Chesapeake Energy Corporation (NYSE:CHK), America’s second largest natural gas producer, is losing a lot of investor love these days. We reported in a separate article that experts and analysts are not very hopeful about Chesapeake Energy Corporation (NYSE:CHK)’s chances of finding lucrative bids for its Utica shale land. Stifel Nicolaus has just downgraded Chesapeake from Buy to Hold, based on a similar theory. SF’s analysis cites predictable reasons for this demotion. The company is not comparing well to its peers. Moreover, chances of gaining any appreciation in share price from further asset sales are not looking bright. In such a scenario, the valuation will be driven from EV/EBITDA instead of Price/Net Asset Value, thus making it even harder for CHK to move up in price in the stock market.
Citi’s research also mentions the positive effect of shareholder activism on Chesapeake Energy Corporation (NYSE:CHK). It doesn’t name any names, but Carl Ichan and Southeastern Asset Management‘s role in shaking up Chesapeake’s administration is well known. Southeastern Asset Management, founded by Mason Hawkins, is Chesapeake Energy Corporation (NYSE:CHK)’s largest shareholder, with a claim to 13.9 percent of CHK’s stock, while Ichan owns a 7.6 percent share in the company. Both shareholders called for probing into the CEO’s accounts and recommended changes to the board of directors. The activism helped the embattled company to outperform its competitors over the last months, and the share price rose 21 percent, and it also brought major changes to the board. Chesapeake is actively selling assets to ease debt and close the gap between expenditure and revenue. Stifel Nicolaus does not expect big returns from these sales, as the natural gas explorer has recovered from its balance sheet crisis and now focus will shift to EV/EBITDA valuation. Discount offered on EV/EBITDA basis is not attractive, as it is larger than other large cap energy peers.
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SF thinks that Chesapeake Energy Corporation (NYSE:CHK) has sold out the best valued assets and getting good a price for the remaining ones (Miss Lime JV, gas assets, undeveloped acreage, possibly the oil service assets) is not likely. About $11.6 billion of assets out of the targeted$13-14 billion have been sold so far. More assets will be sold to close the budget shortfall of $3.1 billion in 2013.