This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Chesapeake Energy vs. Icahn: Round Two

Stocks in this article: CHK

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.

RELATED STORIES:






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

>To follow the writer on Twitter, go to Eric Rosenbaum.

>To submit a news tip, send an email to: tips@thestreet.com.

3 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.13 +48.24 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs