Icahn Bought $350 Million of Chesapeake Shares in Bet on Energy
Carl Icahn
Chip East/Bloomberg
Carl Icahn, a billionaire investor, is loading up on Chesapeake Energy Corp.
Carl Icahn, a billionaire investor, is loading up on Chesapeake Energy Corp. Photographer: Chip East/Bloomberg
Icahn Bought $350 Million of Chesapeake Shares
Daniel Acker/Bloomberg
A natural gas drilling rig stands on a Chesapeake Energy Corp. drill site in Bradford County, Pennsylvania.
A natural gas drilling rig stands on a Chesapeake Energy Corp. drill site in Bradford County, Pennsylvania. Photographer: Daniel Acker/Bloomberg
Billionaire Carl Icahn bought $350 million of convertible preferred stock from natural-gas producer Chesapeake Energy Corp. during the second quarter as part of a larger bet on the energy industry.
Icahn participated in a $2.6 billion convertible offering the company held in May and June, said Aubrey McClendon, Chesapeake’s chief executive officer. The purchase coincides with the acquisition of 10.6 million Chesapeake common shares last quarter, which was disclosed in a filing this week. Icahn didn’t respond to requests for comment on whether the convertible shares are separate from his common-stock holding.
The 74-year-old investor is loading up on Chesapeake, an Oklahoma City pioneer in the development of shale deposits, as its shares trade at a discount to rivals. Icahn’s hedge funds invested about $929 million, or 16 percent of their assets, in energy stocks during the second quarter, marked by the worst oil spill in U.S. history when BP Plc’s Deepwater Horizon rig blew up in the Gulf of Mexico.
“He told us he thought we had great assets, great management and were undervalued,” McClendon said in an e-mail, explaining why Icahn bought Chesapeake’s preferred stock. McClendon co-founded Chesapeake in 1989 with Tom Ward, now CEO of SandRidge Energy Inc., another Oklahoma City-based natural gas company.
Chesapeake, which climbed 60 percent in 2009, rose 39 cents yesterday to $21.32 at 4:15 p.m. in New York Stock Exchange composite trading, leaving the stock down 18 percent this year. The Standard & Poor’s 500 Oil & Gas Exploration and Production Index has declined almost 12 percent.
Accelerating Drilling
Chesapeake is using proceeds from the $2.6 billion convertible offering to repay debt and accelerate its drilling program, according to Jim Gipson, a company spokesman. The company, which specializes in unconventional onshore reserves through stakes in six natural-gas and oil shales, spent about $4.9 billion acquiring and developing properties during the first half of this year, said Raymond Deacon, an industry analyst at Pritchard Capital Partners LLC in Mandeville, Louisiana.
“The stock had a nice move last year but has lagged others this year,” Deacon said in a telephone interview. “They don’t feel like the market is putting the right valuation on some of the acreage” for their shale assets, Deacon said.
Chesapeake’s share price translates into $1.90 per thousand cubic feet equivalent of natural-gas reserves, compared with $2.33 for its typical peer, he said.
Icahn’s Investments
While Icahn has decades of experience investing in oil and gas companies, his hedge funds sold their energy holdings in mid-2008 and began betting on technology stocks such as Yahoo! Inc. The financier often pursues an activist strategy, purchasing a stock and then pushing for changes aimed at lifting the value of his holding.
The preferred stock issued by Chesapeake pays a 5.75 percent annual dividend and is convertible into common shares at an initial price of $27, subject to adjustment upon “certain customary events,” Chesapeake said in May. At present, Icahn could turn his $350 million investment into about 12.5 million common shares, according to McClendon’s e-mail.
Convertible preferred stock provides dividend income and can be exchanged for common shares at a preset price.
Keith Schaitkin, deputy general counsel at Icahn Associates, declined to comment.
SEC Filing
Icahn Capital LP initially invested in Chesapeake by purchasing 2.1 million common shares during this year’s first quarter, according to a Form 13F filed with the U.S. Securities and Exchange Commission in May. The hedge funds acquired 10.6 million Chesapeake common shares in the second quarter, raising their stake to 12.7 million common shares as of June 30, according to a Form 13F filed Aug. 16 with the SEC.
The filing made no mention of the convertible preferred shares Icahn bought. If those shares are separate and later converted, the Icahn funds would rank as Chesapeake’s third- largest stockholder through their ownership of more than 25.2 million common shares. That would equal about 3.4 percent of the company’s common shares outstanding on a fully converted basis.
The SEC requires money managers who oversee more than $100 million in U.S. equities to report their holdings on a Form 13F within 45 days of the end of each quarter. The agency publishes a 500-page list on its website every three months identifying the securities managers must include on their Form 13F, including common stocks, options, convertible bonds and preferred shares.
The agency’s second-quarter list didn’t include Chesapeake’s 5.75 percent convertible preferred stock, and the SEC’s electronic database showed no money managers reporting ownership of the securities.
To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net
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