A round table discussion took place on CNBC today about the merits of buying Chesapeake Energy Corporation (NYSE:CHK) stock after news in recent days has revealed some household names in investing are increasing their stakes in the company. The company faces severe challenges both in its fundamentals and in corporate governance.
The CEO of the company Aubrey McClendon is currently being investigated over possible conflicts of interest incurred when he took personal loans from creditors who were also loaning to Chesapeake.
Mike Murphy, a Managing Partner at Rosecliff Capital called into CNBC live talking up Chesapeake’s share price in the wake of BlackRock Inc. (NYSE:BLK) increasing their stake and a rumored investment from Carl Icahn. He believes that somebody will quite possibly make a bid for the entire company and that is the largest upside on collecting Chesapeake shares.
Chesapeake’s stock has dropped by more than 30% so far this year. The calculation investors have to make is whether or not the company’s assets outweigh its massive debts. Chesapeake’s balance sheet does not look good as some of CNBC’s contributors pointed out. The company is already in the middle of a planned asset sell off of more than $20 billion in order to increase the cash held by the company.
Chesapeake’s stock has risen by over 1.5% today as many have been swayed by arguments like those made by Mike Murphy. Investors are excited at the possibility of a complete acquisition of the company. Murphy believes the price point for such a deal would be in the low 20s.
If somebody offers to buy the debt ridden energy giant, or Carl Icahn gets involved in the running of the firm the price point will surely rise. If on the other hand neither of those things happen Chesapeake is a highly leveraged company in an industry that is highly depressed with no chance of quick recovery.
Gas prices are not going to jump overnight. Chesapeake needs some other source of revenue to get it through this slump which quite possibly takes place before a massive boom in the gas industry. The low price is increasing demand but there is an infrastructure delay.
If Icahn is truly interested there’s no better time for him to try and enter the fray. Only two of Chesapeake’s nine directors are seeking reelection in June. That’s an opportunity for any activist.
The jury is still out on Chesapeake but the downside of continued slump seems more likely than a possible buyout of the firm.