Chesapeake Energy in the Crosshairs

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Just last week, I was detailing Carl Icahn's canny move on Dynegy (NYSE: DYN  ) . On Friday, we learned about Carl's next potential target.

In a "13D" filing -- signifying an active shareholder stake -- Icahn disclosed a 5.8% stake in natural gas producer Chesapeake Energy (NYSE: CHK  ) , with a recent flurry of buying in the $22.72 to $22.89 range. Here's the disclosure from the section entitled Purpose of Transaction: "The Reporting Persons acquired the Shares in the belief that the Shares were undervalued. The Reporting Persons have had and intend to seek to continue to have conversations with the Issuer's management to discuss the business and operations of the Issuer and the maximization of shareholder value."

Other than the increase in his stake, none of this is really news. Back in August, Bloomberg quoted Chesapeake CEO Aubrey McClendon as saying that Icahn "told us he thought we had great assets, great management and were undervalued."

In response to this filing, investors have bid the stock up above $25 per share. Basically, folks are speculating that now that Icahn has amassed a considerable stake, he'll start pushing for some sort of value-unlocking event. That's not a terrible assumption, given his track record with past targets like Motorola and Yahoo! That, and the fact that he's accumulated a portion of his stake using margin borrowing.

Funny. You'd think that after McClendon's experience with buying Chesapeake shares on margin, others might refrain from the risky strategy. Then again, Chesapeake trades at less than half of its mid-2008 highs, and the shares are almost certainly a better value today.

Anyway, it seems pretty likely that Icahn will be looking for some sort of change at Chesapeake, though I have no idea what form that might take. If he is indeed happy with management, then it's hard to see what ideas he might have that Chesapeake itself hasn't already come up with. Between their volumetric production payment deals, joint venture transactions, and midstream IPO, you can hardly accuse the company of inaction on the financial tinkering front.

A management-led buyout, akin to what's been proposed at EXCO Resources (NYSE: XCO  ) , seems far-fetched. In case you haven't noticed, the private equity industry has dialed way back on the size of its targets since the financial crisis. According to peHUB, the biggest deal of 2010 was the proposed buyout of Del Monte Foods (NYSE: DLM  ) for $5.3 billion. Chesapeake's enterprise value is over five times in size.

If Icahn thinks that company should be broken up or sold to a major like Chevron (NYSE: CVX  ) , well, I don't expect management to be receptive. At all. This is co-founder McClendon's vehicle, and I don't expect him to hand over the keys without a fight. If this is the avenue Icahn pursues, expect big-time fireworks.

ChesapeakeEnergy is a Motley Fool Inside Value recommendation. Chevron is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2010, at 8:44 PM, Zade wrote:

    I am wondering if Carl is looking at the switchover of LNG terminals from importing LNG to exporting and seeing the higher price natural gas commands overseas. Maybe that is a place to unlock some value. CHK and Cheniere have been working together on exporting LNG.

  • Report this Comment On December 21, 2010, at 10:33 PM, NHWeston102 wrote:

    Zade, that's an interesting idea but, truthfully, picking up on Toby's last paragraph, I think we may well see some fireworks. I don't think either Icahn or T.Boone Pickens have a lot of resect for McClendon and his merry band of yes-persons on the Board of Directors. The very fact Icahn declared he's buying in to unlock value means that, despite the politik politeness of the words McC is putting in Carl's mouth, Icahn thinks the current management is a band of stumble-bums. Indeed, when you look at the value of CHK assets, it's hard not to think there must be a better way to pull money out of them. The fact that he's willing to go on margin means Carl's playing for keeps. Could get colorful, kids!!

  • Report this Comment On December 22, 2010, at 2:01 PM, dargus wrote:

    I live in the OKC area, own some CHK shares, and am no fan of Mr. MCClendon. He bought on margin during a huge bubble and then got squeezed out. Not a smart move, and he seems to have run his company the same way. I suspect there might be more value in CHK with different management, or at least some new voices.

  • Report this Comment On December 22, 2010, at 4:22 PM, langco1 wrote:

    icahn has been going downhill fast since his disasterous investment in yahoo..lions gate went bad,dynergy close to filing bankruptcy and now chesapeake smart investors are selling out fast before he opens his mouth with another stupid idea...

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