Presenting How Carl Icahn Accumulated A 7.5% Stake In Chesapeake In 18 Days, And His Letter To The CHK Board

Tyler Durden's picture

Recall when Zero Hedge said two weeks ago that in the age of ZIRP, corporate balance sheets simply do not matter. The reason for that conclusion were of course the endless public debates over whether Chesapeake's massively overlevered capital structure would lead to its demise. Our view was that while balance sheets certainly matter in a normal market, one not dominated by central planning and endless hunger for yield, in the new ZIRP normal, none of the old school metrics of solvency, viability or even profitability matter. One person who appears to have agreed with our assessment, and put his money where his mouth is, or $775MM more specifically, is none other than legendary corporate raider Carl Icahn, who minutes ago announced that funds controlled by Icahn have raised their stake in CHK to 7.56%, making him the second biggest holder of the stock, and in a letter just sent to the CHK Board, in rather angry tones, demanded 2 board seats for his own representatives and 2 for Chesapeake's largest shareholder Southeastern Asset Management. Below we chart just how it is that beginning on April 19 at a price of $18.03, Icahn's funds accumulated over a period of 18 days, a total of 49.4 million shares of stock at what appears to be a Volume Weighted Average Cost of $15.70/share, meaning that as of the stock spike on this announcement he is currently in the money.

Full letter from Icahn to the CHK Board:

May 25, 2012
Via Federal Express and Email
Board of Directors
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118

Ladies and Gentlemen:
The past several weeks have proved a difficult time for shareholders of Chesapeake Energy.  The basic function of a board is to oversee management and to hold it accountable.  We believe the board has failed this duty in a dramatic fashion.  Rather than act as a source of stability and provide assurance to shareholders, this board has led the company through a highly publicized spate of corporate governance breakdowns while amassing an astounding $16 billion funding gap, which we believe has contributed to the share price decline of over 55% from the 52-week high.
We are not alone in criticizing this board.  Shareholders have filed lawsuits, withhold campaigns and have otherwise voiced disapproval and all three major proxy advisory firms (i.e., ISS, Glass, Lewis and Egan-Jones) have advised shareholders to withhold votes from directors at the 2012 annual meeting.  Chesapeake shareholders will benefit neither from a constant stream of negative news reflecting upon the companies troubled past, nor from a half hearted attempt by the board to make the minimum possible number of changes to skate by for one more year.  The board must not only find a way to eliminate the enormous funding gap, but also the more substantial creditability gap.
We recently had dinner with Aubrey McClendon to suggest a manner by which that credibility gap might be filled.  The company has publicly identified several actions including reduced spending and asset sales which will relieve some of the funding gap, yet the board still seems to miss the point.  We believe that a management team and a business plan without strong oversight and accountability is doomed to fail.  Accordingly, at that dinner we asked Aubrey to consider direct shareholder representation on the board. The next day we were informed that the board refused to even consider this request prior to the selection of a chairman of their choosing.  We believe that this response was completely disingenuous and illogical.  Why is appointing a new chairman, sometime out in the future, an excuse for putting off considering whether to have shareholders, the true owners of the company, have immediate representation on this very flawed board in this very fluid situation?
The board has recently announced that it is going to select a new Chairman and separate the Chairmanship and CEO roles. While this is certainly a step in the right direction, appointing a new Chairman in the manner that Chesapeake is doing, does not exactly elevate corporate governance to the “gold standard” as the board would have shareholders believe, instead it is woefully inadequate in both process and substance. Having the current board select a new chairman without shareholder approval and without allowing for shareholder representation is akin to asking the fox, who has plundered the hen house, to choose another fox to assist it in standing guard over the remaining hens.
To engender any meaningful credibility among shareholders, corporate governance reforms cannot, in our view, be led by directors whose irresponsible actions have brought this company to the edge of the proverbial cliff.  Accordingly, we propose that at least 4 of the current directors (other than Louis Simpson) should be immediately replaced by two persons designated by us and two persons designated by another large shareholder such as Southeastern Asset Management, the company’s largest shareholder.  In our opinion, only when these changes are effectuated will the board be truly independent and more importantly will investors come to believe that promises made will be promises kept; when a capital plan is agreed upon it will be maintained, not diverged from as it has in the past.
We believe that shareholder representation on boards, even in a minority capacity, is an extremely powerful tool to instill accountability in a company.  This has proven to be the case in numerous companies on which we had minority board representation, including Motorola, Biogen, Genzyme, and Hain Celestial to name a few.  Moreover, as my past record has demonstrated, I work assiduously to increase the value of stocks in which my companies have invested, which has led to gains of billions of dollars for ALL shareholders, not just my firm. Over the last few years, our actions have led to an increase in aggregate market value of approximately $55 billion for shareholders at well over a dozen companies where we have played an activist role. These companies had a market value of under $20 billion when we first invested.  We would like the opportunity to do the same at Chesapeake.
We believe that Chesapeake has collected some of the best oil and gas assets in the world.  However, we believe that the low stock price today does not reflect the value of those assets; rather the stock price suffers because of the enormous risk associated with an ever changing business strategy, enormous capital funding gap, poor governance, and unchecked risk taking.  While the company has recently recognized that their strategy of exponential capital expenditure growth is not sustainable, they still seem unable to distinguish between having cash in the bank as opposed to the projected proceeds of a series of ever more complicated and risky on and off balance sheet financial transactions and the hope of higher commodity prices.  Now is the time for Chesapeake to focus only on what is important.  What is important is that this pernicious funding gap, which we believe this board has created, must be filled. The board must bite the bullet, come up with a realistic plan and stick to it. In our opinion, shareholder representation, especially on this board, is needed to make this happen. A new chairman alone, appointed by this board, will not accomplish this objective.
As I am sure you are aware, this is not our first investment in Chesapeake stock.  In late 2010, we acquired a substantial position in the company and met with management at that time to discuss the maximization of shareholder value.  In part, we believe, due to our presence, the company sold non-core assets, closed their funding gap and announced that they were through spending money on land.   Shareholders rewarded the company for this newfound responsibility, and the stock rallied.  However, without shareholder representatives on the board (a major concern for us at the time) the promises made in 2010 proved hollow, and the company quickly abandoned their new strategy and not only accelerated land acquisitions but also capital spending on non-core assets.  Recognizing this fundamental problem with the board, we sold our position.  That decision turned out to be particularly prescient.  The company’s stock price has plummeted by nearly 60% since that time and the board has watched the current events unfold without, in our opinion, any attempts to demand accountability.  Now more than ever, the company needs the stewardship of a strong board – a board that can instill confidence in the shareholder base and restore accountability and credibility.  If our suggested changes are not made at the board level immediately, we fear the company will be severely hamstrung in its attempt to regain its footing.  It seems to us that the board has been quick to insulate themselves from accountability to shareholders and has expressed no interest in demanding accountability from management.  A new plan and good intentions are insufficient to close the gap between asset value and stock price.  We must have a board whose primary concern is enhancing the value of shareholders, a board that has the strength to hold management accountable, and the willingness to be held accountable themselves.  In our view, only a board that has these attributes can enhance the value of this company.
We, as one of your largest shareholders, wish only the best for this great company and do not wish to bring about any additional distractions, however, we believe that without a strong board to demand accountability there is a significant chance that the value destruction shareholders have seen in the past few weeks may become irreparable.  We cannot stand idly by and allow this to happen. Therefore, if you continue to arbitrarily refuse the request we have made for shareholder representation, we, as activists, will immediately take whatever “actions” we feel are necessary to protect the value of this company.  As you are well aware, this is an extremely time sensitive issue, especially in light of the fact that you have refused to postpone the meeting that is coming up shortly. Therefore, we hope and expect to hear from you in the next few days.
Very truly yours,

