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Franklin funds are now biggest stakeholder in Chesapeake Energy

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Franklin funds are now biggest stakeholder in Chesapeake Energy

Franklin Resources Inc., the manager of the $693 billion Franklin Templeton family of funds, is now Chesapeake Energy Corp.'s largest stakeholder, according to an Oct. 8 SEC filing.

Franklin picked up 242.5 million shares of the Oklahoma shale oil and gas producer, a 12.4% stake, as part of a $588 million private placement Chesapeake used to retire a package of bonds and preferred stock Sept. 10.

Based on Chesapeake's Sept. 9 closing price of $1.89 per share, Franklin spent $458 million and Chesapeake used to that to retire $588 million in debt. Analysts like to see Chesapeake chipping away at what was nearly $10 billion in debt at the end of the second quarter, but insist the driller needs to sell bigger assets such as its Haynesville or Marcellus Shale gas fields to further lighten its load.

"We believe Chesapeake will still need to sell large blocks of its non-core assets and continue to core up its oily inventory in the Powder River Basin and Brazos Valley," SunTrust Robinson Humphrey Inc. oil and gas analyst Neal Dingmann told clients after the deal was announced.

Franklin's rationale for buying Chesapeake shares, which have lost 74% of value in the past year, was not immediately clear. A spokesperson said Oct. 9 that the funds normally do not comment on individual stocks. Despite Franklin's vote of confidence, Chesapeake shares lost 32% between Sept. 9 and Oct. 8's market close of $1.28 per share.

"We're a bit surprised to see continued investor interest in taking equity in the business as the balance sheet remains under significant pressure," analysts at energy investment bank Tudor Pickering Holt & Co. said Sept. 20 after a Chesapeake announced a similar, $145 million deal. "While we appreciate the resulting debt reduction/cash flow improvement of these swaps, we see large scale asset sales as necessary to meaningfully address the debt load."

Mizuho Securities USA LLC Managing Director Paul Sankey noted that Chesapeake still ranks as a sizable operation. "The fascinating thing about [Chesapeake] to this innocent bystander is that its market cap is $2.6 billion; enterprise value around $14 billion," Sankey told clients Sept. 20. Sankey does not cover Chesapeake but thinks that the shale gas pioneer "is seen as 'too big to fail.'"

Chesapeake did not return a request for comment.

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