Tickers in this Article: CHK, PXP, STO, TOT, CEO, UPL, SWN
Here's a question for natural gas investors to ponder: How much growth do you really want? Natural gas prices are still low and reserves are a limited asset, so does it really make sense for these companies to cash out a meaningful amount of these assets too cheaply? Certainly, these companies need to fund their operations and establish enough production to hold valuable leases, but production at below-trend prices is a mixed blessing.

Chesapeake Energy (NYSE:CHK), one of the largest independent natural gas producers, continues to walk that tightrope while remaining very highly leveraged to future rises in natural gas. (For more, see Natural Gas Industry: An Investment Guide.)

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Decent Q1 Performance
Chesapeake reported over 6% sequential production growth for the first quarter, with realized prices up about 2%. Within those numbers, the company reported strong growth in its oil and liquids production - up nearly 9% on a sequential basis and up 56% from last year.

The company produced its energy at a cash cost of about $1.40 per Mcfe; production costs actually declined a bit from the fourth quarter (on a sequential basis), while taxes and corporate overhead ticked up slightly. All in all, adjusted EBITDA climbed nearly 6% sequentially.

Still Building for the Future
Chesapeake certainly stands out as an unusual energy company in that it's willing to get involved in a wide array of business ventures to facilitate its long-term goals. For instance, the company is paying more than $300 million for Bronco Drilling (Nasdaq:BRNC) and its 22 rigs, bringing its total to 120 - meaning that Chesapeake controls (or will control) almost 6% of the rigs operating in the U.S. and Canada. That makes it larger than Pioneer Drilling (NYSE:PDC), though not as large as Patterson-UTI (Nasdaq:PTEN) and Helmerich & Payne (NYSE:HP), and large enough to wonder if a spin-out could be possible in years to come.

Along the same lines, the company continues to add reserves at attractive prices, and operates in almost every significant field in the United States. On top of that, the company is willing to defray its overall capital needs by forming joint ventures with other operators like Plains Exploration (NYSE:PXP), Statoil (NYSE:STO), Total (NYSE:TOT) and CNOOC (NYSE:CEO). (For more, see Oil And Gas Industry Gets Better At Drilling.)

When Will Gas Prices Move?
The major question for gas-heavy producers like Chesapeake, Ultra Petroleum (NYSE:UPL) and Southwestern (NYSE:SWN) is when natural gas prices will move up. Much has been made of the relative undervaluation of natural gas to oil on the basis of energy content.

The problem, though, is that there just are not nearly so many uses for natural gas at present. Maybe companies like Westport (Nasdaq:WPRT) can be part of the transition, but it seems like politicians today are more interested in converting food to vehicle fuel than trying natural gas. In the short term, the best chances for higher gas prices are continued economic recovery and maybe some production curtailments related to environmental concerns about fracking.

The Bottom Line
Chesapeake is undervalued today, but not enough to be a slam-dunk "must buy" stock. The stock has rebounded nicely but new investors may be better off waiting for the pullback. (For related reading, check out Oil And Gas Industry Primer.)

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