Disclosure of a legendary investor’s 5.8% stake boosts the stock price of Chesapeake Energy (CHK) by 8% in one day and may have implications for unlocking value in peer stocks including buy recommendations Devon Energy (DVN), EOG Resources (EOG) and Encana (ECA). More than two decades ago, Mr. Icahn’s investment influenced the restructuring of Phillips Petroleum, now part of buy-recommended ConocoPhillips (COP) and USX Corporation, now a separate U.S. Steel (X) and buy-recommended Marathon Oil (MRO).
CHK stock has appreciated only modestly since the chairman sold all his stock at the bottom of the market in October 2008. At a low McDep Ratio and low credibility, CHK is a classic target for a proactive financier. Meanwhile, DVN has already undertaken major actions to unlock value as it has concentrated its resources, retired debt and is repurchasing stock at a rate of about 0.5% a month. Though EOG manages its finances conservatively, an activist investor might advocate taking on some debt to finance stock repurchase. ECA offers attractive long-term value concentrated on a growth resource while high cash flow multiple at today’s low natural gas price may be holding back stock price.
A widening gap in McDep Ratio between small cap and large cap stocks in the past year attests to rising resource value. Logically, those stocks at the smaller end of the large cap spectrum become doubly interesting for both fundamental value and the increasing likelihood of being targeted for acquisition, leveraged buyout, or stimulus from a change agent.
Originally published on December 21, 2010.
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