Is Chesapeake Energy Cheap According to Graham?

I spent the last week dissecting The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.

However, a quick check can help determine whether a company might be worthy of a look using Graham's teachings. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I screened the stocks of the S&P 500 that met those requirements and was presented with 56 companies. I will be making a CAPScall on most of these companies after comparing them to competitors and their current value in relation to their Graham numbers. Today, it's Chesapeake Energy's (NYSE: CHK) turn.

What does it do?
Chesapeake Energy is the nation's second-largest producer of natural gas. That said, with natural gas prices low due to high supply, the company has reduced production by as much as 1 billion cubic feet per day. Thanks partly to low natural gas prices, the company fell short of analysts' expectations for revenues during its most recent quarter.

However, it hasn't been totally rough for Chesapeake recently. It sold a piece of its large Utica Shale field to France-based Total (NYSE: TOT), netting a total of $2.3 billion over the next several years for Chesapeake and its partner EnerVest. Over the past year, it has continued to implement its 25/25 plan, an aggressive plan to reduce its long-term debt by 25% over the next two years, while growing production by 25% over the same period.

What's it worth?
If you compare Chesapeake to peers of similar market cap, it is the only one that comes in under its current Graham number:

Source: Yahoo! Finance and author's calculations.

Despite being far above their Graham numbers, Chesapeake's competitors still stand to benefit from the (hopeful) recovery of natural gas prices over the next few years. Continental Resources is the largest land holder in the lucrative Bakken Shale fields of North Dakota. Noble Energy has partnered with MarkWest Energy Partners in developing the Utica shale fields. Pioneer Natural Resources expands its operations beyond the U.S., with oil and gas exploration operations in South Africa and Tunisia, among other places.

All that said, based primarily on the gap between its current price and its Graham number, as well as the potential recovery of natural gas prices, I will be placing a "thumbs-up" on my CAPS page in order to track this call and keep myself accountable. I will also be adding Chesapeake Energy to My Watchlist in order to keep up to date on developing news.

Chesapeake Energy may not be the only opportunity to profit off the expected natural gas recovery. One energy company is also a player in oil, which itself seems to be going even higher. Get a copy of our free report " The Only Energy Stock You'll Ever Need " to find out which company is poised to benefit from a possible energy spike. Click here to get your free report today.