Potential Suitors for a Chesapeake Buy-out


Ever since billionaire Carl Icahn bought in last year, speculation has been that he would eventually force a sell-off of Chesapeake.  He has already forced a number of divestitures including the recent sell of their pipeline, processing and mid-stream divisions.  He is almost single-handedly credited with forcing the reluctant resignation of Aubrey McClendon and has a track record of controlling the company's leadership and finances. 


Almost immediately upon acquiring a 7.6% interest in 2012, Icahn forced a huge sale by CHK of all Fayetteville Shale assets to BHP Billiton, a perfect example of how the corporate oil and gas business works.  Further, he teamed up with Southeastern Asset Management (holding a 13.6% share) to shake up the entire board of directors.  Of the four member immediately replaced, Icahn personally selected one, with Southeastern proposing the other three.  He vowed to "personally retool" the company with plans to implement "cost savings initiatives" and a more conservative spending approach.  Rumors that he intended to push for the sale of pipelines and gas processing plants have already been proven true.  Prior to their recent sell off of the entire midstream division, Icahn had maneuvered to make a $4 B pipeline sale to Global Infrastructure.  Money speaks loudly in the corporate world.


Now that he holds as much as a 10% interest, Icahn is wielding even more power. He reportedly is seeking a cash bid for the company, possibly for as much as $40 per share.  But who would their suitors be, and why would they have interest in a debt-ridden, cash strapped company?


Since early 2012, speculation as to a CHK fire sale had begun.  Seeking Alpha entitled their May 30, 2012 article “Is a Buyout CHK’s Only Hope”?  They, along with Bloomberg, were already speculating that Exxon, Chevron, and Shell are all analyzing just that possibility.  Almost everyone agrees that their asset portfolio is unparalleled on-shore in America.  However, Chesapeake is of interest to each for other reasons as well.


Exxon, despite being the world’s largest energy company (with a market value of $373 B) has seen their oil and gas production decline steadily for the last three straight quarters.  Bloomberg says that they “desperately need” to boost production and may well look to acquire CHK as a quick fix.  Chesapeake’s debt is of less concern to them considering that they are sitting on at least $19 B in cash right now.  Phil Adams, a Chicago-based debt analyst with Gimme Credit LLC rates them as the most likely suitor for several reasons.  They have not only the highest corporate credit rating, but can easily buy in without incurring any damage to such.


Speculation regarding Chevron is similarly grounded.  Their year-over-year production numbers have fallen for five straight quarters but they are sitting on a pile of cash similar to Exxon’s.  “For somebody like an Exxon or Chevron”, according to Suntrust’s Neil Dingman, “they just don’t have much in the way of production growth right now, and the easiest way to get that is to go out and acquire it.  Both are sitting on billions of dollars of cash right now that’s really not doing anything.”  Hence, CHK may be an incredibly attractive acquisition prospect for them right now, despite their unattractive balance sheet.


Shell may be greatly interested for different reasons altogether.  Despite being Europe’s biggest oil company, buying CHK would greatly reduce their exposure to regions with higher political risk.  About a third of their production last year originated in Africa and Asia, according to their annual report.  Huntington’s Paul Sorrentino summed it up quite nicely saying “If you want to try to clean up and eliminate some of your political and geographic risk, these (CHK’s) assets would be quite attractive.  Chesapeake has quite a bit of drama surrounding it, but that doesn’t change the fact that these are very desirable assets”.


Speculation that Shell and/or Chevron have interest in CHK holdings were confirmed September 12, 2012 when the Canton Rep (via AP) reported that CHK  had sold a considerable portion of its Permian Basin holdings to a subsidiary of each.  Details were sketchy, but the transaction, described as a “series of deals” was valued at $6.9B.  Once closed, they will allow Chesapeake to have liquidated assets and holdings in the amount of $11.6 B.  This equated to about 85% of their full-year goal of $13-$14B, “which we expect to achieve by year end”, as per then CEO McClendon.  That same day, they announced the sale of unspecified Utica Shale assets to undisclosed buyers in the amount of $600 M.  Apparently this is a small part of an offering announced previously and discussed below.


Whichever suitor may appear, they will have to cope with seven joint ventures and $13.1 B in debt.  “Many people think CHK is too convoluted and too complicated to have somebody buy it out,” says Dingman in a telephone interview reported by Bloomberg.  However, other analysts disagree.  “For any of the major integrated oil companies that want to pick up reserves on the cheap, this would be a good opportunity,” says Sorrentino.  With natural gas almost certainly at its absolute bottom, CHK will be “worth a whole lot more in the near future than they are today.  We’ll look back on this and say, ‘Wow, this was really an opportunity.’  There may be some people that end up kicking themselves.”


Stay tuned……


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