Is Chesapeake Still Cheap?

Yesterday, Chesapeake Energy (NYSE: CHK  ) was the 12th most-traded company on the New York Stock Exchange, according to data provided by The Wall Street Journal. Today, the shares are up another 4%. A recent Forbes report may explain why.

The report says that Standard & Poor's Equity Research has upgraded the stock in the hopes that it will benefit from the destruction wrought by Katrina in the Gulf of Mexico.

That's certainly possible. An interview yesterday with a Chesapeake Energy spokesperson confirmed that its natural gas exploration and production facilities were well inland, far away from the impact of Katrina's wrath. That probably also had something to do with S&P raising its earnings estimates for Chesapeake in 2005 and 2006, which, in turn, may have fueled the buying spree.

But I still think there's more here. According to Yahoo! Finance, the stock has more than doubled over the past 52 weeks. Throughout that time, Chesapeake CEO Aubrey McClendon has been buying shares. When I first revealed his insider buying a little more than a week ago, he had recently bought $10 million in stock. Last week, he bought an additional 300,000 shares for more than $8 million total, according to filings with the Securities and Exchange Commission (SEC).

I wonder whether he was bold enough to buy even more in yesterday's hubbub. Chesapeake isn't saying, and we won't know for sure till tomorrow, when the deadline to file with the SEC for stock purchases made yesterday expires. (The Sarbanes-Oxley legislation from 2002 requires that company insiders and 10% owners file with the SEC within two business days of a stock purchase.)

But I wouldn't blame him if he did. Look at how Chesapeake compares to rivals when figuring free cash flow (FCF) as a percentage of market value:

Company

Market Cap

FCF

FCF as % of Market Cap

Andarko Petroleum (NYSE: APC  )

$21,820 mil

-$1,420 mil

N/A

Apache (NYSE: APA  )

$23,510 mil

$701 mil

2.9%

Burlington Resources (NYSE: BR  )

$29,390 mil

$1,360 mil

4.6%

Chesapeake Energy

$10,630 mil

$1,790 mil

16.8%

Devon Energy (NYSE: DVN  )

$28,200 mil

$471 mil

1.7%

Pioneer Natural Resources (NYSE: PXD  )

$7,630 mil

$536 mil

7.0%

Source: Yahoo! Finance

I'll admit this is a very oversimplified sample. Still, the comparisons are pretty impressive, especially when you consider that the company won't have to deal with as much of the fallout of Katrina as some of its domestic competitors. And with management's stake inching ever closer to 10%, all signs remain bullish. That's why -- beginning today -- Chesapeake Energy makes my portfolio watch list. You may want to consider the same.

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Fool contributor Tim Beyers prefers natural gas to oil. It's not as messy. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile here. The Motley Fool has an ironclad disclosure policy.


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