Morgan Stanley is upgrading Chesapeake Energy (NYSE:CHK) to Overweight from Equal-weight with a $34 tgt.

CHK is levered to the 2010 recovery in natural gas prices; Morgan Stanley expects the shares to remain “gas beta” near term. Beyond their view of improving natural gas fundamentals, they see merit to CHK’s operating plan and expect the strategy to support outperformance. CHK is focusing on the lowest-cost US resource plays and has secured capital from partners to accelerate development. Firm sees improving capital efficiency and accelerating production and reserve growth in 2010/11 as a result. The market is concerned about follow through, and therein lies the opportunity. They see attractive relative valuation at a ~25% discount on 2010e unhedged EV/EBITDA and a ~18% discount to NAV at strip pricing.

Two Aspects to Morgan Stanley's Call:

I) Leverage to the recovery: CHK is “gas beta.” They like the risk/reward of a commodity that should enjoy better fundamentals in 2010, an outlook not fully in the stock. Firm expects the recent decline in rig count to result in production declines (visible in May/June),
tighter balances, and higher natgas prices.

II) The right moves, but market is unconvinced: CHK holds dominant positions in low-cost plays. It has sold working interests in three plays (another to come) in exchange for development capital. Using a partner’s capital to build scale in the most capital-intensive stage of the resource play development cycle is a sound strategy. The underlying asset quality is not in question, and Morgan Stanley expects accelerating reserve adds and production growth in 2010/11 vs. the industry.

Notablecalls: Not exactly the type of call that makes me want to buy any size in the 1/2 pt range. It's just that CHK is a traders' favourite and we have a tier-1 firm upgrading it.

I see it trading above the $23 level in the s-t and if the market is kind enough, maybe it can challenge recent highs.

PS: The 40% premium paid by ANR for FCL may help the commodity space today.