Icahn Offers a Hedge for Chesapeake Energy

[BDP]

Interesting:

http://online.wsj.com/article/SB1000...336142456.html

[Doug Loudenback]

I don't have a WSJ account so couldn't get very far. What's the gist of the article, BDP?

On Edit: I did find this interpretation here: http://247wallst.com/2010/12/06/is-c...hk-lgf-bx-dyn/

[pickles]

Not surprising.

[Pete]

CHK has a ton of debt, negative cash flow and gets 95% of it's revenue from natural gas which is really in the dumper.

They've had to keep issuing stock to fund their continued expansion and Icahn has been buying it up.

His m.o. is to acquire a significant number of shares, then lead other shareholders in revolt of the top management and board, usually when he thinks they are undisciplined in their spending and debt accumulation -- areas where CHK has been criticized in the past.

[BDP]

I don't have a WSJ account so couldn't get very far. What's the gist of the article, BDP?

Sorry about that. I read it in the hard copy and just googled the headlines to get the link. Sorry it didn't work.

Pete summed it up well, but if you want to read it, try the link at the top of this SERP:

http://www.google.com/search?hl=&q=I...US398&ie=UTF-8

If not here's a highlight:

[Spartan]

Icahn targeting Kerr McGee was also the start of a downward spiral in losing a different company. Great guy.

[Swake2]

This is profoundly bad news. But not unexpected.

[Pete]

Actually, Icahn usually pushes towards the things that CHK is already starting to do itself: reign in acquisitions, sell assets (or in this case, enter into several JV's) and drive down the debt.

However, I'm sure Icahn hates the way CHK spends money and I hope they hurry up and finish the development they have underway because it may be winding down in the near future.


Their property acquisitions and development have been mostly a great boon to that part of OKC but there is no way they can justify most of it from a business standpoint.

I calculated today that they have spent more than $55 million just to acquire property in that Whole Foods triangle, and that doesn't include buying out leases, swapping other properties and demolition -- not to mention construction.

Effectively they paid $2 million an acre (!!) for those 27 acres. In total, that is almost three times the last assessed / sold values -- and that was just to tear it all down and get the underlying dirt.

[MustangGT]

Icahn is VERY BAD news. Coporate raider who claims to be looking out for the stockholders. He looks out only for his own pecuniary interests.

[adaniel]

Not surprised one bit.

From my standpoint just in the O&G field, I know that Chesapeake has either letting leases expire or selling off some of their deep rights in Western Oklahoma (the Cana/Woodford Shale Play which is kind of the new hot gas play right now) at fire sale prices over the past year or so; as in less than a quarter on the dollar for that they were aquired for in the first half of this decade. That shows me that they simply do not have the cash flow to complete deep wells, their bread and butter business...a wee bit concerning from an OKC standpoint.

The funny thing is that they're plenty of companies that are out there drilling wells and making some money. Profits can be made in this enviornment if you keep overhead low, i.e. aren't having a ton of debt hanging over your head. And just casual observation from looking at OCC filings from 2007 to now they have gone from the biggest driller in the state to probably not even top 5. I can't speak personally for their situation in other states, but I do know they along with other companies have hit a buzzsaw in the Marcellus Shale are (WV/PA/NY) over concerns on hydraulic fracturing. Companies that are in sound industries yet still have to sell off assets or stocks to pay bills are prime takoever targets. If Ican whips up enough discontent with shareholders and gets his grubby little hands on CHK its bad news for OKC. He is Boone Pickens without the charm.

[KTB]

As long as CHK continues to issue stock to provide income they will be targets. They will just continue to increase their debt and further dilute their value. They need to decrease spending, buy back some stock, and focus on their core product which is not RE investing/development. Although great for the city, their development projects will probably never be in the black. CHK is ripe for a take over and Icahn isn't the only one with eyes on it. All of the negative press concerning CEO pay and other expenditures by the board (purchasing AM's map collection) isn't helping either.

