This "Hated" Natural Gas Stock Could Easily Double

If you visit StreetAuthority.com regularly, then you know I've called the natural gas revolution "The Biggest Story in Energy." And thanks to the financial crisis, the ensuing recession, and a glut of storage and supply during the past few years, natural gas prices are near historic lows.

But investors need to keep one thing in mind. Natural gas prices are starting to perk up, and the long term future for this commodity (as a fuel for power, transportation and export) looks bright, leading me to recently announce that "Now is the Time to Invest in Natural Gas."

There's just one problem: One of the heaviest-hitters in this space is caught in a firestorm of controversy. That's leading many investors to question whether this company is worth an investment.

Let me be clear: It is, without question.

Sure, the company is catching a lot of bad press right now, and some changes may need to be made. And while nothing is a sure thing, I'm telling my Scarcity & Real Wealth readers that I think it's one of the single best ways to profit from the natural gas revolution.

I'm talking about Chesapeake Energy (NYSE: CHK). 

This company has long drawn fire for questionable corporate governance issues and lavish executive compensation policies. That frustration boiled over when it was discovered that CEO Aubrey McClendon had pledged his personal stake in some of Chesapeake's wells as loan collateral. 

While the company's board could have exercised better judgment and been more transparent with regard to disclosures, I don't see anything fraudulent or potentially damaging to the bottom line from this financing arrangement. Still, perceived conflicts of interest erased more than $1 billion in market cap in a single day. For a $10.5 billion company, that's significant.

The company isn't tone-deaf to criticism. Management has announced plans to scale back pay and travel perks for outside directors. It has also agreed to separate the chairman and CEO positions, where McClendon previously filled both roles. 

Unfortunately, the market has other concerns as well, not the least of which are restrictive loan covenants and a crushing $14 billion mountain of debt that must be repaid -- no small task with natural gas prices recently diving to rock-bottom levels. And just recently credit rating agency Fitch downgraded the firm's credit rating. 

But here's what really has investors spooked: Chesapeake doesn't have the cash flow to cover its planned capital expenditures -- the funding gap is estimated at $9 billion. 

Short sellers love to point to that shortfall, but they never mention that Chesapeake's ambitious spending plans are mostly discretionary. The company CAN trim back its exploration and development budget if necessary. 

Furthermore, the company is selling some of its valuable shale assets to raise cash. McClendon may have a propensity to overspend, but he also has an unquestioned gift for engineering mega-deals that recoup leasehold investments and enrich stockholders. Last month alone, Chesapeake locked up three new deals that will bring in $2.6 billion in fresh funding. 

Chesapeake might be a kid in a candy store whose eyes were bigger than his stomach. But whatever sweet assets can't be eaten can be sold to the highest bidder. That includes 1.5 million acres in the oil-soaked Permian Basin of West Texas, properties that could easily fetch more than $5 billion from an interested buyer.

Even with diminished power at the negotiating table, the company should still haul in $10-$12 billion in asset sales this year. Meanwhile, it generated $1 billion in operating cash flow during the first quarter alone. That's at least $11 billion or so that will flow in the door this year -- yet, the market is valuing the entire company at just $10.5 billion. 

The leveraged balance sheet is a viable concern, but don't take your eyes of the bigger prize. The reason Chesapeake is in this precarious position is because the company aggressively scooped up 15.6 million acres of prolific oil and gas-bearing shale land. 

That's a footprint the size of West Virginia -- with leading positions in 11 of the nation's top 15 oil shale basins. Forget about the trillions of cubic feet of natural gas reserves. Chesapeake's vast oil and liquids acreage alone could be worth $50 billion on the open market based on recent transactions. That's double the current enterprise value (what it would take to essentially buy the company outright). 

Risks to Consider: An investment in Chesapeake (or in other natural gas stocks) isn't a sure thing. Prices could pull back from here before resuming what I think is the beginning of a long-term rebound. And with Chesapeake, there's always the threat of more bad news coming out, which could hurt share prices. But I'm convinced the company will eventually right the ship.

Action to Take --> Risk-averse investors will want to wait for current headwinds to subside and/or natural gas prices to rebound further. But the sum of Chesapeake's pieces is still worth much more than the whole. I don't mind paying $100,000 for a house with a few broken windows if it comes with $200,000 worth of antiques in the attic. 

With more deals on the horizon, existing stockholders should hold tight or even accumulate more shares at these depressed levels. 

[Note: Although he is an expert in the area, oil and gas is far from the only arena Nathan is profiting from. Scarcity & Real Wealth aims to profit from the rarest and most valuable assets on the planet -- precious metals, agricultural commodities, energy, and other natural resources. These critical inputs are in short supply, yet worldwide demand is on the rise, making these assets some of the best investments on Earth.

You can learn about one important supply/demand imbalance Nathan has found that will be making headlines next year by visiting this link (and without having to watch a lengthy video).]

-- Nathan Slaughter