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 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

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

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!