Monday’s Chesapeake Investor Call: Two Big News Items

Carl IcahnChesapeake Energy CEO Aubrey McClendon held yet another investor conference call yesterday morning, this one to quell concerns over Chesapeake’s “emergency loan” of $3 billion from Goldman Sachs on Friday. Among the things to come out of the phone conference were two (really) big pieces of news, one of which will directly affect landowners in the Marcellus and Utica Shale, the other which will potentially affect all landowners with Chesapeake leases no matter where they live.

The first big piece of news that MDN noticed was that McClendon said Chesapeake’s days of “land grabbing” are over and he is now laser-focused on development of the land they have, especially liquids-rich land. In particular, the Marcellus and Utica Shale. McClendon said that Chesapeake’s lease acquisition budget for 2013 is being reduced by 90 percent from what it will be in 2012.

Mr. McClendon was busy explaining to investors Monday that the shift toward liquids-rich shale formations is the fourth transition at Chesapeake since its founding in 1989, and signals a move "from a strategy of asset capture to a strategy of asset harvest."

That harvesting will include the vast amounts of acreage the company has acquired at significant cost in Ohio over the past couple years.

Chesapeake became the dominant driller of the Marcellus Shale in Pennsylvania through an aggressive series of land swaps and flips, often financed through complex loan arrangements and joint ventures.*

Why the focus on the liquids-rich Marcellus and Utica? Chesapeake’s new mission is to get out of debt:

"Believe me, Chesapeake’s management team is very, very focused on getting these funding gap issues behind us once and for all and as early as possible," he said.

The $3 billion Goldman Sachs loan comes with an interest rate of 8.5 percent. If Chesapeake fails to pay back the loan by Jan. 1, 2013, that interest rate jumps to 11.5 percent.*

What does this new focus mean for landowners in the Marcellus and Utica? If you have Chesapeake leases, you’re much more likely to be drilled on. Especially as Chesapeake sells off assets in other shale plays to concentrate on the Utica and Marcellus. So this is good news for Utica and Marcellus landowners.

The second big piece of news is for some a bit unsettling (cue Jaws music to create tension). On Monday the Wall Street Journal reported that activist investor Carl Icahn has taken a “significant stake” in Chesapeake, buying up a meaningful percentage of the company’s stock (see the WSJ story here). McClendon “didn’t discourage talk” on the Monday conference call that Ichan had purchased a position in the company’s stock, perhaps on the theory that the stock price would increase on the news.

The high-profile investor was seen by some as a white knight — or at least, the surest way toward a McClendon-free Chesapeake.

For his part, Mr. Icahn, a billionaire financier whose portfolio has included companies as wide-ranging as RJR Nabisco to Marvel Comics, stayed mum on the Chesapeake rumors, and formal filings of any stock purchases may not appear for several days.

One of Wall Street’s most familiar faces, Mr. Icahn has been known to purchase shares at bargain-basement prices, then demand a management or strategy change that causes shares to rise and allows him to sell his stake at a profit.*

Funny how the terminology changes over the decades. In the 1980s Icahn was known as a “corporate raider,” buying up enough shares to force changes in a company that would increase shareholder value so he could re-sell his shares at a huge profit. But yesteryear’s corporate raiders are today’s “activist investors.” Go figure.

What does Icahn’s involvement mean for landowners? Will he try to force McClendon out of the company he founded? Hard to tell right now. It depends on how much stock Icahn has purchased. And what the Chesapeake board allows him to do. Icahn doesn’t have anywhere near a 100 percent successful track record. Sometimes when he tries to force changes (like ejecting a CEO), and it fails. Sometimes, however, he succeeds. Time will tell.

*Pittsburgh Post-Gazette (May 15, 2012) – Billionaire investor Icahn may buy Chesapeake stock

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