Carl Icahn's Top Positions (Part II)

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In a previous article I wrote about two big positions taken by billionaire Carl Icahn, including CVR Energy, a petroleum refiner, and Forest Laboratories, a branded form of ethical drug products maker.  Combined, those two positions accounted for 33.2% of his portfolio. In addition, he also invested significantly in an oil/gas E&P business and a Powertrain and safety technology supplier. They are Chesapeake Energy (NYSE: CHK) and Federal-Mogul Corporation (NASDAQ: FDML).

An Opportunistic Play on Big Natural Gas Asset

As of September 2012, Carl Icahn owned more than 50 million shares in Chesapeake Energy, which accounted for 8.4% of his total portfolio. In November 2012, he increased his holding in the company to nearly 59.7 million shares to be the second largest shareholder, behind only Southeastern Asset Management. Chesapeake is considered to be the second-largest US natural gas producer, only behind Exxon Mobil (NYSE: XOM). Chesapeake had around 21.3 tcfe in total proved reserves. The natural gas proved reserves were more than 15.5 tcfe at the end of 2011, whereas Exxon Mobil had nearly 26.7 tcfe. Chesapeake said that it would sell its non-core assets to focus on drilling in the “core of the core” area. In 2012, it has agreed to divest $12 billion of non-core assets, and it has also planned to sell $5 billion to $7 billion more in 2013. 

Icahn believed that Chesapeake owned some of the best oil and gas assets in the world. However, it was undervalued in the market place due to enormous risk associated with an ever changing business strategy, enormous capital funding gap, poor governance, and unchecked risk taking.Icahn also stated: “they (the company) still seem unable to distinguish between having cash in the bank as opposed to the projected proceeds of a series of ever more complicated and risky on and off balance sheet financial transactions and the hope of higher commodity prices.”  At the current trading price of $16.87 per share, Chesapeake is worth $10.87 billion in the stock market. The market is valuing the company at nearly 6.8x EV/EBITDA. This valuation is a bit higher than the valuation of the largest US natural gas company, Exxon Mobil, at nearly 6.3x EV/EBITDA.

Huge Leverage and Goodwill, Intangible Level

Federal-Mogul is also one of the biggest positions in Icahn’s portfolio. With nearly 76.7 million shares, Federal-Mogul represented around 6.3% of Icahn’s portfolio as of September 2012. Icahn actually controls the whole company, as his stake accounted for more than 77% of the total company’s shares outstanding. With operations in more than 34 countries, Federal-Mogul is the leader in supplying powertrain and safety technologies to OEMs of automotive, commercial vehicle, rail, aerospace, etc. The majority of the company’s sales were generated from two segments: Powertrain Energy (33% of the total sales) and Global Aftermarket (34% of the total sales). Federal-Mogul employed a lot of debt in its operations. As of September 2012, it had $934 million in stockholders’ equity, $541 million in cash, and $2.73 billion in long-term debt. In addition, the company booked big amount of goodwill and intangibles, around $1.4 billion.

At the current price of $8.27 per share, the total market capitalization of the company is $817.94 million. The market is valuing Federal-Mogul at 5.94x EV/EBITDA. One of its peers, Dana Holding is valued at a much cheaper valuation at 2.86x EV/EBITDA. In addition, Dana is paying 1.3% dividend yield, whereas Federal-Mogul is not paying any dividend.

Foolish Bottom Line

With large natural gas proven reserves and reasonable valuation, Chesapeake Energy seems to be a decent pick for opportunistic investors. Federal-Mogul had a huge financial leverage, high level of goodwill, and plenty of intangibles. It also doesn’t pay a dividend and is valued more expensive than its peer. Thus, I personally do not want to buy Federal-Mogul at this time.


hoangquocanh has a position in Chesapeake Energy. The Motley Fool owns shares of ExxonMobil and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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