Icahn And Firmer Natural Gas Prices Could Spark Chesapeake Rally

by Trefis Team
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The improving natural gas spot prices may finally help Chesapeake Energy (NYSE:CHK) as it seems that prices have started to recover from the sub $2 per BTU levels observed for quite a few months. In addition, Carl Icahn’s additional stake in the company could be a welcome move for investors. Icahn is an activist investor and has been critical in identifying the undervalued assets of the company previously.

We have a Trefis price estimate of $19 for Chesapeake’s stock, which is at a 20% premium to the current market price.

See our complete analysis for Chesapeake

Has the natural gas prices recovery started?

An upward swing in natural gas price was almost ignored as more inefficiencies about Chesapeake came to the fore. Since the last week of April, there has been an upward swing in spot natural gas prices and, more importantly, the rate of price rise seems to outweigh the rate of fall registered over the past several months. [1]

The valuation of the company is heavily dependent on the natural gas prices as most of its proven assets are shale resources which are rich in dry gas. Even a slight positivity in gas price could transform the company’s outlook because its operations would fetch much more cash than before. However, it would be early to call it a recovery.

Source: wtrg.com [1]

Icahn’s investment

According to recent reports, Icahn has grabbed an incremental share in the beleaguered company for $785 million, and his stake now stands at 7.6%. Icahn’s motive to increase his stake was to have the rights to name two directors to Chesapeake’s board and simultaneously invoke other majority shareholders to name two other directors. [2]

Chesapeake’s CEO McClendon had received flak for his past decisions and was removed from the company’s chairmanship last month. Chesapeake has been looking for a new chairman since and, a few days ago, it also announced a pay-cut for the directors.

Altogether, we are seeing an overhaul in the company’s board, and the sooner that happens the better it will be for the investors. Nevertheless, certain company policies can be blamed for making Chesapeake look worse than it actually is. And now, with Icanh’s increased stake and a renewal of the company’s board, we can expect to see a boost in investor confidence.

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Notes:
  1. Natural gas spot Henry Hub, wtrg.com, May 25, 2012 [] []
  2. Icahn spends $785M on Chesapeake Energy stake, businessweek.com, May 25, 2012 []
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