Carl C. Icahn

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sessinpo's picture

Let Carl I con have it.

williambanzai7's picture

Icahn is a predator. But a necessary predator, because he eats corporate America for lunch.

And unlike Warren Buffoon, Icahn is a true master of the art of fundamental analysis, not to mention dissident shareholder tactics.

Poetic injustice's picture

Probably all board wakes up in night in cold sweat, trying to guess who will be kicked out from luxurious position.

And hell yea, trim that corporate fat!

ghengis86's picture

Looks like he was buying TFD. Well played.

Xkwisetly Paneful's picture


"One person who appears to have agreed with our assessment"

Please by all means direct me to the ZH assessment, balance sheets are meaningless buy equities.

How can possibly post some sort of agreement with a guy who just bought,

what you called a certain train wreck?




Marginal Call's picture

He's bit off more than he can chew this time.  The whole company should have been liquidated six months ago.



Poetic injustice's picture

He can break up and eat best pieces.

Marginal Call's picture

What best pieces?  They are trying to convert into an oil co.  They are a debt riddled carcass that knows how to drill holes in the ground

Papasmurf's picture

Give him a break.  He's had his hands full, stealing Dynegy.

vast-dom's picture



HungrySeagull's picture

You really want that?

The rotting bloated corpse will jam all the gears and derail the entire system.

malikai's picture

This dude means business.

vast-dom's picture

The man is serious. I suggest the board capitulates to his stewardship.

junkyardjack's picture

When you sell, someone is buying, someone smarter than you.  Buy and Hold, bitchez!

jekyll island's picture

I bought this dog 5 years ago, stay away, it will break your heart. 

Corporate balance sheets may not matter, but the industry does.  Although CHK is transitioning to liquids, it is still a natural gas play and that is going nowhere but down over the next 6-12 months. 

Oh, and the board of directors letting McClendon run a hedge fund inside the company without disclosure to shareholders?  The ability to front run your own shareholders with inside or industry specific information is really not a conflict of interest, is it?  Yeah, buy this POS and you are a muppet and will get what you deserve. 

