Bruce Berkowitz, one of the most famous investment managers in the world, has managed to deliver a decent annualized return of 12.10% since the inception of his fund in 1999. His fund, The Fairholme Fund, has beaten the S&P 500’s annualized gain of only 2.61% during the same period.
In the first six months of 2013, the Fairholme Fund gained 15.08%, with ten concentrated positions. In the second quarter of 2013, Bruce Berkowitz had initiated a long position in Chesapeake Energy Corporation (NYSE:CHK). He owns nearly 3.2 million shares of the company, accounting for 1.1% of his total portfolio. Should we follow Bruce Berkowitz into Chesapeake? Let’s take a look.
The turnaround of the large natural gas player
Chesapeake Energy Corporation (NYSE:CHK) has been an activist target of billionaire Carl Icahn and Mason Hawkins. Both of them are bullish on Chesapeake because of its oil/gas assets. Icahn commented that the company owns some of the greatest oil/gas assets in the world. However, the market does not realize them because of “enormous risk associated with an ever changing business strategy, enormous capital funding gap, poor governance and unchecked risk taking.”
Chesapeake Energy Corporation (NYSE:CHK) has been unlocking its hidden potential by divesting non-core assets so that it can focus on the profitable “core of the core” drilling area. The company sold up to $12 billion of non-core assets last year, and targets another $5 billion-$7 billion more in asset divestment this year. Year-to-date, the company has successfully completed a $3.7 billion divestment.
Recently, the company reduced its capital spending. The leasehold capex budget was down 80% year-over-year. The financials have also improved. In the first quarter 2013, its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) came in at $2.6 billion, a year-over-year growth of 56%, while the company has managed to reduce its borrowing cost by issuing $2.3 billion in bonds at a blended rate of 5.1%.
Looking forward, Chesapeake Energy Corporation (NYSE:CHK) would be more focused and disciplined in capital allocation. For the full year 2013, total capex is estimated to be around $7.23 billion, 46% lower than 2012, along with the shift to higher return liquids-rich areas. The company expects to generate more than $1 billion in adjusted net income, a year-over year growth of 136%, while adjusted EBITDA experienced a 31% growth, from $3.75 billion in 2012 to $4.91 billion in 2013. The market values the company at only 5.8 times its trailing EBITDA.
How about ConocoPhillips and ExxonMobil?
Chesapeake is valued lower than Exxon Mobil Corporation (NYSE:XOM) but higher than ConocoPhillips (NYSE:COP). At $92 per share, ExxonMobil is worth $408.9 billion on the market. It is valued at 6.93 times its trailing EBITDA. Recently, ExxonMobil experienced a significant decline in second-quarter earnings. Its net earnings dropped 57%, from $15.9 billion last year to $6.86 billion this year, while the EPS decreased 55% to $1.55. The recent drop in earnings was due to the falling crude oil prices and production levels, as well as lower refining margins.
