Carl Icahn has a pretty simple formula for investing: Find a company with unappreciated assets and a sleepy management team, rattle a few cages, and wait for shares to finally appreciate. That’s what he did with Motorola (NYSE: MOT) and many other companies over the years. [Read my take on that here.] He doesn’t always succeed, but several big hits have pushed him into the billionaire’s club (he’s actually worth an estimated $8.9 billion, according to Forbes).

He’s at it again. Icahn has been buying up shares of natural gas firm Chesapeake Energy (NYSE: CHK), and is gearing up some fresh cage rattling. Icahn just announced in a 13-D filing that his firm now owns 5.8% of the company and “intends to seek to continue to have conversations with the company’s management to discuss the business & operations of the company and the maximization of shareholder value.”

There’s one small problem: Chesapeake’s CEO Aubrey McClendon is stubborn as a mule, and not likely to warm to Icahn’s overtures. As I noted this summer, McClendon thinks he’s smarter than his peers and can identify cheap assets better than anyone else. But I also concluded that he “thinks that other industry players lack Chesapeake’s savvy, when they really lack Chesapeake’s moxie.” So Icahn is going to have a hard time explaining to McClendon that he isn’t so sharp.

Why Chesapeake?
Analysts are generally scratching their heads on this one. Most think shares are fairly valued, trading at similar values on a price-to-cash flow basis as most other natural gas plays. Shares trade for around $25 (thanks to an 8% spike on Monday), and even the most optimistic analysts think shares are worth no more than $30, when measured in terms of cash flow.

But that’s not the whole story. Chesapeake may look just OK in terms of cash flow, but many agree that the value of its massive real estate holdings are worth well more, perhaps more than $40 a share on a net asset value (NAV) basis. Yet there’s a reason shares sell for 38% less than the NAV. “CHK has terrific (natural gas) shale assets but has been criticized for too aggressively acquiring undeveloped acreage … and a perception of poor financial discipline has caused CHK to trade at a steep discount to NAV” wrote analysts at UBS on Monday morning.

What’s Icahn’s next move?
It’s extremely unlikely that Icahn can simply bully his way through the door and force management to break up the company (as he did with Motorola). Instead, he’s likely to suggest ways that the company’s financial picture can improve, perhaps by selling off assets that are unlikely to be big cash flow generators in the near-term. He might also implore the company to throttle back capital spending plans to boost free cash flow in the near-term. A jump in cash flow would likely lead analysts to upwardly revise their price targets above the $30 mark. Then again, Icahn doesn’t get involved in a situation that may yield 20% upside. He’s hoping for much more…

So perhaps he thinks the company can make these short-term moves to get the stock rolling, and then wait and hope for natural gas prices to rebound, which is clearly the real panacea for this stock. Trouble is, few expect gas prices to move up off of these lows for at least a few years, when supply and demand finally come back into balance. That imbalance may even get worse before it gets better: gas drilling techniques are getting even better, allowing producers to boost production while lowering costs.

Goldman Sachs thinks we’ll have to wait until 2014 for gas prices to firm, which is when a round of coal-fired power plants will be retired and is expected to boost demand for gas-fueled plants. The Goldman analysts tacitly agree with Icahn. “For a sustained rally (in CHK’s shares), we believe confidence is needed in CHK’s capital spending levels.” That echoes Icahn’s likely sentiment that the company needs to start showing its cash flow strength and stop pouring money into every asset that comes up for sale.
 
Action to Take –> It’s often been a wise move to ride Icahn’s coattails. But there’s not much he can do in the near-term (beyond Monday’s 8% spike) to get shares moving much higher.

Icahn is likely to announce his plans soon, and if successful, get Chesapeake started on a 12-18 month process that boosts the company’s profile on Wall Street. Shares are unlikely to budge on such news, but you may be wise to get involved at that point, especially if Icahn’s stated plans are met with a favorable response. Then again, Aubrey McClendon doesn’t like to take advice, so Icahn’s quest may simply prove quixotic. But this is a great situation for investors to watch.
 

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