[onthestrip]

I agree with the last few posters. Im not too knowledgeable on their O&G businesses but I have never heard great things about their practices, unless of course you are talking to an employee. However, knowing a little more about the real estate business I can say what theyve done around their campus as far as acquisitions and development go, is quite reckless. Im surprised there has never been much shareholder rumblings about Chesapeake Land Co. Then again, shareholders did allow a $90+ million bonus to Aubrey after a year when the company's stock tanked.

[Spartan]

The interesting thing is that if Chesapeake has to abandon its development objectives, I don't see why they couldn't strike a deal with a developer for all the land it owns. Free land. They could just give it to a local developer with the right intentions, such as Humphreys, and help that developer build himself up as well, which will benefit downtown. And it's not like their development projects are even intended to break even anyway.

Definitely agree though that it may be best for OKC if Chesapeake focus on being CHK right now.

[Pete]

The good news from a real estate development standpoint is they have already acquired just about everything they want/need. What concerns me is their ability to develop it -- something that has been a risk from the word go. At least they've built some things back... If Icahn came calling a couple of years ago we might have nothing but a bunch of vacant buildings and scraped lots.

As Spartan said, they may very well need to partner with a real estate development company. They own those 27 acres around WF, plus about another 30 with the various NH Plaza properties. Then, they have hundreds of acres east of their campus.

If I was a major stockholder, I'd want management focused on running their core business. They've already created a great environment for their employees.

[MikeOKC]

Icahn is a guy you love to hate. However, an Icahn is what CHK needs right now. He's not out necessarily to takeover CHK. He raids poorly run companies in an effort to gain the influence to change their direction for the better, which improves the company, which improves the stock price --- which lines the pockets of Carl Icahn. In other words, he sees potential of a stock price bump with major changes and with 2.5% of the company already, Carl Icahn will soon have influence. In the Kerr bloodline or not, it's been my opinion for some time that AM cannot survive a truly independent Board of Directors. It's filled now with buddies and protectors and Icahn's raiding can change that - in a heartbeat.

[bombermwc]

Yeah but one thing he also does is sell off parts of companies until they are a shell of what they once were. That also means closing offices. Hell, look at what he did with KMG. Everywhere he goes, you see him splitting companies up and making a mess.

[NickFiggins]

It's not as if something along this line was expected. The business practices at CHK are unsustainable in the long term, and the debt load makes them quite venerable to a takeover. With Nat Gas prices at sub $5 for such a long period, their aggressive nature didn't make a whole lot of sense. The best case scenario for OKC would be a merely a removal of AM, and getting CHK's balance sheet in line. Its interesting to look at the difference in how Devon and CHK expand as far as real estate; Devon with cash and CHK with a mountain of debt.

[Spartan]

Well it seems almost like the whole point in Aubrey's Nichols Hills makeover vision is to create a work/play/live environment where CHK employees live and play where they work, and try and build off of that creative energy that powers Google--if he does a good enough job, maybe he thinks any potential takeover attempt will want to at least keep the company where it is.

[Pete]

Google bought most of it's campus from a failing Silicon Graphics... I interviewed with SGI a bunch of times on that site and apart from some trails that tie into the surrounding public spaces, there isn't really much there other than office buildings and the typical fitness centers. Google has added more buildings since the initial purchase but hasn't developed any sort of real estate to be used as an investment.

I've never known of a company trying to rebuild an entire community around it's HQ through private real estate development... And spend in the neighborhood of a billion dollars to do it. AND in an area that was already considered one of the nicest areas in town to begin with.

If you were an investor, it would be very hard to justify this massive expense. Sure, partner with the community to make it a better place to live and rely on the fact you are employing thousands of well-paid people to drive new businesses in the immediate area to cater to them.

CHK doesn't seem to have much problem getting quality people and they have yet to really do much with the huge majority of the property they have acquired. An easy argument to stop spending on real estate development is that they already have a fantastic campus with tons of amenities and the surrounding area is plenty nice. Instead of spending hundreds of millions on developing retail and hotel space, how about getting your business out of debt and turning a profit?


Personally, I'd love to see them see out their development vision.

