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.

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