Chesapeake shares surge as investor Carl Icahn doubles stake in company

Shares in Chesapeake Energy Corp. have surged in recent days after word got out that billionaire investor Carl Icahn had boosted his stake in the company. On Tuesday morning, Dec. 21, shares in Chesapeake were trading at $25.38 – about an 8% increase since Dec. 17. Shares have traded between $19.62 and $29.22 the past year.

Icahn filed a document with the Securities and Exchange Commission on Dec. 17 saying he had raised his stake in Oklahoma City based-Chesapeake to more than 38.6 million shares, or nearly 6% of the company’s outstanding shares. He paid $945.9 million for the shares, including commissions and premiums for the options to buy the shares.

Chesapeake is a major North American producer of natural gas, gas liquids, and crude oil. Its operations are focused on developing unconventional natural gas and oil reserves, and the company holds positions in the Barnett, Bossier, Eagle Ford, Fayetteville, Haynesville, and Marcellus shale plays.

In the filing, Icahn said he acquired the shares in the belief that they were undervalued. He also noted he intends to continue to hold conversations with Chesapeake management to discuss its business operations and how to maximize shareholder value.

The Wall Street Journal reported that Chesapeake officials had met with Icahn. A Chesapeake spokesman said the company believes Icahn’s investment is evidence of his appreciation of the company’s asset quality and for the strategic direction of the company. However, some industry analysts have speculated that Icahn may push Chesapeake to scale back its aggressive purchases and he may urge the company to stop its free-spending habits, such as buying CEO Aubrey McClendon’s antique map collection for $12.1 million, according to the WSJ report.

Other analysts have said Icahn believes Chesapeake’s stock is undervalued, and he will insist the company find ways to increase its stock price.

A Jefferies analyst said, “Unless investors get some comfort that management’s insatiable appetite for acreage is nearing an end, the stock is likely to remain at a discount to intrinsic value. From that perspective, if Icahn can force management into a behavioral change to slow down lease acquisition, in turn making the company less reliant on asset sales to develop its already captured resources, the stock should outperform in our view.”

A UBS analyst added, “Chesapeake has terrific shale assets but has been criticized for too aggressively acquiring undeveloped acreage, and a perception of poor financial discipline has caused [the company] to trade at a steep discount…Chesapeake may be vulnerable to activists given 1) it is trading 69% below its 2008 high stock price, 2) insiders control just 1.2% of shares outstanding (CEO McClendon controlling less than 0.5%), 3) recent criticism for its compensation of its CEO, and 4) a staggered board with 4 of the 9 seats up for re-election in 2011.”

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