Though natural gas prices have fallen about 20% from their peak levels, they're still at historical highs. That's good news for Chesapeake Energy (NYSE:CHK) and its shareholders; this large natural gas producer is actually growing its production by meaningful amounts.

In the recently completed third quarter, the country's third-largest holder of natural gas reserves (behind ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP)) increased production by nearly 28% year over year, to more than 1.3 billion cubic feet equivalent per day. While much of this growth is coming from acquisitions, the company has produced about 8% organic production growth on a year-to-date basis.

With average daily production and average realized gas prices both up about 28%, it's no surprise to see strong sales growth. Further, although operating costs are on the rise, the company continues to operate quite efficiently. Reported net income increased faster than sales, even after including $80 million in non-operating costs.

Let's review some of the things to look for in a good energy play. Production growth? Check. Strong production margins? Check. Now let's look at reserves. The company ended the quarter with more than 6 trillion cubic feet in estimated proven reserves and had a reserve-replacement ratio of close to 500%. The cost of acquiring and developing reserves through the past nine months has been $2.23 per million cubic feet equivalent -- a pretty good price relative to current spot gas prices. Last but not least, the company estimates that it still has at least a 10-year inventory of drilling sites.

Judging by management's comments on the conference call, I think further acquisitions might be likely. Chesapeake recently acquired Columbia Natural Resources for about $2 per MCFE in reserves but was able to hedge more than half of the current production at more than $10 per MCFE. That's a profitable spread, even with rising production costs, and I expect the company will pursue similar deals as they arise.

While the forward curve on natural gas suggests that prices will drop more rapidly than for oil, the natural gas market still looks pretty healthy. With ample reserves and good profitability, Chesapeake certainly looks poised to benefit from an ongoing high-cost market for natural gas.

Further fuel-ish Foolishness:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).