Icahn Thinks These Energy Shares are Undervalued

Posted by Ian Cooper - Monday, December 20th, 2010

From Barron's:

"Carl Icahn, fresh off his bid for power plant owner Dynegy (DYN) last week, has already turned his attention to another big player in the energy market. In a regulatory filing he made after the market closed on Friday, Icahn disclosed that he had accumulated 38.6 million shares of Chesapeake Energy (CHK), a 5.8% stake, and has already been talking to management. Beyond saying the shares are undervalued, Icahn didn’t explain his interest in the company.

Chesapeake, the second-largest producer of natural gas, has floundered as natural gas prices remain depressed. The company’s shares are down 10% this year, and analysts expect the company’s earnings to drop 10% next year. Natural gas futures fell below $4 per million British thermal units on Friday even as gas in storage dropped last week more than it had at any point in the heating season. An oversupply of natural gas has kept prices down for the past couple of years after they briefly traded around $13 in 2008. But natural gas producers have attracted interest in the past year from major integrated oil companies like Exxon Mobil (XOM) that want to expand their portfolios.

Obviously it’s too early to say whether Icahn simply believes natural gas prices will rise, or whether he expects to start a fight with Chesapeake management. If so, it could be a doozy. Chesapeake CEO Aubrey McClendon, who was the highest paid CEO of an S&P 500 company in 2008, is known as a fiery leader who doesn’t back down from a brawl.

Chesapeake shares rose 5.6% to $24.61 in early trading on Monday."

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