a dilutive offering may be in the wings. And, this is a company that has demonstrated a willingness to raise cash even right after saying they wouldn't.
2) Is the CEO thinking of shareholders? CEO McClendon gets paid a lot, but doesn't own a lot of shares. He used to, but he lost most of them to an October margin call, and his selling badly acerbated the stocks fall. The board has recently paid McClendon an obscenely large bonus and required him to invest it in the company's wells. The board claims that's aligning interests. Investments in the company's wells are not the same as investments in the company's equity. McClendon has used company money for personal interests, such as his NBA team and art collection.
3) Bought Board. The median annual compensation package for non-employee directors is $680 thousand. No wonder McClendon's eccentric expenditures are rubber stamped.

Valuation:
In the ground are 11.8 trillion cfe of proved reserves and 236 trillion cfe of unproved reserves of various quality. Giving the company credit for 30% of its unproved reserves yields a total of about 80 trillion cfe. Say the company can sell the gas for $1 more per thousand cfe than it costs to get the gas (including paying McClendon and everybody else). That would value the company at about $80 billion. Subtract $14 billion for debt, for a value of $66 billion. With 626 million shares outstanding, that's $105 per share. If I were more comfortable with management, I'd tack on a premium for their management of this resource and another boost for my rosy expectations for gas prices in the long run. But, Management is a concern, and my 30% credit for unproven reserves may be to high, so I'll just stick with $105 for now.