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Chesapeake Energy Should Consider Sale: Top Shareholder

Hawkins optimism can be countered, though, and hasn't been seen as a likely acquisition candidate as a whole or in its parts by Wall Street analysts covering Chesapeake.

  • The Eagle Ford VPP (volumetric production payment) of which Hawkins wrote refers to a financial structure that rating agencies consider debt, and that Chesapeake critics highlight as a microcosm of a very complicated, and overly levered balance sheet.
  • The selling of the Permian assets coincides with McClendon's strategy to only play in the drilling basins where the company is No. 1 or No. 2, however, the removal of the Permian assets from the company's liquids production guidance has presented a production forecast for the next two years focused more on out-of-favor natural gas than investors want to see.
  • Chesapeake has wanted to launch an initial public offering for its oilfield services business since last year, yet the oil service business has been the most depressed niche within the energy stock sector as the North American pressure pumping business is experiencing declining margins. This environment suggests that a deal will be difficult to launch, and could raise less than Chesapeake had crowed about last year when it said its oilfield services assets could be worth as much as $10 billion.
  • Many Wall Street analysts contend that between VPPs, joint ventures and other complicated aspects of the Chesapeake balance sheet -- with rights to future production sold off to Chinese national oil companies and European energy giants like Total -- Chesapeake can't even be sold, regardless of the debate about market price versus net asset value.
  • McClendon told TheStreet last November that Chesapeake's joint ventures are no different than any other company's transactions, though few Wall Street analysts agree.

    Regardless, getting McClendon to sell the company lock, stock and barrel isn't likely. When asked by TheStreet if his view that the company's transactions were no different than peers meant he would consider an outright sale, he countered that he had no interest in that and the company was moving from a period of asset acquisition to asset development.

    Chesapeake shares closed down 1.5% to $17.13 in Monday trading, within reach 52-week lows. The drop puts shares down nearly 24% and 45% in 2012 and the past 12 months, respectively. Since the start of 2011, the value of Southeastern Asset Management's Chesapeake Energy stake has fallen from well above $2 billion to more than $1.5 billion, according to Bloomberg data.

    Last week, Southeastern, with an over-13% stake in Chesapeake, changed its status to an activist investor so that it can work with the struggling gas giant's management to boost shares. In a filing with the Securities and Exchange Commission, Memphis, TN-based Southeastern said that it would work with management and outside parties on "possible courses of action to assist in building corporate intrinsic value per share or to cause the company's true economic value to be recognized."

    "We appreciated receiving the letter and look forward to further discussions with our largest shareholder in the days and weeks to come," said Chesapeake Energy spokesperson Michael D. Kehs said in a statement.

    Hawkin's fund, which counts Dell (DELL), Chesapeake Energy, Loews (L), DirecTV (DTV) and Disney (DIS) as its five biggest holdings among 13 investments over $1 billion, according to Bloomberg data, has been involved in recent hotly contested corporate moves like Martin Marietta's (MLM) now-stalled $5 billion offer for Vulcan Materials (VMC). On Friday, a judge ruled that the bid should be delayed, raising questions of whether a hostile slate of Martin Marietta directors will come up for vote in Vulcan Materials June shareholder meeting.

    Activists and unsolicited takeover offers have played a big role in the recent turnaround of struggling large-cap companies. For more on recent examples of activism and share recoveries, see why a kinder, gentler activist emerged in recent the Nook and AOL deals with Microsoft . For more on Southeastern's involvement with Vulcan Materials, see why investors are betting on earnings as hostile takeover bids recede.

    See 5 ways Chesapeake Energy can be saved from itself for more on how it can initiate a share turnaround.

    -- Written by Antoine Gara from New York.

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