Zero Govt's picture

so how are JP Morgan and Goldman Sucks doing with shareholder disclosure???

KandiRaverHipster's picture

"...just got 250,000 shares at 18 1/4 from Janson, think I'll pull twice that at 18 1/2 outta the California pensions. We got close to half a million shares in the bag...and, I'm pretty sure we got the Beezer Brothers out of Tulsa coming in with us and I'm working on the Silverberg boys in Canada."


brettd's picture

Niice.  It's a great scene. 

blunderdog's picture

Awesome.  Vultures de-cloaking.

pacu44's picture

Can this triger a "Black Swan" event? Could this be the first domino to fall?

russwinter's picture

I think you can stick a fork in CHK and a clean recovery for nat gas prices.  In fact their practices set up energy producing industries (including coal) to maladjustment problems and insolvencies.   According to Fitch, there is a $10 billion gap between cash flow from CHK's operations and capital spending along with leasehold acquisitions.  Meanwhile CHK continues to generate more capital losing production in the face of growing insolvency.  The firm is planning on doing $9-$11.5 billion sales in assets for the rest of 2012.    One of the more revealing exercises items in this maladjusted/bagunca sector watch is the fact that CHK is trying sell inferior money losing properties to raise the cash to pay a Vito and Guito loan with Goldman Sachs under the following terms. This loan was to pay down a revolver that had interest rates of a couple percent:

Chesapeake Energy Corporation (CHK) today announced it has entered into a $4.0 billion unsecured loan from Goldman Sachs Bank USA and affiliates of Jefferies Group, Inc. The net proceeds of the loan, after payment of customary fees and original issue discount (if any), will be utilized to repay borrowings under the companys existing corporate revolving credit facility. The new facility, which ranks pari passu to Chesapeakes outstanding senior notes, matures on December 2, 2017 and may be repaid at any time this year without penalty at par value and carries an initial variable annual interest rate through December 31, 2012 of LIBOR plus 7.0%, which is currently 8.5%, given the 1.5% LIBOR floor in the loan agreement.

Take note, that these loans subordinates the debt structure of CHK. The company after this deal will owe about $30 billion in liabilities of which $13 billion is LT debt.  The market cap of CHK is still about $10 billion. Properties and goodwill are valued at $39.6 billion, which I believe will prove to be quite inflated.   These are fundamentally leaseholds with a use it or lose clause, and at today's prices ALL are losers on an all-in-cost basis.  Their favorable hedges have run off.  Further CHK DOES NOT EVEN HAVE THE CAPITAL TO DRILL THESE PROPERTIES AT NEGATIVE RETURNS ON ALL IN COSTS.  These will go on fire sale before it's over.

Spitzer's picture

Good info

Im working for Arc energy right not. They seem to be pretending that the price of nat gas doesnt matter too

slewie the pi-rat's picture

one of my children usta work for one carlI's companies

i've always kinda enjoyed following carlI's moves, so thanks tyler! 

(at least he didn't buy the debt.  yet...)


halflink123's picture

IMO he didnt buy the debt because, last time I checked it was trading at 100 cents on the dollar

pemdas's picture

For a long time CHK has been the "bad boy" in the room.  My guess is the rest of the industry would like to see Chapter 11 here so the leasing arms race can end and sanity return to the sector.

trulyslide's picture

Chesapeake will be fine with or without this Icahn blackmail.

halflink123's picture

The funny thing about Chesapeake is I wonder if anyone understands how it actually makes money.  They don't "explore" for oil and gas like normal companies; they "buy land", magically find oil and gas (when no one else can) and then sell the now gas-laden land, only to repurchase it again, only to sell it again, etc.

So I guess their expertise is their ability to find gas when other people can't?  How?  

I think Icahn sees the assets and yes they're valuable, and he wants them, but this company has just massive problems: the business model, the balance sheet, the management.  Really I think he's right in that their only hope is massive deleveraging and the only way to conceivably invest in this type of deal is to take a controlling or very influential position, otherwise it's probably hopeless for a small investor, and highly highly risky also IMO.


SwingForce's picture

Carl's a smart man. And he's not Jon Corzine. He's not Jamie Dimon. He's not Tim Geithner or Ben Bernanke. He's not Lord Blankfein, he's not Jeff Immelt or Robert Nardelli. He's not Mitt Romney, or Obie Debt Brother. 

He's a Long Lost Brother of Mine. All that said, I would not & did not buy CHK last week when ZH first wondered about how long .....

oddjob's picture

He pulled the same shit with Talisman and got crushed.

Zero Govt's picture

"..Chesapeake's massively overlevered capital structure.."

the poster-child of the economy Ben and the WS bankers built surely?

overmedicatedundersexed's picture

the banks (lenders) are the true owners of chk, stock is fiat..Carl I am sure has a plan but if this works out for him he should start turning water into wine. plan get pos news of buy outs pump it up and sell into the retail buying?

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