But I can just imagine AM standing in front of Icahn and a bunch of furious stockholders who have been watching their shares go down and flounder and trying to justify buying properties for three times their value in order to tear them down and build something pretty near your HQ.

[MikeOKC]

...A group of 17 billionaires joined “The Giving Pledge,” a long-term philanthropic endeavor organized by America's two wealthiest citizens, Warren Buffett and Bill Gates, promising to give away most of their fortunes.

Among those who announced their participation today were Facebook founder Mark Zuckerberg, investor Carl Icahn, former junk bond kind Michael Milken and film maker George Lucas.

http://newsok.com/oklahoma-city-bill...#ixzz17l48KNqF

[Spartan]

Google bought most of it's campus from a failing Silicon Graphics... I interviewed with SGI a bunch of times on that site and apart from some trails that tie into the surrounding public spaces, there isn't really much there other than office buildings and the typical fitness centers. Google has added more buildings since the initial purchase but hasn't developed any sort of real estate to be used as an investment.

I've never known of a company trying to rebuild an entire community around it's HQ through private real estate development... And spend in the neighborhood of a billion dollars to do it. AND in an area that was already considered one of the nicest areas in town to begin with.

If you were an investor, it would be very hard to justify this massive expense. Sure, partner with the community to make it a better place to live and rely on the fact you are employing thousands of well-paid people to drive new businesses in the immediate area to cater to them.

CHK doesn't seem to have much problem getting quality people and they have yet to really do much with the huge majority of the property they have acquired. An easy argument to stop spending on real estate development is that they already have a fantastic campus with tons of amenities and the surrounding area is plenty nice. Instead of spending hundreds of millions on developing retail and hotel space, how about getting your business out of debt and turning a profit?


Personally, I'd love to see them see out their development vision.

But I can just imagine AM standing in front of Icahn and a bunch of furious stockholders who have been watching their shares go down and flounder and trying to justify buying properties for three times their value in order to tear them down and build something pretty near your HQ.

Well I'm not sure it was ever intended as an investment, Aubrey would say he literally thinks his company will continue to grow so fast that they need the land for more office space. The problem is that he was too nice to all of the surrounding property owners who really owe Chesapeake a TON, which sucks because some of them are very ungrateful and still ticked about being payed 3 times what their land was worth and then land-swapped. Virtually every business he land-swapped with now is in a MUCH better space..ahem Pearl's Graveside..

[Pete]

Building Classen Curve & Whole Foods and buying Nichols Hills Plaza (have submitted proposals to rebuild as shopping/housing) and most their other properties has nothing to do with growing their campus.

And they've said for quite a while they want to build housing on the property east of their HQ.


Don't get me wrong, I'm all for this as long as they see it through. But I've said from the beginning it was hard to justify from a business perspective and I was worried either economics or shareholders were going to shut the whole thing down before they get anywhere near what they had intended.

[SkyWestOKC]

My friend who works up there says the amount of waste (monetary) is astounding. They'll let you pay for just about anything through the company card as long as you can find a remote link to the business and it will be approved. Plane ticket to Vegas for the weekend? "Oh yeah, I was meeting a client" For them that's close enough and they won't ask any questions as to who, or what they, the "client", were interested in.

He said it's comparable and in some cases worse than government waste.

[soonerguru]

My friend who works up there says the amount of waste (monetary) is astounding. They'll let you pay for just about anything through the company card as long as you can find a remote link to the business and it will be approved. Plane ticket to Vegas for the weekend? "Oh yeah, I was meeting a client" For them that's close enough and they won't ask any questions as to who, or what they, the "client", were interested in.

He said it's comparable and in some cases worse than government waste.

I can assure you that government employees cannot spend money like this. There is no way to spend government money like this -- at least at the state level.

[SkyWestOKC]

I mean, not in that exact form. But the government waste is comparable. At Tinker, you get paid for a full hour's worth of work if you are clocked in for 1 minute of that hour. If your supervisor allows you to leave one hour early, they'll let you stay on the clock until 1 minute after so you get credit for the full 60 minutes.