Recommendation: Buy Chesapeake Energy (CHK)

Energy/Utilities Holdings

Ticker Amount Exposure

DO 3948 Oil Drilling

FEN 5686 Various Energy

HES 8451 Oil Integrated

PBR 4088 Oil Integrated

PXJ 9980 Oil Services

SU 9462 Oil Production

VPU 6884 Utilities

Macro Summary

• Fracking technology and low prices, increasing the appeal for consumers going forward.

• Gas is a big step toward energy independence; US is world’s largest producer

• Interest growing for utilities, transportation, and industry.

• LNG infrastructure beginning development.

• Higher oil prices inducing demand.

Why Chesapeake?

• US 2nd behind XOM in nat. gas

• Plan to reduce LTD by 25% while maintain 25% production growth over next two years.

• Hedged 96% of 2011 gas production at $5.84/Mcf ($3.78 current).

• Asset sales to BHP ($4.7B), CNOOC ($1.3B).

• Aims to double EV within 5 years by targeting oil production.

• Oil production up 55% in 2010 to 60,000 bbl./day in 4Q.

Stock Chart (Daily, 6 mo)

Stock Chart (Weekly, 3yr)

The Numbers

Prev Close: 33.631y Target Est:

40.11

52wk Range:19.62 – 35.95

Avg Vol (3m):

13,475,000

Market Cap: 22.04BP/E (ttm): 11.4EPS (ttm): 2.51Div & Yield: 0.30 (0.90%)Forward P/E: 11.29

• Target price calculated by taking the top 20 peers by market cap and weighted averaging their P/E’s, excluding P/E’s >25% the peer average.

• Multiplied the result (14.66) times 2010 earnings plus ½ the projected growth rate of 18%.

SWOT Analysis

Strengths Knowledge that can be transferred to more profitable oil production Hedged gas production for reliable assessment of goals Large acreage positions in unconventional oil fields

Weaknesses 90%+ 2010 revenues from natural gas Natural gas price weakness Major gas opportunities are a few years forward

Opportunities Growth of nat. gas popularity due to cost, cleanliness, and abundance Expanded usage opportunities for natural gas via LNG Expanded oil production

Threats Decline in coal usage by power companies may not materialize Fracking technology has environmental opponents

Investment Thesis

• Chesapeake is positioned well between their current production of natural gas and the ability to transfer the technology to oil to benefit from rising prices.

• Natural gas fulfills desires for a cleaner burning fuel and energy independence for the U.S. As well, the proven stability of its price lends itself to industry and utility usage.

• CHK has outlined strategy to reduce their debt burden while increasing production growth. Their ability to raise cash by selling assets has been proven by over 6B in recent sales.

Sector : Energy Industry Group: Oil/Gas E&P Current Holdings: DO, FEN, HES, PBR, PXJ, SU Target Sector Allocation: 5.84%, $28,817 Current Sector Allocation: 8.43% , $41,615 Remaining Allocation: -2.59%, ($12,797)

BUY 100 shares of CHK at Limit Price of $34 ($3400; <1% of portfolio)

BUY 50 shares of CHK at Limit Price of $32.6 ($1630 )

Holding Period/Exit Strategy: 4-5 years; watch for technological development and goal fulfillment.

Portfolio Placement / Recommendation