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Third Point Hedge Fund Takes Stake in Chesapeake

Activist hedge fund Third Point LLC, which has transformed more than one U.S. oil and natural gas operator, now is the fourth-largest investor in Chesapeake Energy Corp., according to stock market insiders.

Marketfolly.com and several other analyst groups reported last week that Third Point, the private hedge fund operator run by Daniel Loeb, listed Chesapeake as one of its largest new holdings in a June exposure report to investors. The hedge fund's top positions in June were in order Yahoo!, gold, Delphi, Chesapeake and Apple, according to Marketfolly.com. The previous exposure report by Third Point to investors did not include a Chesapeake investment, it noted.

Loeb has been known to take a position in companies and then work to clean them up by writing letters in which he expresses his disapproval for the company's performance or for its management. In May Loeb revealed that Yahoo!'s new CEO, Scott Thompson, did not have a computer science degree as had been assumed; Thompson resigned later that month.

Third Point's investments and Loeb's letters have affected at least two U.S. natural gas producers in recent years.

In 2005 Third Point acquired an 8.6% stake in Western Gas Resources and became its largest shareholder. Loeb then urged the producer to buy back 10-15% of its shares from the market to increase shareholder value (see NGI, Aug. 22, 2005). Western Gas was acquired the following year by Anadarko Petroleum Corp. (see NGI, June 26, 2006).

In 2006 Third Point also purchased a 7.2% stake in Pogo Producing Co., and later that year Loeb demanded in a letter to company shareholders that Pogo initiate a process to sell the company "in whole or part" (see NGI, Dec. 4, 2006). Pogo's management team in April 2007 stated that a "strategic alternatives process," which included a possible sale or merger of the company or changes to its business plan, was ongoing (see NGI, April 30, 2007). Plains Exploration & Production Co. purchased the company later that year (see NGI, Nov. 12, 2007; July 23, 2007).

Chesapeake's second largest shareholder Carl Icahn told CNBC's Fast Money last week that CEO Aubrey McClendon was "a very bright guy and he's put a lot of great assets together...The problem was [the company] gambled too much in buying them and they have a cash gap. Now they have to cut expenses but I think they can."

Icahn said he felt good about the company's corporate governance now that the board has been reconstituted and former ConocoPhillips Chairman Archie Dunham has been appointed nonexecutive independent chairman to replace McClendon.

"I can tell you, the shareholders control the company now," he said. "I think natural gas in the next few years will go quite a bit higher and Chesapeake will be there to take advantage of it. I would not sell Chesapeake. I would be against selling this stock."

Chesapeake last week completed the first of its multi-asset transactions to sell its midstream businesses with the $2 billion sale of Chesapeake Midstream Partners LP (CHKM) to Global Infrastructure Partners (GIP) for $2 billion. The sale, which is expected to result in a pretax gain of around $1 billion to Chesapeake, gives GIP 100% of CHKM's general partner interest and 69% of its limited partner units. Chesapeake in June announced that it was selling the midstream units to GIP in three separate packages for more than $4 billion in cash (see NGI, June 11).

GIP had been Chesapeake's original funding partner in forming the midstream business in 2009 before it was launched as a public company two years ago (see NGI, July 12, 2010; Sept. 28, 2009). Chesapeake indicated that negotiations were continuing between the parties for the sale of additional Midcontinent gathering and processing assets to CHKM, as well as a separate transaction to sell stakes in Chesapeake Midstream Development LP to GIP.

Proceeds from the transactions are part of Chesapeake's 2012 asset sales program, which is supposed to generate cash proceeds of $11.5-14 billion, according to McClendon. Including the sale of the midstream businesses, announced asset sales for the year to date total around $6.6 billion.

Meanwhile, Reuters reported that the U.S. Department of Justice is "probing" allegations that Chesapeake and Encana Corp. plotted in 2010 to avoid bidding against each other in Michigan public land auctions and private land owner transactions. Michigan officials had told NGI last month that they were reviewing the allegations after Reuters reportedly obtained rival executives' emails from two years ago indicating that they had "repeatedly" discussed the land deals (see NGI, July 2).

The Justice Department source is "not authorized to speak publicly," and the "probe could last for months, if not longer," the report indicated. The companies declined to comment, as did the Justice Department.

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