Monday, May 14, 2012

The Vulture Circles Above Chesapeake

The vulture is "activist investor" Carl Icahn, who caused Chesapeake Energy to straighten up a bit and behave last year - remember the 25/25 plan? After agitating long enough to get a quick $158 million return on his investment, Icahn flew the coop. But now heeeeeee's baaaaaaak.  The Wall Street Journal reported that Icahn will soon report that he has taken another stake in the company.

But what does he plan to accomplish with this investment? Last time around, he didn't stick around long enough to "go activist" on CHK by shaking up the board or breaking up the company. But last year the stock price was twice as high as it is today. Fast forward to today and the company is vulnerable:  it's over-leveraged and taking on more debt, both expensive traditional debt and off-balance sheet volumetric production payment deals, and selling off valuable assets, including some of its valuable oil producing lands, to stay ahead of cash flow needs. CHK has some great assets, but the company has entangled itself in lots of complicated deals that make me wonder how much future cash flow management will have to sell to keep the land acquisition machine rolling.

Based on the value of the underlying assets, there is room for the stock to rise, but when the smoke clears how much of the company will be left?

No comments: