Chesapeake: Board Shake-Up Spurs Hope

NEW YORK (Trefis) -- Over the past few months, cash-strapped Chesapeake Energy(CHK) has faced several headwinds as its leadership team misgoverned and aggravated the operations already marred by rock-bottom gas prices. A policy crisis and the alleged involvement of its top management in illegal activities have been a characteristic of Chesapeake in the past few months.

The company is set to crown a new chairman and replace as many as four members on its nine-member board, with activist billionaire investor Carl Icahn playing a central role. We think this move will help reinforce its strategies and make it less vulnerable to external factors. This news should bring about some respite to the investors; however, it is still a long journey for Chesapeake to rise to yesteryear's highs from a profitability standpoint, especially with rock bottom gas prices.

The current market price for Chesapeake is converging toward the Trefis price estimate of $19 with improving investor sentiment surrounding the stock.

Many have argued that Chesapeake may become a takeover target for the big oil and natural gas companies, but we believe differently. Chesapeake's overburdening debt is not easy to ignore, even after accounting for the magnitude and quality of its assets, which are largely undervalued due to depressed natural gas prices.

Moreover, the gradual rise in natural gas spot price, which crossed $2.5 per million BTU, has shrugged off heavy discounts that were available for Chesapeake assets a month ago. This might fend off an acquisition threat as there were no takers when it was most lucrative to grab the cheapest gas assets. However, the threat is not completely allayed as the assets are still undervalued.

Over the past few weeks, the stock price has risen with a revival in investor confidence. Currently, the Chesapeake stock is driven more by market sentiment and the general perception about the management's performance, rather than by the company operations. And, hence, the stock is not likely to show its true fair value in the near term until the noise from the non-operating factors slowly dies down.