It is no longer news that Chesapeake (NYSE:CHK) has gone through a trying experience. Stockholders continue to wonder whether or not the company can bounce back after revealing Aubrey McClendon's debt issues earlier this year. This revelation was like the mythical Pandora's Box, as it led to a variety of trouble for Chesapeake that it could not simply undo.
It seems that Chesapeake may finally be ready to rebound from these events and restore a semblance of order and balance to the company and the stock. Billionaire investor Carl Icahn and Southeastern Asset Management have stepped in to offer an effective solution for halting the downward trend of the company. It may interest you to know that Carl Icahn and Southeastern Asset Management did this in grand style by acquiring a 7.6% and 13.6 % stake of its common stock respectively.
As part of their move to revive Chesapeake, Carl Icahn and Southeastern Asset Management have pushed out four of nine directors. This is the board that oversaw many of McClendon's activities. Also, one director was a former senator, and another was a former governor. Neither of these two had prior experience in business management. These are two of the directors who will likely retire from the board, and I believe this is fantastic news for Chesapeake investors. Icahn and Southeastern Asset Management are trying to rid the company of the poor organization that has been hurting it.
Interestingly, Chesapeake's management has agreed to a reconstruction of the board. McClendon will have to vacate the seat of Chairman, but he will remain the Chief Executive Officer of Chesapeake and a director at the same time. Some people may be surprised that McClendon is still allowed a stay in the management. I want to state that McClendon remains an important asset to the future profitability of Chesapeake, however, even though some of his past actions were questionable. The fact remains that he played an important role in Chesapeake's expansion. As a gas producer in the United States, it has become second only to Exxon Mobil (NYSE:XOM). Thus, having McClendon is good for Chesapeake, and a new system of checks and balances will surely curb his excesses.
As the restructuring continues, I believe this will only have positive effects on the stock. The company needed something major to happen, and Icahn and Southeastern Asset Management understand that. Their massive changes will hopefully help it recover from the great losses from earlier in the year.
As part of the efforts to heal the ailing stock, Chesapeake will be selling some of its assets, which will help solve the problems of growing debts and a reduction in cash flow. One of the assets up for sale is the 57,000 acres of producing wells and leaseholds that Chesapeake has in Woodbine Sand Play located in East Texas. The oil and gas fields no longer represent a core business for Chesapeake. With plans to reduce its debts to about $9.5 billion by the end of the year, furthermore, the only logical thing is to get rid of operations that cause it to deviate from focusing on its core businesses. Michael Kehs-a Chesapeake spokesperson-claimed, "While highly prospective, the company no longer considers [the area] core."
Continuing to focus on its core business, Chesapeake revealed another intention to sell Chesapeake Midstream Partners (CHKM), a spin-off that it started about two years ago. Interestingly, while many shareholders are in support of the sale, new shareholder Carl Icahn has called for a reexamination of the sale.
If you bring all the facts to the table, it does not take much analysis to observe that it would not make much sense for Chesapeake to sell the spin-off, at least not now. For one, the mere fact that Chesapeake Midstream Partners have Chesapeake as its parent company will tarnish its reputation with the bad situations surrounding Chesapeake. Thus, it is doubtful that the spin-off will get its real worth in the market if it is placed for sale. Therefore, I agree that this sale would not be beneficial to the company and hope that it does reconsider, as recommended by Carl Icahn.
Even more sales are beginning to surface. Chesapeake plans to sell its 337,000 acres in the Utica and Pleasant Trend fields in Ohio as a way of raising cash to meet some pressing concerns. However, it is still too early to know what the reaction of stockholders will be. It is safe to assume that the reactions from will be mixed because Chesapeake may be invariably selling itself piece by piece if it continues to sell its assets at such a rapid pace.
Looking a Chesapeake's competitors, it may interest you to know that BP (NYSE:BP) is in trouble, especially with mounting tensions between it and its Russian partners in the TNK-BP joint venture. In fact, it intends to sell its 50% stake in the joint venture as soon as it gets favorable bids from potential buyers. No one has publicly shown any interest in wanting to buy BP's stake in the alliance, however, so this may have a fairly limited impact on the stock for a while.
Oil India claimed that it may purchase stakes in Chesapeake and ConocoPhillips (NYSE:COP). T.K. Ananth-the Finance Director for the Indian firm-claims, "We have appointed bankers and also identified the regions. We are moving in the right direction ... so, hopefully this year we will have some acquisition finally." Oil India has set about $1.27 billion dollars aside to be used for acquisitions in foreign countries. This development is only beginning to develop, so its impact on the stocks will quite likely be inconsequential. It is something for investors to watch closely though.
Chesapeake may not be out of trouble yet, but it certainly is moving in the right direction. I believe the massive restructuring will raise confidence in the stock and help it finally start improving. As it is currently rebuilding, however, everything remains quite risky. At the very least, the current news is showing much better potential for the future of this company and the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.