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Chesapeake Energy vs. Icahn: Round Two

The Argus Research analyst also takes issue with the recent "improvements" made by Chesapeake in its debt reduction plan. Chesapeake lowered its debt to assets ratio in 2010 from 48% to 43%, but the Argus Research analyst says that it was merely a function of Chesapeake offering more preferred shares, which are debt by another name.

"If I take the preferred shares plus long term debt and short term debt, by November 2010 Chesapeake's debt to assets ratio was the highest since September 2008. They haven't reduce it at all," the Argus Research analyst contends.

The "monetization" of assets is inherent in the 25% debt reduction plan, and that's a situation that Chesapeake watchers will monitor closely to see if, in the end, a fundamental shift is really underway.

"Twenty-five percent is a number where it would significantly reduce leverage and it's achievable in a two-year time frame, but it's going to take some asset sales. In the past Chesapeake has done some unique things, like JVs and other unconventional financings, and it hasn't been the cleanest way to monetize assets," notes RBC Capital Markets' Hanold.

The nature of monetization of assets by Chesapeake is bound to be the sticking point again, and circles back around to the hopes fanned by Icahn's sudden interest in unlocking Chesapeake value. Speculation has risen that Icahn would try to bundle together a block of Chesapeake assets and sell them off for a quick shareholder pay day -- and with Chesapeake at a No. 1 or No. 2 position in almost every major U.S. land drilling play it makes sense -- yet that hasn't been the approach of Chesapeake CEO McClendon in the past.

Monetization of assets isn't new for Chesapeake. It's monetized assets through joint ventures with a number of foreign players and entered into volumetric production payments (VPPS).

Critics say that the VPPs are simply debt by another name, and the rating agencies look at VPPs this way. Furthermore, with the joint ventures, Chesapeake loses operational control of assets.

"They don't need to have the No. 1 or No. 2 position in every single drilling play, so let's see them exit some positions," says Argus Research analyst Weiss, who remains skeptical of Chesapeake conceding to Icahn without much reluctance. "I didn't see anything in the wording of the Chesapeake strategic plan to definitively conclude that Icahn is leading them to sell assets as the approach to monetize assets," the analyst adds.

For a fundamental shift to truly be underway, investors will have to see Chesapeake monetize assets through true asset sales as opposed to monetization through joint ventures and off-balance sheet financing.

The Argus analyst noted that Chesapeake's plan to slow production growth to 25% could in the end simply be a function of its monetization of assets, too. If it moves more assets off the balance sheet by signing more VPPs, "it's getting paid today to take revenue and profit out of the future," and it also would lower production growth with any actual asset sales needing to occur.

Even the skeptical Argus Research analyst Weiss said that if Chesapeake achieves its debt reduction goals without additional dilutive offerings and by actually selling off assets, it would no doubt be a good thing to see. However, as has long been the case with Chesapeake Energy, actually seeing is believing, and not before then.

-- Written by Eric Rosenbaum from New York.

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>To contact the writer of this article, click here: Eric Rosenbaum.

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