Chesapeake: Is Management Sending Hints Of A Complete Buyout?

| About: Chesapeake Energy (CHK)

So, today we hear that Aubrey McClendon is going to retire effective April 1, 2013, and the stock price is up $2 on the news. Shorts on 100 million shares will be scurrying to cover over the next few days. This is a new data point in my thesis that the company will be bought in total, but that the stock price has to come up further in order to get in the range of a rational $40-50 per share offer.

Any serious buyer would want to have the "McClendon problem" out of the way before an offer.

We are a month into the new year and still no word on the major asset sales that were to be complete "by the end of the year or early in 2013"

There is no nicer feeling to an investor than to wake up on a Monday morning to find the price of one of your favorite holdings has doubled. The very first thought is that the quote must be a mistake. Then you look at the news, and there it is, "XYZ, inc has offered to buy ABC, Inc. for...." a lot more money than you paid for the stock.

Chesapeake Energy (NYSE:CHK) is the second largest natural gas producer in the U.S. The company is extremely leveraged and has been the subject of serial management indiscretions over the recent past.

CHK seems to be sending some hints that a total buyout could be in the process of negotiation.

Below are comments by Nick Dell'Osso, CFO of Chesapeake Energy in the 3rd quarter earnings conference call, my interpretations are in italics:

You may have noticed that we reduced the content of our outlook on schedule A at the back of our earnings release and are not currently providing guidance for asset sales for the remainder of 2012 and in 2013. Going back about a year ago, we added this incremental information on those subjects, in part because we expected asset sales to provide funding for the majority of our drilling program.

Why would CHK stop guidance on asset sales progress for the fourth quarter into the 1st quarter of 2013? It would make sense to do this if all the separate asset deals were put on hold pending a total buyout negotiation. The last sentence of the above paragraph is a reason why they provided the information in the first place, not a reason why they have stopped providing said information.

As we approach the end of 2012 and look forward to 2013, we expect to continue our announced asset sale goals as previously identified, but also expect to have sufficient visible liquidity on hand to cover the amount of any funding gap in 2013 as we complete our asset-based transformation and reduce our debt to no more than $9.5 billion.

I'm not sure what Mr. Dell'Osso said in the above paragraph, so I will consider it "fill" for the conference call.

The previous guidance we had around the overall magnitude of asset sales in 2012 to 2013 of $17 billion to $19 billion is still consistent with our plans in Q4 2012 and 2013. However, I will note that it is possible that some of the oil and gas sales transactions scheduled for Q4 could actually close in Q1 2013. We remain absolutely committed to reducing our net long-term debt to no more than $9.5 billion.

$17-19 billion worth of asset disposal is a big number that involves a large number of deals both small and large. It is hard to swallow that all activity has ceased. Unless, of course, there is a "Big Guy" urging them to put a hold on all deals.

And if not achieved by December 31, 2012, we expect to accomplish this number one goal in early 2013.Our changes to our outlook also include a 1 million barrel increase in projected oil production for 2012, which reflects better than expected production results and is aided by minor delays in the previously anticipated completion of asset sales. These delays in closing are also the primary contributor to increasing our drilling and completion CapEx guidance and our outlook on schedule A by $250 million on the high end of our previous range. However, I'm pleased to report that we were able to offset that increase by an equal $250 million decrease in projected leasehold spending.

Now, Mr. Dell'Osso wants us to believe that the asset disposal program will resume, and kind of indicates that it will be complete early in 2013.

In the last paragraph: the "delays in closing contribute to an increase in drilling and completion CapEx..." Why? One would think that the delays in closing these deals would cause a reduction in CapEx, not an increase. Fortunately the increase in CapEx is offset by a matching decrease in leasehold spending.

I can imagine a potential buyer saying, "Keep drilling, but stop buying leases."

Earlier in the transcript Mr. Dell'Osso discusses the $2 billion term loan that, "will provide the company with additional financial flexibility through Q4 of this year and into next year as we balance the timing of asset sales and other balance sheet considerations."

Obviously the company needs these asset deals pretty urgently. For all of them to be delayed, at once, in a time of great need seems to suggest a total deal is in the works.

Other indications that a total buyout could be under way are:

After the "slippery deals" uncovered during the past couple of years, Aubrey McClendon will never be a credible CEO of a public company again. Much less in total charge of the company he founded.

Carl Icahn, if anyone has seen recent video, is no spring chicken. You might argue that Carl would like this deal done as soon as possible. Carl has added to his original position, which give me a warm, cozy feeling.

At least one new director has made a major open market purchase of CHK common stock.

Tom Ward, the CEO of Sandridge Energy (NYSE:SD) and McClendon's co-founder of Chesapeake, is going through the same thing that McClendon has gone through over the past couple of years. I think it is perfectly reasonable for these two to team up again in a private energy enterprise. They would certainly have more than the original $50,000 used to start Chesapeake.

Any stock play on a possible buyout is a risky long shot. Jim Chanos has recently advised to avoid leveraged natural gas companies like "the plague." On the other hand, Chesapeake is more an oil company today (61% of revenue) than a natural gas company and is likely to get more that way in the future.

My personal opinion is that the company is worth $40-50/share in an acquisition. That number is so large relative to the current price that any acquiring company's BOD would get tarred and feathered by their shareholders if they offered that price from this level. Look for, and pay attention to, any unexplained little run-ups in CHK stock price. If a buyer agreed that CHK is worth $40-50/share, they would have to gradually drive it to somewhere near $30/share in order to avoid the tar and feathers.

If the CHK assets are worth what the company thinks they are a major oil company could offer $50/share and recover a major piece of the cost by selling assets after the closing and still have significant resources to develop.

If there is to be a buyout it will likely be done by the end of the 2nd quarter of 2013, or sooner. If it doesn't happen by then I will sell and never look back.

I'm playing it with a complex of some shares and a variety of call options at different strikes and expirations.

Disclosure: I am long CHK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long CHK call options