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Rumors swirl about Chesapeake Energy and Big Oil firms

By Bob Downing Published: October 21, 2013

From Heather Ingrassia of Seeking Alpha blog:

On Thursday, October 17, it was reported by the Daily Mail that Oil Majors such as BP (BP) and Royal Dutch Shell (RDS.A) (RDS.B) may be interested in acquiring Chesapeake Energy (CHK). In the wake of the Daily Mails report, I not only wanted to review what was reported, but also highlight a number of the reasons why I still remain slightly bullish on shares over the next 12-18 months.

#1 - The Icahn Theory As Noted By Geoff Foster

In a recently published article, Geoff Foster wrote that, "Billionaire US investor and corporate raider Carl Icahn recently increased his stake in Chesapeake Energy to 10%. Dealers on both sides of the Atlantic are convinced that the man who began his career as a Wall Street stockbroker in 1961 is confident that the second largest natural gas producer in the US, which is heavily into fracking, will soon attract a foreign cash bid in the region of $40 a share. A number of dealers heard that both BP and Royal Dutch Shell could be running the slide-rule over the Oklahoma-based company whose shares yesterday touched a 52-week peak of $27.67".

Although I strongly believe that a potential takeover could occur in the next 18-36 months, I'd personally like to a see a much higher bid than the proposed target of $40/share. For example, a bid that would fall in the range of $45.94/share to $53.59/share would subsequently value the company's market cap between $30 and $35 billion. This would clearly be much more attractive than the $26.12 billion the company is valued at when you consider the hypothetical bid of $40/share. Any continued discussion about a potential takeover should shed shares higher in the near-term, but if such rumors were simply untrue shares could be headed down a fairly unfavorable path.

#2 - Recent Job Cuts Are All Part of the Plan

On Tuesday, October 8, Chesapeake Energy announced that it would be laying off 800 employees nationwide, including 640 at its Oklahoma City headquarters, apparently concluding the changes that have led ~1,200 people to leave the company since the first of the year. According to the company's restructuring initiative, these layoffs would be the last phase of its plan that is set for completion by November 1. In addition to the ~1,200 people that have left the company since the start of the year, it should be noted that the company has also shed at least $4 billion worth of non-performing assets.

How will these cuts affect the company's upcoming results for the third and fourth quarters? According to a recent note that was featured on Seeking Alpha, "Chesapeake Energy said it will incur approximately $70M in one-time charges in Q3 and Q4 related to its recent layoffs of ~900 employees, according to an SEC filing. The charges include ~$45M of compensation expense related to the acceleration of restricted stock awards and another $25M related to other workforce cuts outside of the workforce reduction plan".

#3 - Recent Performance and Trend Status

On Thursday shares of CHK, which currently possess a market cap of $18.04 billion, a beta of 1.22, a forward P/E ratio of 12.93, and a current dividend yield of 1.27% ($0.35), settled at a price of $27.63/share. Based on their closing price of $27.63/share, shares of CHK are trading 4.63% above their 20-day simple moving average, 6.27% above their 50-day simple moving average, and 27.61% above their 200-day simple moving average. These numbers indicate a short-term, mid-term, and long-term uptrend for the stock which generally translates into an aggressive buying mode for both near-term traders and long-term investors.


(Click to enlarge)

Conclusion

When it comes to those who may be looking to establish a position in Chesapeake Energy, I'd continue to keep a watchful eye on a number of additional catalysts. In this instance, I'd keep a closer eye on how the company's cost-cutting efforts will pay off over the next 12-18 months, as well the any indication that the company's fiscal discipline has improved in both the short and long term.

 

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Utica and Marcellus shale web sites

Ohio Department of Natural Resources' Division of Oil and Gas Resources Management State agency Web site.

ODNR Division of Oil and Gas Resources Management. State drilling permits. List is updated weekly.

ODNR Division of Geological Survey.

Ohio Environmental Protection Agency.

Ohio State University Extension.

Ohio Farm Bureau.

Ohio Oil and Gas Association, a Granville-based group that represents 1,500 Ohio energy-related companies.

Ohio Oil & Gas Energy Education Program.

Energy In Depth, a trade group.

Marcellus and Utica Shale Resource Center by Ohio law firm Bricker & Eckler.

Utica Shale, a compilation of Utica shale activities.

Landman Report Card, a site that looks at companies involved in gas and oil leases.FracFocus, a compilation of chemicals used in fracking individual wells as reported voluntarily by some drillers.

Chesapeake Energy Corp,the Oklahoma-based firm is the No. 1 driller in Ohio.

Rig Count Interactive Map by Baker Hughes, an energy services company.

Shale Sheet Fracking, a Youngstown Vindicator blog.

National Geographic's The Great Shale Rush.

The Ohio Environmental Council, a statewide eco-group based in Columbus.

Buckeye Forest Council.

Earthjustice, a national eco-group.

Stop Fracking Ohio.

People's Oil and Gas Collaborative-Ohio, a grass-roots group in Northeast Ohio.

Concerned Citizens of Medina County, a grass-roots group.

No Frack Ohio, a Columbus-based grass-roots group.

Fracking: Gas Drilling's Environmental Threat by ProPublica, an online journalism site.

Penn State Marcellus Center.

Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.

Allegheny Front, environmental public radio for Western Pennsylvania.