Is Chesapeake Ripe for Icahn-ization? (CHK, LGF, BX, DYN)

If ever there was a plump target for a Carl Icahn-style workout it would have to be Chesapeake Energy Inc. (NYSE: CHK). Icahn’s fight for control of Lions Gate Entertainment Corp. (NYSE: LGF) demonstrates his tenacity for a relatively small-stakes play. Lions Gate’s market cap is less than $1 billion. Chesapeake’s market cap is near $15 billion.

Of course the fight would be tougher, but Chesapeake has lost about two-thirds of its value since mid-2008. What was once a $67/share stock now trades at around $22/share.

The Wall Street Journal notes in an article about Chesapeake that the single biggest buyer of the company’s stock in the first nine months of 2010 is Carl Icahn.  He now owns a 2.5% stake in Chesapeake. As the WSJ points out, maybe Icahn is betting that natural gas prices will rise, but that’s not likely.

Icahn was instrumental in killing The Blackstone Group LP’s (NYSE: BX) buyout of Dynegy Inc. (NYSE: DYN). That deal failed because Icahn and Seneca Capital both thought that Dynegy was worth more than the $5/share Blackstone offered. Since mid-2008, Dynegy’s share price has fallen about 90%.

Chesapeake’s attractiveness is the estimated 16 trillion cubic feet equivalent of the company’s proved reserves and the nearly 14 million acres worth of leases it holds. The issue is can Chesapeake, or any other natural gas producer, make a profit while gas prices remain below $5/thousand cubic feet.

Chesapeake also believes it owns 4 billion barrels of “unrecognized” oil reserves on the leases and properties it now holds. That’s even more reason for Icahn to be interested in Chesapeake.

A report in Platts Energy Economist provides a detailed look at Chesapeake’s history of sales, joint ventures, and production deals, most of which began in 2008. Platts also notes that since the company’s founding in 1992, Chesapeake “has reported a cumulative net income of minus $368 million”, and that’s before natural gas prices fell through the floor earlier this year.

The short version of this story is that the parts of Chesapeake are absolutely worth more than the sum. Management’s course through the past few years has been to cut debt and fund additional production by issuing more stock and selling off assets. That’s basically Icahn-ization without Icahn. He undoubtedly thinks he can do it better.

Paul Ausick