Chesapeake Energy Board, Shareholders Now In Tandem: BAML

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Chesapeake Energy Corporation (NYSE:CHK)’s board and shareholders are believed to be singing in unison following the resignation of CEO Aubrey McClendon.

The Co-Founder of the Oil and gas company was seen as a figure that polarized the relationship between the shareholders and the board.  However, now that he is leaving the company within two months, it seems as though the strings of bonding are once again being fastened.

Chesapeake Energy Board, Shareholders Now In Tandem: BAML

The company has been in the process of disposing assets, having ditched quite a number of them in 2012, in exchange for a value estimated at $12 billion. Chesapeake Energy Corporation (NYSE:CHK) scheduled to continue with its asset disposal through 2013.  Many had started questioning how swiftly the $13B cap company would completely finish this process. However, a cordial relationship between the board and shareholders is likely to speed up the process thereby reducing the risk attached to the stock. Currently, Chesapeake ranks among the riskiest stocks in the Oil and Gas industry.

In a report published Tuesday, Jan. 29, Bank of America Merrill Lynch analysts,  published a report reiterating a Buy rating and maintaining a price target of $36 per share. The analysts are optimistic that the latest developments at Chesapeake will likely accelerate the disposal process, which should work in favor of the company’s cash flows, thereby reducing risk.

“While not significant to underlying value [the resignation of Aubrey McClendon] likely removes a weight of negative sentiment that has left Chesapeake Energy Corporation (NYSE:CHK) as one of the largest net short positions of the large US oils. On the margin we expect the overhang to partially unwind and may explain a post market rebound in the stock of ~10%. It also clears the way for a reconstituted board to reset strategy that at a minimum accelerates asset sales. In the extreme an outright sale cannot be ruled out,” the analysts wrote.

The analysts backed their unique price target of $36, which is currently the highest stating that the company’s net asset value (NAV) tramps enterprise value (EV) significantly. Chesapeake’s most recent rating update came from Stifel Nicolaus research which upgraded the stock from Hold to Buy, with a price target of $25.

BAML analysts also pointed out that despite the overwhelming positive difference between NAV and EV, the route to releasing value required confidence in the $18-19 billion of assets sales committed by management in 2012/13 at the same time as capital discipline was imposed by a new board. The analysts also noted: “with Aubrey’s departure we believe credibility of these targets will immediately step higher not least as a majority of the boar d represents ~25 percent of the shares”.

The target for the current year promises a 20 percent reduction in a forward multiple that at ~6x is not obviously cheap compared to the  peers. However, the upside from aggressive disposals is the catalyst that stands to re-rate the shares.

The main target according to BAML is to close the gap between the NAV and share price. This remains a high risk going by the current disposal pace. Nonetheless, the analysts believe that given recent events, the range of options for the sales will likely expand significantly so that expectations of fair value can shift from focus on an inflated forward multiple to release of embedded NAV.

Finally, the analysts believe that Chesapeake Energy’s 2013 CapEx remains at approximately $6 billion. Additionally, McClendon’s reign leaves Chesapeake Energy Corporation (NYSE:CHK) with tons of Liquid  Rich Assets, but cash crunch has derailed the conversion cycle.

“In our view CHK still represents one of the strongest liquids growth stories in the sector. With board interests now fully aligned with transferring associated value to the share price we believe realizing a sum of the parts NAV is a realistic outcome that is not being recognized in the shares,” the analysts wrote.

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