Chesapeake Energy: Energized

There's no natural gas in the Chesapeake Bay off of Maryland, but Chesapeake Energy is awash in the stuff. The company is based in Oklahoma and is America's largest active onshore gas driller, with 87 rigs at work. A few days ago, Chesapeake raised its forecasts for 2007 gas production and average prices, earning positive Wall Street attention. Yesterday, Goldman Sachs upgraded Chesapeake's stock (symbol CHK) from neutral to buy. Three days earlier, JP Morgan had promoted it to overweight.

Given the company's single-minded focus, it's no surprise that the movements of its stock are tethered to a single product, natural gas. In recent weeks, spot-market and futures prices for gas have soared, primarily because of soaring demand for power during a blistering heat wave that has engulfed much of the U.S. Of course, prices could reverse course if the weather moderates, but it's hard to see them weakening much. Demand is rising fast and it's harder to find new supplies. Chesapeake's strategy of drilling in well-known onshore gas fields makes for a high degree of confidence that its wells will deliver.

Chesapeake trades at $33, about the midpoint of its 52-week range. At nine times trailing earnings per share, it's priced about the same as other major production companies. It yields little, just 0.7%. But that's okay because Chesapeake is not a utility but a true growth company. It claims a 33% compound annual increase in gas production for the past four years, gobs of interesting development projects in Texas and the rest of the Southwest, and a big position in many gas fields where the margin between production costs and the market price of gas is wider than the national average. If you're an energy bull and enjoy the comfort of investing close to home, here's a chance to buy shares of a first-class company at a fair price.

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