Chesapeake Faces Possible Collusion Charges As Stock Suffers

In a previous article, we wrote how Chesapeake‘s (NYSE:CHK) stock is currently heavily driven by market sentiments rather than its operations, and the stock’s recent downward movement over a land price-fixing allegation reaffirms our view. The share price swooned last week on the news that Chesapeake and the Canadian natural gas company Encana (NYSE:ECA) may have violated antitrust laws by acting in concert to suppress the land prices in Michigan in 2010. ^[1] The stock has recovered slightly since.

We have a Trefis price estimate of $19 for Chesapeake, which is slightly above the current market price.

See our complete analysis for Chesapeake

Chesapeake has been embroiled in allegations over the past few months. First was related to illegal activities by its management and, now, it’s a land price-fixing scandal where the company is said to have plotted with Encana to avoid bidding against each other in land auctions in Michigan.

While these events are indeed grave, we believe the more critical issues relating to the company operations and liquidity are being ignored. Chesapeake is already marred by low natural gas prices, and it may become more difficult for the management to concentrate on asset divestitures in the next one year, if the noise unrelated to the company’s business does not die out soon.

Chesapeake might have to file for bankruptcy should its planned $11.5-$14 billion asset sale not be realized in 2012-2013. Its cash drought is evidenced by the $4 billion loan it took this year, but that too is meant to keep it afloat until it’s able to monetize its assets.

Hence it’s critical for the company to address its liquidity issues in the next one year, beyond which even a gradual rise in existing gas prices will help it sail through safely.

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1. Chesapeake Energy (CHK) Falls 8% on Yet Another Scandal, www.wyattresearch.com, June 25, 2012 [↩]