Aubrey McClendon is certainly audacious. The co-founder, chairman and chief executive officer of Chesapeake Energy (NYSE: CHK) always swings for the fences. Trouble is, he has swung and missed more often than not. But hope springs eternal, and he’s taking big swings once again. And that’s why McClendon and Chesapeake Energy are either loved or hated, depending on who you talk to.

There’s Gas in Them Thar Shales

After seeing the natural gas market soar and fall throughout much of the last two decades, McClendon started to see a perfect storm brewing a few years ago, one that temporarily made him a billionaire. In 2008, natural gas prices were soaring and geologists were starting to see that the United States was sitting on the “Saudi Arabia of natural gas” under deep rock formations known as shales.

With more and more power plants expected to switch from coal to natural gas during the next decade, and a seemingly unlimited bounty of gas underground, Chesapeake borrowed millions in order to buy up and exploit vast untapped gas fields. And McClendon had no trouble finding fans on Wall Street. Shares doubled from the summer of 2007 to 2008, peaking at $69.

The bull market for natural gas seemed unstoppable. The energy source rose from under $2 per thousand cubic feet (MCF) throughout much of the 1990s, shooting past $5 in 2003 on its way to the $8 mark in 2008.

And then reality set in. The global economy cooled, natural gas prices plunged below $4, and Chesapeake suddenly found itself awash in debt. Long-term debt shot up from $7.4 billion at the end of 2006 to $13.2 billion at the end of 2008. Annual interest payments soon ballooned to $800 million. Just four months later, in November 2008, shares had lost 80% of their value.

McClendon was left with no choice but to sell off assets, take on equity partners, and sharply cut spending on the development of new wells. [As an example of a recent asset sale, Chesapeake sold off 25% of its Texas-based Barnett shale fields for $2.25 billion to France’s Total (NYSE: TOT) in January of this year]. Although he has pulled the company back from the brink, investors still have very strong feelings about this high-risk/high-reward approach.

#-ad_banner-#On the one hand, if natural gas prices weaken, that debt load could again start to bite, implying further asset sales. To beat back those concerns, Chesapeake announced in May that it plans to raise $5 billion in fresh equity in order to repay up to $3.5 billion in debt and increase investment in new oil fields (as the company reduces its dependence on natural gas shales).

But Cheseapeake is still primarily a natural gas play, with more than two-thirds of its revenue still expected to come from natural gas.  And bulls correctly note that rising natural gas prices would turn this stock into one of the best performers in the industry. That’s because Chesapeake is still sitting on some of the most promising yet low-cost gas fields in North America. Specifically, Chesapeake is most active in two shale formations, known as Marcellus (in the Northern end of the Appalachian Mountains) and Haynesville (located in Louisiana and East Texas). And it has moved more quickly to tap those fields than rivals such as Anadarko Petroleum (NYSE: APC) and Devon Energy (NYSE: DVN). Those two firms have been seen as tortoises to Chesapeake’s hare, which has not been a bad thing in light of the swift plunge in gas price, from as noted above, $8 per MCF to around $4.25 per MCF today.

Where Chesapeake’s shares end up in a few years depends on where gas prices go, but also on McClendon’s never-ending re-jiggering of the company’s assets. He’s convinced he knows when to sell certain gas fields at their peak of value, while snapping up undervalued fields on the cheap. In a late 2009 conference call with investors, management said that “it sees acquiring and selling acreage as a potential strategic profit center based on the company’s ability and technical expertise in delineating emerging resource plays,” according to a Goldman Sachs report. In effect, the company thinks that other industry players lack Chesapeake’s savvy, when they really lack Chesapeake’s moxie.

Action to Take –> Depends on where you think gas prices are headed. Shares are reasonably priced at about 4.5 times projected 2010 earnings before interest, tax, depreciation and amortization (EBITDA) of $5.2 billion, on an enterprise value basis. Where gas prices go in the next few years will tell us a lot about whether EBITDA can approach $7 billion by 2012 or 2013, or whether it will slump down toward $3 billion. Analysts tend to think that these gas plays are worth about six times forward EBITDA. So the math is pretty straightforward. If EBITDA can approach $7 billion on higher energy prices, then the target enterprise value would be $42 million, implying a market value of around $30 billion, more than double the current value of $13.75 billion.

Then again, if falling gas prices push EBITDA back down to $3 billion, and you exclude the company’s current $12 billion debt load, then the company would be worth less than $5 billion, or less than half the current value. Unless gas prices barely budge, which is unlikely for this volatile commodity, then shares of Chesapeake are either overvalued or undervalued by half.