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Chesapeake Shares 'Have Hit a Floor,' Says Analyst

Chesapeake Energy Corp.'s stock price may have reached its bottom, an energy analyst said Friday. However, things may heat up in the coming days after activist shareholder Carl Icahn revealed late Friday that his firm now owns a 7.6% stake in the company -- and he wants four board members replaced.

The natural gas giant, which has seen its share price fall to as low as $13.32 on May 17, ended the week at $15.79, up 21 cents (1.35%) on the day, partly on reports that Icahn bought a big stake in the company. Current investor BlackRock Institutional Trust Co., which already had 883,000 shares at the end of March, also was said to have boosted its stake to up to five million shares.

"We believe shares have hit a floor," said Sterne Agee's Timothy Rezvan. Most of Chesapeake's $13 billion-plus debt load is unsecured by its portfolio, which gives the company flexibility, he said. "We believe Chesapeake has more flexibility to raise cash this year than many investors think. If asset sales do not proceed as planned, we believe Chesapeake could raise cash through secured debt, which would debunk the 'goose egg' theory for Chesapeake's equity this year."

However, the Sterne Agee analyst said even if this year's liquidity risks are met, more challenges await Chesapeake because of uncertain -- and likely low -- natural gas prices. "We believe shares have bottomed but do not see significant upside in shares unless gas prices continue to recover to $4.00/Mcf or asset sale proceeds exceed expectations," said Rezvan.

Icahn's firm reported after the markets closed on Friday that it had purchased a stake in Chesapeake, giving him just above 50 million shares. Icahn's filing indicates that he wants to replace four Chesapeake board members with two Icahn representatives and two representatives from Southeastern Asset Management, the largest shareholder at 13.8% of the stock.

Icahn's move into Chesapeake may be different than when he bought into the producer two years ago. Analyst Antoine Gara of TheStreet noted on Friday that Icahn's previous Chesapeake share purchase in late 2010 "was anything but activism" when he became for a short period the company's second largest shareholder (see Shale Daily, Dec. 10, 2010). Icahn "was in and out without waging a proxy campaign.

"Chesapeake shares soared from the low $20s to as high as $35 after Icahn revealed his 5.8% stake in late 2010, and it's been straight down with Chesapeake shares since as the corporate governance situation worsened. If investors are looking to Icahn as a reason to consider a fast money, headline-driven catalyst for Chesapeake shares, it's a logical assumption that may not be helpful for long-term investors."

Global Hunter Securities analyst Mike Kelly said the DJ portfolio, sold in parts or as a whole, could fetch up to $1 billion. Chesapeake doesn't have the "luxury" to do the kind of work that it would take to develop the properties, which are oil- and gas-rich.

That Chesapeake has put the DJ Basin portfolio up for sale on Thursday is not entirely surprising In conference calls to discuss 4Q2011 and 1Q2012 performance, CEO Aubrey McClendon and COO Steve Dixon expressed no enthusiasm about the leaseholds that are spread across portions of Colorado and Wyoming. In a conference call early this month Dixon admitted to analysts that in the Niobrara formation, Chesapeake "and others have struggled outside of the Greater Wattenberg Field to make this formation economic across a broader area."

McClendon in February told analysts that the DJ Basin "has not worked for us in the Niobrara" and the company had turned its focus to the Powder River Basin.

"I mean, on the DJ Basin, like with other companies, our results have been spotty. And today I don't think we're drilling anything in the DJ Basin in the Niobrara," the CEO said during a 4Q2011 conference call. "I think for the DJ, I wouldn't say all is lost as you're outside of Greater Wattenberg, but there's going to be some other ideas. But we have certainly shifted our focus on the Niobrara play to the Powder River Basin."

In early 2011 Chesapeake struck a $1.26 billion joint exploration agreement with China's CNOOC Ltd. to buy a one-third interest in Chesapeake's 800,000 net acres in the DJ and Powder River basins (see Shale Daily, Feb. 8, 2011). According to Chesapeake, the sale would not be affected by the CNOOC agreement.

Meanwhile, Chesapeake claimed in a federal court filing in Oklahoma City Thursday that a group of shareholders requesting that the court delay the annual meeting scheduled for June 8 have plenty of information about McClendon's financial dealings (Deborah G. Mallow IRA SEP Investment Plan v. McClendon, 12-cv-436, U.S. District Court, Western District of Oklahoma). Investors who are unhappy can't prove they will be "irreparably harmed" if the June 8 meeting goes forward, the filing said. McClendon's loans aren't on the annual meeting agenda, and the CEO's finances already have been disclosed in proxy filings, lawyers said.

"The suggestion that shareholders have not been provided sufficient information cannot withstand even superficial scrutiny."

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