Five Reasons Chesapeake Energy Is Poised to Pop

1. HUGELY UNDERVALUED - Chesapeake Energy (CHK) is hugely under valued, perhaps by greater than two times the current market value. If you add up CHK's assets (proven reserves & implied value of undeveloped lease holds) included, the stock price should be in the range of $62.00 per share. CHK is currently trading at $23.50. You do the math. Can you say major discount?

2. LIQUIDS SHIFT STRATEGY - CHK plans to increase its production from ~10% liquids to ~25-30% liquids in next few years by increasing liquids production from ~50,000 bbls/d to 250,000 bbls/d by YE 2015. Shifting from a product valued at $4/mcfe to one valued at $15/mcfe will obviously drive per unit ebitda, cash flow, net income and shareholder returns much higher. The street seems to be taking a "show me" position on this statement from CHK management. I do not believe this is priced in to the stock.

3. HEDGING STRATEGY - CHK has hedged successfully for 17 of past 19 quarters. CHK’s hedging program has generated ~$5.9 billion in realized gains since inception in 2001. The hedging program will continue into 2011.

4. INSTITUTIONAL OWNERSHIP & INSIDER BUYING - The institutional ownership players and levels are impressive. Recent insider buys are a bullish indicator. Longleaf is a solid mutual fund and does good due diligence work. Additionally, CHK recently added the "Icahn hedge" to it's arsenal. Carl Icahn may start pulling the reigns and create shareholder wealth. Icahn has a nose for a buying opportunity, I view it as highly positive he is now a shareholder.

5. JOINT VENTURE TRANSACTIONS & UPCOMING IPO - CHK has created enormous value through JV transactions. The company emerged with the best assets in the industry by 2008 and then sold off minority interests at a large profit to de-risk the plays. CHK has completed five JV transactions creating $12.8 billion in immediate direct value and $37 billion of value in the interests CHK retained. Oilfield services provider Frac Tech Services Inc filed with U.S. Regulators on Wednesday to raise up to $690 million in an initial public offering of common stock. Chesapeake currently owns about 26 percent of Frac Tech, while World Investment Group owns about 74 percent of the company.

In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the consensus, when the consensus opinion appears to be wrong. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. I believe this is the case with CHK, and some major market players agree.

Disclosure: I am long CHK. These are my personal opinions on CHK and the market players. The detailed company information was gathered from the company website chk.com.