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Chesapeake Revisited, as Icahn Slides to 8.98% Ownership
Posted by: Dianne Tordillo (IP Logged)
Date: November 20, 2012 04:09PM

As highly esteemed activist investor Carl Icahn reported increasing his Chesapeake (CHK) stake by almost 20 percent today, Chesapeake’s long talked-about issues pertaining to its corporate governance and its financial losses that caused the company’s tumultuous and highly scandalized year, reappeared in the spotlight.

With a market cap of $11.06 billion, Chesapeake remains as one of the largest producers of natural gas. Headquartered in Oklahoma City, the company’s operations expand to multiple locations such as Utica, Cleveland, Tonkawa, Mississippi and Eagle Ford, to name a few.

Icahn’s most recent stake addition places his current Chesapeake shareholding at about 59.7 million shares. Currently trading at $17.86 per share, Chesapeake stock is actually up almost 2 percent for today’s afternoon trading.

Icahn’s holding history with Chesapeake spans back to 2010, initially purchasing a little bit over 2.1 million shares, and adding to the stake throughout the consecutive quarters of that same year. But at the start of 2011, Icahn significantly reduced his shares by more than 90 percent, and by the second quarter of 2011, he sold out his original shares of Chesapeake.

In a letter he wrote to the company in May, filed with a 13D form to the SEC addressing his more recent purchase of Chesapeake shares, he made sure to bring up his previous holding of the company:

“As I am sure you are aware, this is not our first investment in Chesapeake stock. In late 2010, we acquired a substantial position in the company and met with management at that time to discuss the maximization of shareholder value. In part, we believe, due to our presence, the company sold non-core assets, closed their funding gap and announced that they were through spending money on land. Shareholders rewarded the company for this newfound responsibility, and the stock rallied. However, without shareholder representatives on the board (a major concern for us at the time) the promises made in 2010 proved hollow, and the company quickly abandoned their new strategy and not only accelerated land acquisitions but also capital spending on non-core assets. Recognizing this fundamental problem with the board, we sold our position. That decision turned out to be particularly prescient.”

When Icahn acquired a brand new holding of Chesapeake in May with a strict demand for shareholder representation in its board of directors, the company’s stock price had already taken a dive by more than half its value. Icahn also demanded a slew of changes to the company board at the time including a new chairman and replacement of several directors. In the May letter, he wrote:

“We believe that without a strong board to demand accountability there is a significant chance that the value destruction shareholders have seen in the past few weeks may become irreparable. We cannot stand idly by and allow this to happen. Therefore, if you continue to arbitrarily refuse the request we have made for shareholder representation, we, as activists, will immediately take whatever “actions” we feel are necessary to protect the value of this company.“ (View the original letter here)

Chesapeake immediately responded to Icahn stating in a release:

“We share Mr. Icahn’s belief that Chesapeake shares are substantially undervalued by the market today. The Board and senior management are executing a plan that we believe will deliver a higher stock price and better recognize the underlying value of the company’s assets. The Board will carefully review Mr. Icahn’s letter. The Board’s immediate priority is to name an independent Non-Executive Chairman and it is proceeding expeditiously toward that objective having consulted with shareholders.”

In June, Icahn got what he asked for. Chesapeake announced the appointment of five new independent directors in the reconstituting of its nine-member board. Former Conoco CEO, Archie Dunham, became the non-executive chairman, and Aubrey McClendon gave up his seat as Chesapeake chairman; however, McClendon still remained a Chesapeake director, CEO and president, despite the damaging news Chesapeake publicly endured about McClendon accepting personal loans from a company that was doing business with Chesapeake, which caused an even bigger uproar among Chesapeake investors (Source: Associated Press).

Icahn even took part in choosing one of the directors during the reconstitution, along with Southeastern Asset Management, Cheseapeake’s largest shareholder; Icahn chose Vincent Intrieri, a former employee at various Icahn enterprises, where Intrieri served multiple leadership positions.

After Chesapeake’s announcement, Icahn finally said during the reconstitution: “We believe Chesapeake is now heading in the right direction. With the Board providing strong oversight, the management team will be sharply focused on realizing the value of its assets and the company will be well positioned to create substantial value for shareholders going forward.”

Not surprisingly, Chesapeake is ranked only 1 star in Business Predictability, as it continues to build strategies in gaining back financial stability and paying back debt. It has a Financial Strength of 6 out of 10 and a Profitability and Growth rank of 5 out of 10 on GuruFocus.

Chesapeake is one of Icahn’s top holdings, along with CVR Energy Inc. (CVI), Forest Laboratories Inc. (FRX) and Federal-Mogul Corp. (FDML).

Besides Icahn, Guru investors Mohnish Pabrai, Bruce Kovner, Arnold Schneider and Steven Cohen have all bought shares of Chesapeake as of the quarter ending Sept. 30. (View Chesapeake’s holding history with other Gurus at CHK: Holding History.)

Here is the complete portfolio of Carl Icahn. Also check out his Undervalued Stocks, Top Growth Companies and High Yield stocks.

To read more about related topics, visit the following GuruFocus articles and submissions:

Chesapeake CEO Aubrey McClendon Discusses Oil, Natural Gas and the Future of Chesapeake Energy

Chesapeake Energy – When Asset Sales and Board Shakeups Become the Only Option

Inside Chesapeake’s Outlook: Gas and Liquids

Activist Investor Carl Icahn Bought Into Chesapeake Energy

Longleaf Partners Comments on Chesapeake Energy

Mohnish Pabrai Adds to his Chesapeake and Ceneral Motors Holdings

Guru Discussed: Carl Icahn: Current Portfolio, Stock Picks
Stocks Discussed: CHK, CVI, FRX, FDML,
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