Friday, May 18, 2012

Where's Carl?

On Monday, May 14, 2012, Chesapeake Energy watchers and marketeers were all a twitter about the possibility of Carl Icahn, Corporate Investor, riding to the rescue with tons of cash. 

During a Special Conference call on 5/14/12, Aubrey McClendon was asked about Icahn re-entry into the Chesapeake fold:

McClendon noted that Icahn briefly invested in the company in 2010 with good results.

“He made over $500 million and called to thank me when it was over,” McClendon said. “If he comes in (again), I’m pretty confident he’ll make a lot of money.”

Icahn didn’t return a call for comment.

Since then, no one has seen Icahn.  Rumors of his whereabouts include that this was all a rumor, or that he's in negotiation with Chesapeake Energy, or he's waiting for Chesapeake Energy to fall even more before swooping down and gobbling up the remains.

It's now early Friday morning, May 18, 2012, and we are all asking "Where's Carl?".

Late afternoon, on Friday, May 11, 2012, Chesapeake Energy announced they have secured a $3-billion dollar loan to cover their "revolving credit facility",  by Monday (5/14/12), the amount increased to $4-billion.

The loan increase, Icahn rumors, nor McClendon's special conference call did much to calm the jitters. Initially, on Monday, 5/14/12, stock increased and then closed down.  Rest of the week showed a slow downward dribble, with Chesapeake hitting a new 52-week low of $13.32 on Thursday, 5/17/12.  The news of T. Boone Pickens dumping his remaining Chesapeake interests did not help.

(With regards to Pickens, we like to note he has dumped ALL natural gas stock, not just Chesapeake holdings. )

By Wednesday, (5/16/12), more rumors surfaced about circling sharks.  Although speculation and theories of the whereabouts of Icahn persist, corporate names were being dropped.

Anadarko and Chevron were mentioned as possibly taking a few big and small bites.   Other candidates could include France-based Total, BHP Billiton of Australia, Devon Energy, Apache Corp. and Occidental Petroleum Corp.  Exxon-Mobile was also mentioned earlier this month.

To further add to Chesapeake's woes, S&P lowered Chesapeake Energy Corp.'s $4 billion senior unsecured term loan due Dec. 2, 2017 to a "BB-" rating and stated "rating outlook is negative."
Standard & Poor's lowered the ratings on Chesapeake on April 26, 2012, and again on May 15, 2012. The downgrades reflected a confluence of factors,including turmoil over revelations about its CEO's personal financial transactions and increased funding risks stemming from weak internal cash generation and very heavy capital expenditures.
This week a group of Chesapeake Energy Corp. investors asked a judge to postpone the company’s annual shareholders’ meeting so they can gain additional disclosure of Chief Executive Officer Aubrey McClendon’s compensation.

The custodian of a group of New York City pension funds is calling on Chesapeake Energy Corp. shareholders to vote against two board members, saying they failed to monitor financial activities of the company's chief executive that have engulfed the natural-gas giant in controversy.   

The City of New York Office of the Comptroller, representing pension funds that own 1.9 million shares of Chesapeake, is opposing the only two directors up for election, who both serve on the company's audit committee: V. Burns Hargis, president of Oklahoma State University, and Richard K. Davidson, former chief executive of Union Pacific Corp.

And credit worries continue to mount.

The reports have come as Chesapeake grapples with a 2012 funding shortfall of $9 billion to $10 billion as natural gas prices remain at their lowest in a decade. The company managed this week to tap the capital markets for a $4 billion bridge loan -- but investors are still worried. 

"They need too large of an asset sale over too short of a time, otherwise they are going to have a liquidity crisis," said Marc Gross, portfolio manager at RS Investments' high-yield and floating-rate bond funds. 

"All of the problems they are having today is because they didn't expect $2 gas, and it's hurting them a lot more than they are letting on. The company is under stress," he said. 

The cost of insuring Chesapeake bonds against potential default jumped on Thursday after hedge fund manager T Boone Pickens dumped 71,000 of its shares. 

Five-year credit default swaps were last trading 26 basis points wider at a record wide of 887, surpassing the previous historical wide of 828 seen in Jan, 2009. 

That means it costs $887,000 a year for five years to insure $10 million of debt.
Will Chesapeake need bigger loans or will Carl appear to "save" them?  How many more shoes will drop?   Is this the end of Aubrey?  And what of Chesapeake employees with their stock investments? Is Chesapeake another Enron waiting to happen? Stay Tuned.

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