Enverus Blog

Insights across the energy value chain

Carl Icahn is one of the world’s most famous investors.  His investments over the years have ranged from video games to biotech to communications to casinos to Yahoo!.  Recent news that billionaire activist investor Carl Icahn disclosed a 5.8% stake in Chesapeake Energy has caused investors, analysts, and shareholders to take a closer look at Chesapeake and the possibility the company is undervalued.

Icahn is the definition of “active investor” and this is not the first time he has dabbled in the energy sector.  Along with his Chesapeake position, he’s also extended an offer to buy Dynegy for $665 million.  And who can forget his involvement in the 1984 Pennzoil/Texaco/Getty Oil feud, now made even more famous by a Youtube video of Icahn recounting the event at Caroline’s Comedy Club in Manhattan, NY.

If Icahn sees CHK as undervalued, why is it undervalued?  In CHK’s January 2011 investor presentation, the company announced an “inflection point” in the liquids production.  CHK’s liquids production currently hovers around 10%, but the company expects to have liquids production at 25% by 2013, with a YE 2015 goal of 250,000 bbls/day.  We, at DI-ESP, have already written about some of Chesapeake’s  position in the top domestic unconventional oil play (Granite Wash, Avalon, Niobrara, Bone Springs) as well as their gas positions (Marcellus, Barnett, Fayetteville, and Haynesville).  With natural gas prices still hovering around $4.40/MMBTU and crude oil prices pushing $90/bbl, it’s easy to lose favor with companies who have large gas assets.  But, CHK’s strong push for oily assets and a more balanced portfolio should be creating shareholder value.

Icahn’s Presence Already Being Felt at Chesapeake

As most analysts have stated since Icahn announced his position in CHK, the problem with CHK is its balance sheet and aggressive capital spending program.   When Icahn announced his position in CHK, he stated he believed the stock was undervalued and has already begun talks with CHK’s management about a shift in strategy.  Chesapeake’s new plan “represents a fundamental shift from our aggressive asset accumulation of the past few years to a multiyear period of asset harvest, characterized by a clear focus on capital discipline and maximizing returns,” CEO Aubrey McClendon said.   Currently, CHK has a debt ratio of 38% and long term-term debt of $11.45 billion, but plans to reduce the debt by 25% over the next two years by monetizing assets and reducing spending on new lease positions.

Icahn’s Presence Already Being Felt at Chesapeake

Shareholder and analysts have complained for years about the aggressive spending of CHK, so the question is, will CHK actually follow through?  Well, it appears that the company has taken the first steps in reducing its debt and Carl Icahn’s presence is being felt immediately.  The company announced on January 30, 2011 that it has agreed to sell 33.3% of its oil-rich Niobrara leases to China’s Cnooc for $570 million.  Cnooc will also fund 2/3rd’s of Chesapeake’s share of drilling and other costs up to $697 million.

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Matt Menchaca

Matthew Menchaca is a Research Analyst at Drillinginfo. He is a key member of the Data Management Department and the DI Analytics group. He performs industry research, tracks play development and provides various types of analysis on unconventional resource plays in the U.S. Matthew graduated from the University of Texas at Austin in 2010 after studying Geography and Geological Sciences.