For troubled stocks, having a big supporter in your corner provides credibility to your potential prospects and turnaround plans. For beleaguered natural gas super Chesapeake Energy Corporation (NYSE:CHK), that support came from one of the largest hedge fund managers in the business — Carl Icahn.
Icahn has stuck with CHK through thick and thin, and was one of the main reasons why former CEO and founder Aubrey McClendon was eventually removed from his position. Essentially, Icahn was the major force that helped start Chesapeake on its transition. Without him, CHK may not have been with us at this point.
So needless to say, when Icahn announced he had dumped a ton of the stock, CHK shares tanked — hard.
But the real question is, should investors in Chesapeake be worried that the fracker has lost one of its major cheerleaders or should they be buying with two fists.
Owning CHK Since 2012
As an activist investor, Icahn knows how to spot a deal when he sees one. Under that guise, he announced a very big stake in CHK back in 2012 and started pushing for be changes under the fact that Chesapeake suffered from “poor governance and unchecked risk taking.”
Since that initial stake, Icahn has added to shares many times over the years and brought in several executives from other, more successful oil companies to run the show. Those efforts have helped CHK trim the fat from non-core assets, reduce its debt and hopefully live within its means and operating cash flows.
And it seemed that Icahn was happy with the progress with the firm. As of August, he and his associated funds — such as Icahn Enterprises LP (NASDAQ:IEP) — owned a whopping 73 million shares. That gave him a 9.6% stake in the energy stock.
But it seems that Uncle Carl may have had a change of heart last week. A recent filing showed that Icahn’s various funds sold CHK stock by the millions. His stake now only sits at 35.3 million shares or about half of what he owned a month ago.
So with Chesapeake’s biggest fan now saying “see ya later,” many retail investors and traders were rightfully spooked. CHK shares fell more than 7% during the regular session and an additional 4.4% in after-hours trading. But it may be that investors might be making a huge rash decision over Icahn’s dumping of CHK stock shares.
The Turnaround Is Still On at CHK
Icahn’s selling has more to do with Uncle Sam than fracking. In a very brief statement listed on his website, Uncle Carl mentioned that the sale has to do with “recognizing a capital loss for tax planning purposes.” Icahn’s position in CHK was pretty much a bust and it appears that he is using the loss on the shares to cover gains he had elsewhere. That’s a smart tax-saving strategy that many investors use to pay less in taxes. Why not take the loss on some of the shares.
With tax-loss selling as the backdrop, Icahn’s selling isn’t as bad as investors initially thought. And keep in mind, he still owns 35 million shares of CHK.
And let’s not forget that his work at Chesapeake is largely already done. While Icahn was a major supporter of CHK, the truth is that his influence on the stock has waned. His installed CEO — Doug Lawler — has done a great job at keeping Chesapeake alive during the oil downturn.
Lawler has cut non-core assets through numerous asset sales, reduced working CAPEX by millions and has reduced CHK’s insanely high debts. Those debts — which topped $21 billion at one point — have been reduced to just $8.7 billion. Meanwhile, Chesapeake continues to make smart moves to buy up more of its debt for pennies on the dollar or swap current high-yielding bonds for lower-yielding ones.
And that’s been the major crux of buying CHK stock over the last few years. Getting the firm through the current malaise by reducing its massive debts. Chesapeake continues to execute on that front. Icahn has been pretty silent on the stock for years now as his appointed board and CEO have made good on their plans.
That is, he’s been more of a silent activist since kicking McClendon to the curb.
CHK Is a Risky Bet With Or Without Icahn
The real truth of the matter is that Chesapeake is a risky play with or without Icahn. Making a bet on CHK stock today is making a bet that it can keep going in the current oil/natural gas environment and reduce its debts. Having Icahn there or not makes no difference for investors on that front. He did his part. And for that investors should be thankful.
With that mind, Icahn punching out is actually pretty meaningless … even more so when you consider why he did it.
At the end of the day, investors should ignore the noise of Icahn selling and base their investment decision in CHK solely on whether or not they think it’ll survive. All signs point to yes — with a big sign of volatility. Icahn just added another speed bump.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
