The country's second-largest natural-gas producer, Chesapeake Energy
Crude oil currently trades at about $103 per barrel. In contrast, natural gas currently trades for less than $2 per thousand cubic feet, or Mcf -- which means that the current price differential between crude oil and natural gas is around 52-to-1. However, one barrel of crude oil is roughly equal to 5.8 Mcf of natural gas, which gives a ratio of just 6-to-1 on an energy-equivalent basis.
Nothing lasts forever
Even an eighth-grader can spot the enormously skewed nature of energy prices. Either crude-oil prices will have to fall or natural gas is trading well below what it should. Now, falling oil prices seem pretty unlikely, but rising natural-gas prices seem probable in the future. Cheap natural gas will eventually find takers as companies exploit the economies of scale and develop more ways to put this cheap commodity to use. I suspect the trucking and electric-utilities industries are the first in line to do so. Whoever it may be, Chesapeake, as a producer, should stand to gain in the near future.
Things do not look rosy for the company right now. The balance sheet reflects nearly $11 billion in debt and a debt-to-equity of more than 60%. But what looks really worrisome is its tottering capital ratio of 0.4 times. With just $350 million in cash and a burgeoning working capital, liquidity concerns are at an all-time high. This may even affect daily operations, but at present there doesn't seem to be a problem with that.
The company announced three separate cash transactions totaling $2.6 billion to divest oil and gas assets. This also includes a 10-year deal to sell natural gas at $4.68 per Mcf from its Anadarko Basin Granite Wash play, which has proven reserves of 160 billion cubic feet of natural gas equivalent. Now that's what I'm talking about. Liquidity concerns should be taken care of now. I believe this is the best possible move in current circumstances. SandRidge Energy
Quietly moving in for the kill
While Chesapeake has been increasing its liquids production to make the most of current market conditions, there's no doubt about its firm grip on natural-gas assets, because that's where the potential lies. Even private equity firms are planning to cash in on the lucrative natural-gas market. Kohlberg Kravis Roberts
The biggest incentive is from the trucking industry, which sees natural gas as a cheaper alternative to gasoline. Last month, fellow Fool Jeremy Bowman gave us the lowdown on why things are looking ripe for natural-gas demand to pick up. While Jeremy thinks it will take time to see a conversion en masse, it will eventually happen, with trucking companies like Clean Energy Fuels
Foolish bottom line
All in all, Chesapeake looks like a smart investment right now. Foolish investors should dig deeper and move in early, as it is potentially undervalued at this point. All you need to do right now is add the company to your free watchlist.
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Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Chesapeake Energy, and Clean Energy Fuels. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.