Chesapeake Energy Corporation (CHK): Buy….or Beware?

Few stocks in oil and gas industry are more hotly debated than Chesapeake Energy Corporation (NYSE:CHK) . Former CEO Aubrey McClendon really seemed to live up to the wildcat reputation of a typical Midwestern oil man. Unfortunately, that never sat well with investors, and he recently rode off into the sunset by taking an early retirement.

While a new leader has yet to be hired, the company that person will inherit is one that’s still in transition. Should you buy the stock now knowing it has nowhere to go but up? Or is caution the better part of valor, with the best view being from the sidelines?

What’s so great about Chesapeake Energy?
An investment in Chesapeake Energy is first and foremost a bet on the future of natural gas. The company is our nation’s second-largest net producer of natural gas. Every year it pumps out 4% of our total natural gas needs. Furthermore, when you add in the company’s vast partnerships, its gross production is almost 9% of our total annual output. Without the work of Chesapeake Energy Corporation (NYSE:CHK), natural gas prices wouldn’t be as low as they are today.

While those low prices are currently a problem for Chesapeake Energy and investors in its stock, it does give a hint at its future potential. Demand for natural gas is heading higher, which over time should push its price up as well. In the future, that demand will come from a variety of new sources, including chemical and electrical production as well as an increase in the use of natural gas as a transportation fuel.

Until that demand is realized, Chesapeake Energy Corporation (NYSE:CHK) is spending billions to grow its oil and natural gas liquids production. The company is now the 11th-largest liquids producer in the country, and production is growing every day. As you can see from this map, the company has a foothold in some of the best-producing areas of the U.S.:

Source: Chesapeake Energy Investor Presentation

This transition will fuel the company’s near-term profits while a recovery in the price of natural gas will really boost the long-term value its stock.

So, what’s the downside here?
The company’s growth has come at a great cost, with too much of it funded by debt. If there’s one recurring theme among smaller oil and gas companies it’s that too much debt has been compounded by too much natural gas production. That’s one reason why the stock of SandRidge Energy Inc. (NYSE:SD) has been crushed over the past few years. That company is in the midst of its own turnaround and has been following the same playbook on liquids growth as Chesapeake Energy. However, that’s not easy to do while also trying to get out from under the weight of debt.