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Chesapeake Energy Should Consider Sale: Top Shareholder

Tickers in this article: CHK

NEW YORK ( TheStreet) -- Chesapeake Energy (CHK) should consider offers to sell itself.

That's what the struggling oil and gas company's largest shareholder Southeastern Asset Management advocated to embattled CEO Aubrey McClendon in a Monday letter, as the company struggles with an over 40% 2012 stock drop in the past year.

In a filing with regulators earlier in May, Southeastern changed its status as an investor to "activist," signaling that the investor will look to play a more vocal role in Chesapeake Energy's strategy as it tries to overcome rock-bottom gas prices, a massively indebted balance sheet, and a string of revelations about potential conflicts arising from CEO McClendon's personal investments.

Chesapeake shareholders meet their 2012 savior: Mason Hawkins, CEO of Southeastern Asset Management

"We urge the board to be open to any offers to acquire the whole company," Southeastern Asset Management CEO O. Mason Hawkins wrote in a letter to Chesapeake on Monday. While Hawkins said that Chesapeake Energy shouldn't rush into an acquisition, especially as the value of the firm has fallen far below its net asset value per share, he added, "we don't want to use this large price-to-market gap as an excuse to refuse discussions with potential acquirers who would be willing to pay a price today that recognizes the longer term value of the company."

The letter by Southeastern Asset Management, in addition to its activist stance, signal that investors will ask for a lot more out of Chesapeake Energy even after it agreed to split the chairman and CEO roles and to early termination of a controversial oil & gas well ownership program for McClendon.

Still, Southeastern's letter also gives support to key parts of Chesapeake Energy's strategy, signaling that investor activism may not yield hostility as has happened in Carl Icahn-led campaigns and recent criticism by Yahoo!'s(YHOO) largest outside shareholder.

Hawkins was optimistic about Chesapeake's asset divestiture plans in Monday's letter. "We applaud current management efforts to do an Eagle Ford VPP, sell the Permian assets and do a Mississippi Lime JV at a time of good oil prices. We would also urge the company to accelerate monetizing any assets that are not core to the E&P business (such as midstream & oil services assets) and/or any more E&P assets which are not overly reliant on depressed spot natural gas prices."

Hawkins optimism can be countered, though, and hasn't been seen as a likely acquisition candidate as a whole or in its parts by Wall Street analysts covering Chesapeake.

  • The Eagle Ford VPP (volumetric production payment) of which Hawkins wrote refers to a financial structure that rating agencies consider debt, and that Chesapeake critics highlight as a microcosm of a very complicated, and overly levered balance sheet.
  • The selling of the Permian assets coincides with McClendon's strategy to only play in the drilling basins where the company is No. 1 or No. 2, however, the removal of the Permian assets from the company's liquids production guidance has presented a production forecast for the next two years focused more on out-of-favor natural gas than investors want to see.
  • Chesapeake has wanted to launch an initial public offering for its oilfield services business since last year, yet the oil service business has been the most depressed niche within the energy stock sector as the North American pressure pumping business is experiencing declining margins. This environment suggests that a deal will be difficult to launch, and could raise less than Chesapeake had crowed about last year when it said its oilfield services assets could be worth as much as $10 billion.
  • Many Wall Street analysts contend that between VPPs, joint ventures and other complicated aspects of the Chesapeake balance sheet -- with rights to future production sold off to Chinese national oil companies and European energy giants like Total -- Chesapeake can't even be sold, regardless of the debate about market price versus net asset value.