This Oil & Gas Stock Could See A 20% Hike By July

by Daniel Green

Chesapeake (CHK) has fought off shareholder anger, and on May 1, 2012, the Board of Directors agreed to reduce directors pay as well as strip CEO Aubrey McClendon as chairman of the board. At this point Chesapeake directors started the search for an independent chairman. Then May 25, 2012, the heat was turned up on McClendon even higher when Carl Icahn entered the fray when he purchased 7.56% of ownership of Chesapeake Energy Corporation. It is believed that Southeastern Asset Management holds the largest stake in Chesapeake with 13%. The rapid price drop of natural gas on the spot market in 2011 and questions about CEO Aubrey K. McClendon's competency at the helm have led to more displeasure with shareholders. The turmoil at Chesapeake will blow over but necessary changes must be made now for the company to survive through 2013.

Icahn wants changes that reflect shareholder interest

The New York Times reported that Mr. Icahn sent a letter to Chesapeake's Board of Directors. Mr. Icahn has asked that 4 of the 9 current directors be replaced by members that he and other major investors choose. Chesapeake has responded to the letter stating the search for an independent chairman and the board's committee will consult with shareholders and even review Mr. Icahn's call for nominees.

Another angry investor in 2009, Jeffrey Bronchick of Cove Street Capital, championed for more governance by the board after Mr. Aubrey received $100 million in compensation in a year that Chesapeake had lost 59% of its value. Bronchick believes the directors are not the biggest worry right now. Today Bronchick believes the problems at Chesapeake are more because of $2 natural gas prices and that capital spending was not decreased. Bronchick understands that with Carl Icahn in the mix change is really on the way. Mr. McClendon will remain as CEO and a director for Chesapeake but tangible change is on the way for the shareholder.

There are other angry shareholders too. New York City Comptroller, John Liu holds 1.9 million Chesapeake shares within pension funds; Liu believes the directors themselves are the problem, and Liu welcomes any change. The board in recent years has not acknowledged advisory votes by shareholders to reign in board members by majority-vote measures and by demanding a yearly election of all board members. The board continues to do business as usual and elects only one-third of the members every three years. In 2010, Mr. Icahn began his movement for more governance when he leveraged his position into the sale of assets and decreasing land purchases. Mr. Icahn also wanted shareholder representation on the board, but Mr. Icahn was brushed aside by Mr. McClendon and board members. Mr. Icahn sold his shares in 2010, and the company returned to buying land and instituting an expensive drilling strategy once again.

Selling Assets

Chesapeake Energy needs to find $7 billion by the year's end to adhere to credit-line requirements. Chesapeake will be forced to sell land and drilling rights, and it is speculated that Chesapeake will sell the Permian Basin fields. Chesapeake has already sold off $2.6 billion, and it is reported that Chesapeake is willing to sell another $11 billion in assets as well. A plan for divestitures is also on Mr. Icahn's agenda, and will be when shareholders meet again in June at the annual meeting.

A surplus of natural gas has pushed gas prices down for three years. Chesapeake is not the only company that the lower natural gas prices have affected. Companies like Devon (DVN), Exxon Mobil (XOM), Anadarko (APA) and Encana (ECA) have struggled with operations, and the glut of natural gas has forced change in production schedules and future exploration. Energy companies are struggling in the market right now with many breaking below their 200-day moving average on a daily basis.

Opinion

I believe that changes will come fast to Chesapeake, with Mr. Icahn leading the charge before, at, and after the shareholder meeting in June 2012. I think a person would be wise to join in the action and buy Devon. Sure, a person might not make much money in the next few months, but I do think we will see a 20% rise in Chesapeake before the shareholder meeting. It will be a slow increase, but the stock has stabilized in the $15 to $16 range. The stock also appears to be building a nice base at this level and has bounced up 15% off its 52-week low recently. I think there is still another push upward in the next 3 months, but the stock needs to break-out above $18 per share. One piece of big news from the annual June meeting may also help scare some of the people with shares short, which increased by 20 million shares short from April-May 2012 to just about 15% of the total stock float. Mr. Icahn can be very boisterous when he chooses, and positive changes at the shareholders meeting will be discussed heavily.

Sure the price of natural gas is down right now because of a milder winter across North America. Maybe a mild winter leads to a warmer than usual summer. There is still plenty of need for natural gas to power electricity plants when people are consuming energy with their air conditioning unit. I would be surprised if we did not see a little relief in natural gas prices in the immediate future. Demand usually catches up with supply in long run, and Chesapeake can be a good buy at these levels based on future demand. The price to earnings is currently around 6.5 with an expected price to earnings going forward of 9, and this seems reasonable to analysts. The overall outlook for Chesapeake has been rising daily since Mr. Icahn's purchase, and I don't think this should be underestimated. Mr. Icahn has learned how to deal with the Board of Directors from his experiences in 2010, so Mr. Icahn is not going into the shareholders meeting blind and without knowledge.

But I don't think a person can count out natural gas, because there are ideas and projects in the works that make natural gas the energy of the future. I think Chesapeake is worth buying if you believe in the catalysts going forward of debt reduction, Mr. Icahn harnessing the Board of Directors, and a warm summer to help with over supplies of natural gas. I think all three could be in line soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

conocophillips octomom dan savage new world trade center kellen moore guy fieri ryan braun