As I said [recently], we’re going to see a flurry of mergers and acquisitions (M&A) between oil majors and energy minors in the coming months.

I also pointed out that the best way to profit from this activity is to get in with the more accessible, minor companies, versus the behemoths.

[ad#Google Adsense 336×280-IA]Take Chesapeake Energy (CHK), for instance, which sports a market capitalization just north of US$9 billion.

That’s pretty appealing to any major integrated oil company wanting to acquire high-quality natural gas and shale oil assets at bargain prices.

In fact, when you compare it to Royal Dutch Shell’s (RDS.A) offer of US$70 billion for BG Group (BRGXF), Chesapeake looks downright cheap.

Is this the next company to be gobbled up by the M&A machine?

Keeping the Faith

Despite its massive asset sales over the past few years, Chesapeake still holds many productive natural gas producing properties. And, as Shell pointed out by its purchase of BG Group, natural gas isn’t dead, by any means. When it comes to looking at where future growth in energy usage will come from, liquid natural gas (LNG) stake holders still have faith.

Yes, lower oil prices are a threat to natural gas in the short term, not necessarily by acting as a major fuel substitute, but by delaying the conversion of trucking fleets from diesel to compressed or liquefied natural gas.

But oil prices are a bump in the road.

Chesapeake insiders are betting that the future of natural gas and oil are going to be brighter than the market anticipates, and I agree. It’s not a question of if we’ll see a recovery in energy prices, but when the recovery will occur.

And since no one is going to ring a bell when the recovery finally happens, it makes sense for investors to do some select buying of beaten-down names.

Gathering Your Eggs

I’ve already recommended a few names that I see as benefiting the most during the recovery, including EOG Resources (EOG) and Synergy (SYRG).

Those recommendations still stand, as they’re growing companies with a very low debt load.

Chesapeake has a much harder road to travel down, but I think it’ll also emerge as a winner. The company has been slicing its debt over the past five years. And it’s finally in a place where, if prices recover even moderately, the company will start making significant profits from its operations and expanded margins from much lower debt service.

One of the best signs of a company’s future success comes from insider purchases. In the energy sector, this usually foolproof guide is a little more challenging.

Insiders may love their company and how management is handling the operations, but they can’t control or predict where the price of the commodity they’re selling is headed in the short term. If they could, they would all have been selling last September, and they weren’t.

But, assuming reasonable market returns in the future (energy is one of those commodities that cycles fairly regularly from oversupply to undersupply), it’s a good idea to have some of your eggs in baskets where the insiders are steadfast buyers of their stock.

In the case of Chesapeake, two insiders – an activist investor and the Chairman – are adding to their holdings.

Archie Dunham, the Chairman of Chesapeake, added a million shares to his holdings at the end of March at just under $14 per share. He followed Carl Icahn, who paid slightly more at $14.15 earlier in March. Icahn, through his investment vehicles, now owns more than 73 million, or 11% of the company’s outstanding shares.

Bottom line: CHK shares have been rallying as of late, despite lower natural gas prices, because it’s also a major oil producer and has spent the better part of the last five years trying to rebalance its portfolio from all gas to a mix of gas and liquids.

The shares are cheap at current levels, and, while they may get cheaper again in the near term, I think we’re looking at a potential acquisition target in a year or so. Follow the insiders on this one.

And the chase continues,

Karim Rahemtulla

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Source: Wall Street Daily