Chesapeake Energy logo

Chesapeake Energy Corporation (NYSE:CHK) has been one of the most talked about companies on the market as of late and its plight is certainly one of the most interesting. After corporate scandals and emergency loans the company’s share price is rallying on the back of an activist investment from Carl Icahn.

Chesapeake’s biggest upside is still the possible acquisition of the firm. Any firm seeking to do that faces a mountain of problems that might delay or ward off their attraction entirely. The company is struggling under a mountain of debt, about $13 billion, and is still running massive cash deficits. It is hoped that Icahn’s involvement in the company and the assets sales plan will help to solve this problem but $13 billion is still a large amount to take on.

The company is involved in an intricate web of joint ventures and it subsidiaries that are not wholly owned raise problems for buyers. First of all it increases the complexity of the deal and makes valuation a harder thing to describe accurately. The second is that any company getting involved in the administrative Byzantium will have to rely on other firms for their success.

Chesapeake’s biggest asset is its position as the number 2 producer of natural gas in the United States as that market explodes. The explosion has led to the all time lows in gas prices that have both positive and negative impacts. Any company looking to get involved will be assuming that they’re taking a hit now for a hugely profitable gas industry later.

The first problem is one of timing. If Icahn’s plans work well and debt is reduced it could lead to rising value that could reduce the expected return from the deal. If a firm jumps in too early their money may be lost on debt dealings. The second problem is a justifiable expense in kind for companies comfortable enough to assume the third problem will disappear in the coming years.

Chesapeake, even after its valued losing year, still has a market cap of over $10 billion. That’s a great deal for any company to sink in based completely on future performance with a negative return now. There are only a handful of companies that might be willing to get involved and the most likely candidates are the large energy companies.

Firms like Chevron Corporation (NYSE:CVX), Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell Plc (LON:RDSA) are large enough and buoyant enough to consume Chesapeake’s assets and debts without worrying about the hit they’ll take if prices don’t ramp up.

The firms are already involved in the energy sector, a plus, and if natural gas does become a viable alternative to oil in the coming years will need to invest in the area in order to succeed. That means the firms would benefit from buying a company like Chesapeake who has done the ground work and is undervalued by the standards of a presumed future gas high.

There are factors that might ward them off other than the company’s financial problems and the gas low. The firm is still buried deep in accusations of bad corporate governance. That will remain high on the list of downside risks as the goings on at Chesapeake remain a mystery to most outside the company despite recent journalism.