Billionaire Carl Icahn Is Making Good On His Promises

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Billionaire activist investor Carl Icahn likely made investors of Transocean (NYSE: RIG) and Chesapeake Energy (NYSE: CHK) very happy over the last few years. Icahn announced in early January that he planned to increase his Transocean stake from 1.56% to over 3.4%, but per a recent 13D filing with the SEC, Icahn now owns 20.15 million shares, or 5.6% of the company, making him the largest shareholder. This news comes just as Chesapeake's controversial CEO Aubrey McClendon announced his retirement, set for April 1. Chesapeake's stock has been up over 10% on the news.

I believe that with McClendon gone, Chesapeake may move higher; and with Icahn investing heavily in Transocean, investors could be rewarded as Icahn pushes to unlock shareholder value, including the $4 dividend he is pushing for.

Icahn had this to say regarding McClendon's departure...

Aubrey has every right to be proud of the company he has built, the world class team of people at Chesapeake and the collection of assets he has assembled, which in my opinion, are the best portfolio of energy assets in the country. While it is known that some of these assets will be sold by the company in due course, I do not believe that this will in any way effect the ultimate realization of Chesapeake’s potential.

Although I applaud Icahn for his kind words about McClendon, the real takeaway for shareholders in this statement is the mention of Chesapeake's asset base. The McClendon departure is an overall win for Icahn and investors. Back in May of 2012 Icahn sent the Chesapeake board a letter with plans to break up the board, install a few new directors, and force the company to reduce its leverage and begin monetizing its asset base.

With McClendon gone the asset sale pace could jump, whereas the Chesapeake Board may seek to capitalize on the 15 million acres of undeveloped assets. GHS Research believes the asset sales could move from the planned $17 billion to $19 billion for 2012 to 2013. The company expects to raise $4.9 billion from the exit of its midstream operations and another $3.3 billion from the Permian sale by the end of the first quarter. 

GHS Research believes that a major oil and gas company might find Chesapeake intriguing, saying that

We think that a major with lower cost of capital versus Chesapeake can quickly get a starting point of $30 per share of value fairly easy.

That is 50% above Chesapeake's current trading range. 

Transocean is still recovering from the pressure its stock received following the Deepwater Horizon incident. Of the five major companies involved, Transocean remains down the most. Since the incident in April of 2010, Transocean is down 33%, while BP - which had a 65% interest in the well and was the project operator - is down 25%. Anadarko Petroleum (NYSE: APC), which had a 25% non-operating interest in the well, is up 9.5% since then. Other notables: Cameron International, supplier of the equipment that failed to seal the well, is up 34%, and Halliburton, which was in charge of stabilizing the well walls, is up 27%.

In some respects, Icahn has given the all clear to invest in Deepwater Horizon impacted stocks.  Anadarko is also a competitor of Chesapeake's; Anadarko trades well above its peer and was rumored to be interested in purchasing some of its assets. Anadarko trades at a price to sales multiple of 3.0 and forward price to earnings of 20, compared to Chesapeake's 1.1 (P/S) and 16 (forward P/E).

Back to Transocean, compared to other major oil and gas driller, Transocean trades on the low-end of the industry at 2.1 times sales:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Price to Sales</strong></p> </td> </tr> <tr> <td> <p>Diamond Offshore</p> </td> <td> <p>5.4</p> </td> </tr> <tr> <td> <p>Noble</p> </td> <td> <p>2.8</p> </td> </tr> <tr> <td> <p>Ensco</p> </td> <td> <p>3.3</p> </td> </tr> <tr> <td> <p>Atwood</p> </td> <td> <p>4.0</p> </td> </tr> <tr> <td> <p><strong><em>Average</em></strong></p> </td> <td> <p><strong><em>3.8</em></strong></p> </td> </tr> </tbody> </table>

With the Deepwater Horizon settlement now finalized, the company should be able to move forward without the overhanging uncertainty. Transocean will pay $1.4 billion in penalties on a five-year schedule, with just over 70% due to be paid through 2014. Moving forward, I would expect the driller to come more in line with peers on a multiples basis. With a peer average 3.8 times sales multiple on Transocean's next year expected sales of $10.1 billion, the stock would have an upside of around 90%. For more info on how Transocean stacks up against its top competitors see my other article - Unearthing The Value Carl Icahn Sees In Transocean.

The $4 per share dividend that Icahn is pushing for in Transocean would be a 6.9% yield at the current share price. Also, the $4 dividend would be a total payout of about $1.4 billion, which pales in comparison to the $6 billion of cash Transocean has on hand, not to mention the $3 billion in cash flow from operations it expects to generate in 2013.

Based on a back of the envelope calculation, the Transocean position is still less than a third the size of Icahn's Chesapeake position. Icahn owns 58.6 million shares of Chesapeake, which is his fourth largest position - 8.4% of his 13F portfolio is concentrated in the oil and gas stock. In Chesapeake, Icahn has fellow activist Mason Hawkins of Southeastern Asset Management as an investor, which owns over 89 million shares (check out Southeastern's portfolio). 


mhargra has no position in any stocks mentioned. The Motley Fool owns shares of Transocean 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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