Should Carl Icahn Move On From Chesapeake?

ICAHN CAPITAL LPChesapeake Energy Corporation (NYSE:CHK) posted earnings of $0.10 a share, meeting estimates, but well below the same quarter last year of $1.23. However, the company saw its stock down over 6% as it announced that planned asset sales might be delayed.

Carl Icahn has made a pretty penny since investing in the natural gas company. Despite a 6% stock slide following the company’s 3Q earnings announcement, Chesapeake remains up over 35% since the announcement that Carl Icahn had taken an 50 million-plus share stake in the company. The real question is whether he and other investors should now put their money to work elsewhere?

The planned asset sales that Chesapeake had announced earlier this year as part of its debt reduction program are instrumental in helping the company move into the key phase of being able to develop its vast asset base. Fueling the debt reduction is suppose to be a suite of asset sales that would allow the company to pay down $4 billion on its revolver by the end of 4Q. The company has been on a CapEx spending spree for several years, gobbling up properties and reserves, and now has itself overloaded with debt. The company had hoped to implement a 25% production growth plan and 25% debt reduction over two years, but this too may be delayed.

The “Icahn premium” on Chesapeake shares put the stock up 10% during the week following his investment, however, the magnate’s recent announcement of a Netflix, Inc. (NASDAQ:NFLX) stake sent the company up over 17%, a bit excessive in our opinion. Icahn announced a 10% stake in the Internet streaming company, and joins John Griffin and Jana Partners as shareholders, albeit their share holdings pale in comparison to Icahn’s 5 million shares; check out all of Netflix’s fund owners. Netflix shares have been on a roller coaster ride for the past few years, and trade with vast uncertainty given the amount of competition, from conventional cable and satellite providers to other streaming companies, and even competition from the likes of Amazon. The company now trades at 100x earnings after the stock’s pop; see our candid thoughts on whether you should follow Icahn into Netflix.

With Chesapeake’s inability to pay down debt and meet asset sale targets comes renewed liquidity concerns. The company’s CapEx plans for 2012 and 2013 appeared high when compared to planned asset sales and free cash flow projections, even before the delay in asset sales. Despite having a strong asset base, no capital to develop these properties leaves Chesapeake in a tough position. We now have a more cautious outlook on the company given recent announcement; check out more thoughts on investing in Chesapeake.

For a more stable oil and gas play you should check out one of Chesapeake’s competitors, such as Devon Energy Corporation (NYSE:DVN), Apache Corporation (NYSE:APA) or EOG Resources, Inc. (NYSE:EOG).

Devon had positive interest from a number of funds in 2Q, including Jim Simons and First Eagle Investment Management. As well, the company had five funds with over 5% of their 2Q 13F invested in the company. However, some of the more robust fund interest was for EOG. EOG had the likes of Israel Englander, Jim Simons and Ken Griffin as investors, with Simons increasing his 1Q stake by over 1300%.

EOG does trade well above its peers at 23x, while Devon and Apache trade much lower, 10x and 13x, respectively, but we believe that EOG has the greatest growth prospects. EOG is expected to grow EPS over the next five years at a rate that exceeds Chesapeake and the others by at least 7% annually.

Devon has sold off $10 billion in assets that were in the Gulf of Mexico and Brazil in an effort to focus on onshore drilling. Meanwhile Apache has been on an acquisition binge that may hamper the company on being able to allocate capital to unlock value in other properties. However, unlike Devon, who is focusing more on onshore properties, Apache has a more even split between liquids and gas reserves, and even so, one billionaire’s fund loves Devon. To put it simply, what attracts us more to EOG is the company’s refocus on higher margin plays. The company plans to focus 90% of 2012 CapEx on liquid rich plays for the time being, as natural gas prices remain strained. EOG has a diverse liquid-gas portfolio that allows it to shift between the two depending on the fundamentals and outlook of each.