Is Chesapeake Energy (CHK) a Good Investment?

In a 13D filing earlier with the SEC earlier this week, billionaire Carl Icahn put more pressure on Chesapeake Energy Corporation (NYSE:CHK) by increasing his previous stake in the natural gas company by over 19%. Icahn is a legendary corporate raider, making large moves into stocks and taking meaningful stakes in an effort to affect change. Check out other stocks Icahn is fighting with.

ICAHN CAPITAL Carl Icahn

Chesapeake was Icahn’s fourth largest holding at the end of 3Q, making up 8.4% of his 13F portfolio. Icahn’s initial position of 50.1 million shares was taken in May, and his most recent move puts him owning 59.7 million shares. The share increase moves Icahn from a 7.6% Chesapeake owner to 8.9%. Icahn has called for a shakeup of management and various asset sales to help pay down debt.

Chesapeake has laid out an asset sale plan that includes a target of $13 billion of sales in 2012 and $4 billion in 2013. Asset sales are expected to help bridge the gap between declining cash flow and still elevated expenditures above $8 billion, in addition to helping pay debt obligations. EPS came in at $2.81 for 2011, but is expected to be down to $0.60 this year on lower gas prices. Even with a strong asset base, a new chairman and four new directors, the natural gas producer still cannot gain the trust of investors. Since the end of May when Icahn took his initial stake, the natural gas company has tumbled 20%. Chesapeake also saw increased selling pressure last month after stating that asset sales for 2012 could be delayed. Investors were reminded of liquidity concerns, as the asset sales will be part of the natural gas company’s necessary debt pay-down.

Notable competitors include Apache Corporation (NYSE:APA), Devon Energy Corporation (NYSE:DVN), EOG Resources, Inc. (NYSE:EOG), and Anadarko Petroleum Corporation (NYSE:APC). Apache has also been on an acquisition tear, much like Chesapeake, and also been burning cash with CapEx – expected to be $9.5 billion in 2012. One big difference is that Apache is seeing strong production growth, expected to be up 6-9% in 2012, following a 14% growth in 2011. Apache also has a balanced liquids to gas portfolio (45%/55%) compared to Chesapeake’s more-weighted gas portfolio. Check out which Apache IR insider is buying up shares.

Devon looks to see production up 5%, with oil carrying the weight, expected to be up 21%. Devon has recently been buying up assets to reposition itself as an onshore producer, giving the stock more growth potential. The E&P company has also been downsizing its offshore portfolio, selling off over $10 billion in assets located in the Gulf of Mexico and Brazil.

Anadarko is also expected to see positive improvements in production, expected to be up 7% in 2012. Anadarko is targeting a 90% liquids production, using $6.6 billion in CapEx to develop onshore properties in the U.S. and internationally. The overhang from lawsuits should soon be cleared up, with Anadarko coming to a $4 billion agreement with BP and an anticipated wrap up of the Algeria and Tronox dispute expected.

EOG managed to beat 3Q results handily, posting $1.73 and topping estimates by over $0.50. EOG also has some of the more robust production targets at 10.6% and 9% in 2012 and 2013, respectively. The energy company has also been building cash with another $100 million in expected asset sales for 4Q, which will bring the 2012 total to $1.13 billion. EOG is undoubtedly running on all cylinders, but we believe that the stock has gotten ahead of itself – now trading at an industry high 26x earnings. See which three Chesapeake competitors made out list of top five natural gas stocks.

Chesapeake is the only one of the five energy stocks with an immeasurable P/E, but behind only Apache’s 27% net profit margin, Chesapeake is the highest at 15%. The debt concerns and the possibility of cash flow falling short of covering debt obligations, especially if asset sales do not remain on schedule, will continue to pressure shares. We remain cautious until Chesapeake shows improvement in its capital structure, currently operating with a debt to equity ratio of 1.2,  compared to the peer average of 0.44. We see a large amount of execution risk remaining, but take solace in the fact that Icahn is showing resilience and would consider the stock as a possible buy should Icahn be able to affect a more sustained change beyond just plans – we want to see more actual action. Mohnish Pabrai also has labeled Chesapeake as one of its top stock picks.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Biggest Airports in the World

The 5 Most Gang Infested Cities In America

The 34 Smartest Countries in the World

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!