Chesapeake Energy: Why Dan Loeb is Likely Long Equity

Chesapeake Energy: Why Dan Loeb is Likely Long Equity


Daniel Loeb of Third Point LLC has acquired 5 percent stake in the embattled natural gas producer Chesapeake Energy Corporation (NYSE:CHK), according to some reports. Activist investor Daniel Loeb listed Chesapeake as his firm’s fourth largest position. According to Sam Forgione and Svea Herbst-Bayliss of Reuters, Loeb could have acquired the stake through a combination of buying equity, derivatives, and debt.

Michael Mauboussin’s 10 Attributes of Great Investors [Pt.1]

michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkIn 2016, Michael J. Mauboussin completed his 30th year on Wall Street. The analyst, who was working at Credit Suisse at the time, decided to celebrate by reflecting on the ten attributes of great investors he had observed over the previous three decades. He published his ideas in a report in August 2016. I've summarised Read More

 Chesapeake Energy Corporation has been in the news for the past few months for all the wrong reasons. CEO Aubrey McClendon is accused of taking about $1.3 billion in personal loans from a company that does business with Chesapeake. The company is also looking for a potential buyer to sell some of its assets to cover the shortfall. There has been management reshuffle, too.

The natural gas giant’s share prices declined 38 percent since July last year, now trading at $19.36 with a market value of $12 billion. In 2008, shares were trading close to $70.

Chesapeake’s relatively undervalued stock and recent management restructuring should have created the conditions Loeb looks for. Though no one is sure whether he is long or short in Chesapeake, many sources reiterate that he is long in all his top positions which include Yahoo, gold, Delphi Energy Corp. (TSE:DEE) and Apple Inc. (NASDAQ:AAPL) and now Chesapeake. According to the sources, Loeb’s move into Chesapeake occurred last month. We did not see a position in Chesapeake as of May 31st Additionally, sources told us they are pretty sure he is long and not short. Furthermore, Loeb very rarely shorts stocks, so we have further reason to believe that he is long.

It is unlikely he is long the debt because the yield is not very attractive. 2020 senior unsecured bonds yield less than 7%.

In long positions, the investor expects stock prices to go up; in a short position the share prices are expected to decline. In the first half of this year, Loeb’s biggest portfolio, Third Point Offshore Fund, jumped 3.9 percent while the Third Point Partners Fund grew 4.5 percent and the Third Point Ultra fund was up 6 percent.

Looking at his history, Loeb is likely to fight another boardroom battle after amassing a big position in Chesapeake. It is unlikely that Loeb amassed such a large stake in a company with severe corporate governance issues, without planning to pressure the board and management. Recently, he gained three board seats in Yahoo, including one for himself. Daniel Loeb also played a key role in ousting the former Yahoo! Inc. (NASDAQ:YHOO) CEO Scott Thompson after discovering that Thompson had falsified his resume.

The two largest shareholders in Chesapeake, are Carl Icahn and Mason Hawkins of Southeastern Asset Management. They both find Chesapeake’s stock undervalued, and they welcomed Third Point’s involvement in the company.

During an interview, with CNBC, Icahn said, “I think natural gas in the next few years is going to go quite a bit higher, and Chesapeake will be there to take advantage of it… I would not sell it at all now”