) -- It's Aubrey McClendon versus

Carl Icahn

, as the investor activist makes his play for

Chesapeake Energy

(CHK) - Get Report


On Monday, investors reacted to the news that Icahn was getting into the Chesapeake fray enthusiastically, sending Chesapeake Energy shares up to their highest price since June, on the hope that, finally, the long frustrated group who have thrown in their lot with Chesapeake's stock would see the embedded value unlocked.

Icahn is now the second-largest shareholder in Chesapeake Energy, with a 5.9% stake, behind only Southeastern Asset Management, which owns more than 12% of the independent oil and gas producer's shares. Icahn was previously the 6th-largest Chesapeake shareholder, with a 2.5% stake.

The heavyweights of the traditional asset management world which Icahn has now passed among the ranks of Chesapeake shareholders include

The Vanguard Group




State Street Global Advisors


Icahn has been actively increasing his Chesapeake Energy play throughout the year, starting with a first quarter 2010 investment of more than two million shares.

The gradual increase in Icahn's position in Chesapeake Energy was drowned out by Icahn's surpassing of the 5% threshold last Friday: the gloves come off at the 5% level -- or, in the least, Aubrey needs to invite Carl to a white-gloved lunch before they throw down the gloves and declare a duel for the future of the energy company. Indeed, a Chesapeake Energy spokesman said on Monday that the company looked forward to a dialogue with Icahn and they had already met on Monday for a friendly discussion.

In any event, beneath the splashy headlines about the battle that pits the "controversial" and "bull-headed' CEO of one of the energy sector's biggest underperforming stocks versus the long-time activist investor, who only has money on his mind regardless of sector, there are several themes that should resonate for energy investors.

From the outlook for natural gas prices in 2011, to the calculations going through the mind of Carl Icahn and the long-range, long-debated strategy of Aubrey McClendon, not even to mention the long-held Chesapeake shareholder frustration, it's all reached its culmination in Icahn's upping of his Chesapeake stock ante.

Here are 2 key questions to explore as a result of the looming battle between Carl Icahn and Aubrey McClendon.

QUESTION 1: Is Carl Icahn making a bet on natural gas prices in 2011?

After the Icahn news broke, Fadel Gheit, an analyst at Oppenheimer & Co., quipped, "Maybe Icahn can use his clout to finally get natural gas to $7."

In fact, several analysts commented on the relationship between Icahn's interest in Chesapeake Energy and the outlook for natural gas market pricing next year. A big comeback by Chesapeake and pay-off in the strategy of CEO McClendon isn't going to occur based on the potential for a significant recovery in natural gas prices.

The Oppenheimer analyst, for one, thinks that natural gas won't come anywhere near the $7 level in 2011 -- with or without the help of Icahn -- and, in a way, that's exactly what Icahn's wants as he figures out how to exact the most value from Chesapeake Energy's assets.

Another energy market expert said that he is in the camp of not expecting natural gas prices to see much movement until the end of 2011.

In the opinion of the Oppenheimer analyst Gheit, "Icahn has at least 18 months during which there won't be a major catalyst for gas prices. As far as Chesapeake specifically, all the hedges are in place and known, and the company has a predictable production forecast without any major discoveries that could change the company's overnight."

Gas prices in the $4 to $5 range won't provide a major value bump for any of the stocks in Chesapeake's peer group. The independent gas producers need $7 natural gas to be attractive on their own.

Based on hedged positions and tax rates on production, Chesapeake estimates that it will earn more money with gas at $4, $5 or $6 in 2011, than with gas at $7 -- with $4 gas providing the best net income scenario per share. Net income per share with gas at $4 is estimated to be $2.45 in 2011; while net income per share with gas at $7 is expected to be $2.11

Yet at the more holistic level of trying to peg what will serve as the next major catalyst for a move up in these companies, there's another view of companies like Chesapeake operating in the current price environment, and for investors wondering whether vast drilling programs make economic sense.

Oppeneheimer's Gheit says that he isn't as negative as some other Chesapeake analysts about McClendon's long-term game plan. He thinks that it's "not a matter of if it works, but when," yet that leaves Icahn time and opportunity to maneuver.

"There's hope that gas prices recover next year, but the light is getting dimmer and the tunnel longer," Oppenheimer's Gheit said. "The best thing that happens for both tomorrow is $7 gas, but it's not coming. Yet Icahn is looking at his watch and McClendon at the calendar."

So what's the catalyst for Chesapeake Energy given the pessimists' outlook for natural gas and the predictable nature of Chesapeake's assets? The answer is obvious: Carl Icahn


the catalyst, and he's got little competition.

QUESTION 2: What's Icahn's checkmate move on the Chesapeake Energy chess board?

After the acquisition of

Atlas Energy




(CVX) - Get Report

, the latest round of M&A chatter pegging the next independent oil and gas producer to fall began.

Amid the chatter, the consensus view was that Chesapeake Energy was not a likely target for a takeout. The logical speculation in the energy market is that with McClendon's strategy of funding Chesapeake's future with its present assets through joint ventures with a host of foreign partners, the company will find it hard to "make it to the chapel" on time for a marriage, since it already has so many girlfriends.

McClendon's strategy has been to sell off stakes in a myriad of assets to players like China's


(CEO) - Get Report


The joint ventures allow McClendon to play the game of de-levering the balance sheet after big cash spends and fund drilling, but it's not a road to unlocking short-term value in shares.

Icahn may want to throw the joint venture strategy by the wayside, relegating it to a necessary evil in the misguided management approach of McClendon. At the same time, with a wholesale takeout of Chesapeake unlikely, Icahn might try to sell a meaningful block of assets to a foreign player.

A foreign company like


(TOT) - Get Report

might want to come in and buy a large independent, but at this point, they are still moving up the learning curve when it comes to valuing and running these independent land-based U.S. drillers, Oppenheimer's Gheit said. "These guys are just learning horizontal drilling and fracturing, and are basically familiar with the lay of the land, but not at the point of making a big acquisition.

Icahn and a major foreign player could meet somewhere in the middle over a sale of a significant block of Chesapeake assets. "Icahn is looking five quarter from now, whereas a foreign energy player like a Total may be looking at the landscape five years from now," Oppenheimer's Gheit said.

Therefore, if Icahn can line up the Chesapeake shareholders while McClendon lacks a short-term catalyst for unlocking value in Chesapeake shares, there might be the opportunity to package a block of Chesapeake assets.

The Chesapeake chess board includes a great set of pieces: for all its balance-sheet issues and charges of management cronyism, Chesapeake is the only one among the independent producers with a top position in all the key U.S. shale territories.

"We're not talking about the whole thing, but say $10 billion. Looking across the Marcellus, Haynesville and Eagle Ford operations as a targeted block of assets, Icahn can zero in a package of properties and say, 'OK, let's sell it,'" Oppenheimer's Gheit speculated.

Icahn isn't in the business of running companies, but he does love the game of taking a stock that is selling at $24 -- and a stock which many people believe could easily be worth $35 to $40 -- and figuring out how to get the stock there.

Part 2: This is the first part of a two-part story on Carl Icahn and Chesapeake Energy. Click here for Part 2.>>

-- Written by Eric Rosenbaum from New York.


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