Now that activist investor Carl Icahn has taken a 7.56% stake in Chesapeake Energy (NYSE:CHK), it is worth considering what redeeming qualities he sees in the natural gas producer. This is an intriguing development for a company that has surrendered almost half of its market value over the course of the past year. Here is what's to like about Chesapeake.

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Bottoming Out
An extremely pessimistic tone has already been cast over Chesapeake shares. The stock presently trades at a forward P/E of roughly 8.6 and a price-to-book ratio of about 0.74. From a shear valuation standpoint, it is likely that the slightest bit of good news could produce a sharp reversal. For comparative purposes, it is worth noting that peers such as Southwestern Energy (NYSE:SWN), Anadarko Petroleum (NYSE:APC) and Devon Energy (NYSE:DVN) trade at forward P/Es of approximately 19.4, 12.0 and 8.9, respectively.

Regardless of whether Icahn succeeds in having four of the current board members axed, reforms are forthcoming. The company is already searching for an independent non-executive chairman so that it can split up the chairman and CEO roles currently held by Aubrey McClendon.

Icahn's mere presence as a major shareholder will bring about enhanced corporate governance. Chesapeake certainly has room for improvement in this area as it recently treated its shareholders to the revelation that it is the subject of an informal SEC inquiry, which coincidentally, or not, followed reports that McClendon used his personal investments in the company's wells to attain more than $800 million in private loans.

SEE: Carl Icahn's Investing Strategy

Other Considerations
From an operating standpoint, Chesapeake Energy has plenty of upside potential. Natural gas prices hit their lowest level in 10 years in late April, but have rallied 34% in the weeks since. A surplus of natural gas reserves will continue to be a burden for the industry in the short term, but as major integrated oil and gas companies switch their focus to oil, prices will eventually stabilize.

Chesapeake itself has proven to be adept at managing its own portfolio. In 2009, it produced 70.7 billion cubic feet (Bcf) per million barrels of crude oil (MMBL). By the end of 2011, the ratio had dropped to 31.7 Bcf per MMBL. Until the price of natural gas gets some legs under it, this appears to be a sensible strategic shift.

SEE: Natural Gas Industry: An Investment Guide

The Bottom Line
It remains to be seen how much change Carl Icahn will be able to exact at Chesapeake, but the timing of his entry is ideal. The combination of unprecedented drops in natural gas prices and a freewheeling approach to corporate governance have driven this stock into the ground. These setbacks will only be temporary though, and the company has ample potential to unlock the value that Icahn and many others see.

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At the time of writing, Billy Fisher did not own shares in any of the companies mentioned in this article.

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