Top picks 2012: Chesapeake Energy

With over 15 million acres spanning major U.S. gas plays, no company is better positioned for a surge in natural gas demand.

By TheStockAdvisors Dec 26, 2011 6:57PM
Image: Oil drums (© Kevin Phillips/Digital Vision/age fotostock)This post is one in a series in which 50 newsletter advisors share their Top Stock Picks for 2012. 

By Nathan Slaughter, Scarcity & Real Wealth

What if I said you could buy 1,000 acres of productive land, and then later unload 250 of them, pocketing enough cash from the sale to cover the entire initial investment? Yes, that means you would keep the remaining 750 acres for free.

Better still, what if that land contained 5,000 barrels of recoverable oil per acre? This isn't a hypothetical scenario -- it's just another day at the office for Chesapeake Energy (CHK).

I am referring to Chesapeake's recent sale of 142,500 Utica acres, which netted $2.1 billion. The company paid only $2 billion for its entire 1.3 million-acre position in the region (it acted early when land was still cheap). So this one deal recouped the entire leasehold cost.

In effect, the remaining 1.15 million Utica acres didn't cost the company a cent -- and based on the $15,000 per acre joint-venture purchase price, they are worth $17 billion. Some of that land is located in the dry-gas portion and won't command top dollar. But you get the idea.

Not many other companies can create $17 billion out of thin air. CEO Aubrey McClendon has perfected this tactic, engineering seven of these deals with trusted partners such as Norwegian oil giant Statoil and Total.

Chesapeake has invested $33.8 billion in shale acreage and subsequent drilling expenses. Thus far, the wells on that land have generated $5.8 billion in revenues, asset sales have raised $21.4 billion, and the value of the retained land is worth $48 billion.

That means the $33.8 billion invested has already returned $75.2 billion in cash flow and retained value -- for a return on investment of 222%.

The Utica Shale is only the latest example. Chesapeake has accumulated 460,000 Haynesville Shale acres in Louisiana, 1.8 million Marcellus Shale acres, and 2.4 million Anadarko Basin acres in Texas and Oklahoma.

Incidentally, the Utica Shale and the Marcellus Shale occupy the same geographic footprint in many places. That means Chesapeake will have the opportunity to save millions by reusing existing surveys, drilling pads, and other infrastructure.

All told, the company is sitting on more than 15 million acres spanning four of the nation's five biggest gas plays and 12 of the top 15 liquids reservoirs.

It is also raking in cash from 46,000 productive wells and remains the industry's most active driller -- Chesapeake will complete more wells over the next 12 months than many rivals will add in a decade.

As it stands, the company is already producing 3.3 billion cubic feet (Bcf) of gas per day, with output that has risen for 21 consecutive years. And growth potential is staggering over the next 24 months.

Chesapeake is also undergoing a strategic shift toward oil and liquids. By the end of next year, oil and NGL could represent 40% of Chesapeake's total revenue.

There is about to be a demand revolution for clean, affordable natural gas. And nobody is better-positioned than Chesapeake. At the same time, the company's oil production growth is off the charts.

Keep in mind, the company has a market cap of just $15 billion and an enterprise value of $28 billion. Based on conservative prices, its enormous oil and gas reserves alone are worth $52 billion -- and that doesn't count other hidden assets, which the market is throwing in for free.

Steven Halpern's offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.

Tags: CHK


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