Carl Icahn’s Curious Energy Exposure

Activism doesn’t seem to be part of Carl Icahn’s plan for Chesapeake Energy at the moment. Instead, he is behaving like a value investor.

Last month, Carl Icahn surprised many by increasing his ownership of Chesapeake Energy (NYSE:CHK). The billionaire now owns 11.19% of the company, the stock value of which has dropped by more than -40% over the past year and recently hit a new 52-week low.

It is not uncommon for Icahn to buy more of a stock that has significantly underperformed. The billionaire has increased his Hertz (NYSE:HTZ) position despite the stock’s -13% decline last year. Hertz now represents over 4% of his public equity portfolio. But he is best known for being an activist investor, so an increase exposure to a poor performer is generally followed by an activist move – as is the case with Hertz.

Icahn’s relationship with Chesapeake – and with other energy stocks – seems to be different. Activism doesn’t seem to be part of Icahn’s plan for Chesapeake at the moment. Instead, he is behaving like a value investor.

Carl Icahn increased his exposure to Chesapeake last month for the first time in two years, despite oil prices plunging 50% since the summer of last year. He started buying Chesapeake stock in 2010. He sold a large part in 2011 but bought significantly more in 2012. The large stake acquired in 2012 gave him the right to shake things up in the company. This culminated with the 2013 dismissal of Audrey McClendon, Chesapeake’s founder and then CEO.

Many applauded the decision, and between 2012 and 2014, Chesapeake’s shares doubled in value. However, Icahn kept his position unchanged even when the stock hit a $31 high in June 2014. Yesterday, the stock closed at roughly its 2012 low, $14.35.

Chesapeake’s stock value clearly correlates with the price of oil. If Icahn expects an upward correction in the price of oil, Chesapeake is a good bet. Looking beyond stock performance, the company reported healthy financials, and its CEO is making the right moves in response to the crisis. Last week, the company announced plans to reduce capital expenditures by a half billion dollars in 2015 to improve cash flow. According to RBC Capital Markets, it is expected to end 2015 with $6 billion of cash and credit. The Street Quant Rating rates the stock as a hold.

According to his last SEC filing, Icahn has remained faithful to his other energy positions as well, including CVR Energy (NYSE:CVI) and Talisman (NYSE:TLM). He has not changed his position in CVR Energy since 2012. He also kept his exposure to Talisman Energy in 2014, even when the stock fell by -70% in December 2014 before being acquired by Repsol for $8.3 billion. These investment decisions indicate that Mr. Icahn remains bullish on the overall energy sector. “I believe a great amount of profit in the next few years will be made by those who hold positions in energy companies,” he said in a statement earlier this year.

Carl Icahn might be right. The energy sector showed a glimpse of recovery yesterday when the oil prices rallied. U.S. crude traded up $2.49, or +5.2%, to $50.09 a barrel. The higher prices are a result of higher crude inventories in the US.. and limited exports form Iran. A missed deadline on the Iranian nuclear talk will most likely keep sanctions on their crude export in place. The limited global supply could lead to a rebound in prices. CHK closed higher on Wednesday after the announcements at $14.35 from $14.16 the previous day.

Increasing your exposure in a stock that dropped in value by double-digit percentages is not for the faint of heart. Your first instinct might be to run to the exit. The herd mentality explains why most individual investors end up buying high and selling low. It’s hard to go against the grain, and even Icahn’s decision has proven questionable. Sticking to a rules-based investment strategy can help investors stay focused and overcome emotion-driven decisions.

When macroeconomic trends affect the price of a stock but an investor still believes in the real value of the company, a dollar-cost averaging strategy makes sense. Dollar-cost averaging refers to the technique of increasing exposure to a specific security based on a fixed schedule regardless of its share price. If you invest a fixed dollar amount each month and the price of that particular security drops each month, you automatically buy more shares when the stock is low (and fewer shares when the prices is high). In the long run, the average cost you pay per share becomes lower and lower. If your bullish view on the stock plays out, you will be rewarded for sticking to your strategy.

In times of macroeconomic uncertainty, this type of strategy saves investors from emotional decisions, while capturing the benefit of averaging down the price of a holding. If Carl Icahn is right and oil rebounds in the long run, he will benefit from doubling down when CHK’s stock price was falling.

Chesapeake is part of our rules-based index, the iBillionaire Index (IBLN). For those less familiar with our methodology, every quarter we screen the billionaires’ equity portfolios and select 30 stocks based on a fixed set of rules. The top 30 stocks with the highest cumulative exposure across the tracked billionaires portfolios are included in the index. After our last rebalance, CHK passed our screening methodology and remained part of the index. This did not come as a surprise, because CHK represents a large part of Carl Icahn’s portfolio. For more information, check out the IBLN Index page.


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