The “problem” is a lack of transparency, which wouldn’t be such an enormous red flag if McClendon hadn’t developed earned such a reputation as a reckless spender and a bit of a blowgut … a little too much like Enron’s Ken Lay for the market’s comfort.
As of the last filing, Chesapeake reports $39.6 billion worth of property, plants and equipment, which is calculated at “cost based on full cost accounting.” And you know what? Those valuations might be 100% on target. On the other hand, that doesn’t mean McClendon didn’t overpay for them based on some excessive optimism — his eyes have been known to be bigger than the company’s wallet.
And at the extreme other end of the spectrum, there remains the lingering chance those assets are completely misvalued; there’s just little verifiable detail about those assets out there. As John Olson noted of the corporation, “You don’t know what they have. I know that I don’t know.”
Now, back to the original point …
Although we might not have a clear idea of what all the listed property and assets actually are worth, there is some clarity on Chesapeake Midstream Partners and Chesapeake Midstream Partners LP — the two assets the company is selling first.
That value? They might well be the best things the organization has going for it right now; the proverbial superstars on the company’s bench. Both offer real cash flow, and both are quite resilient to natural gas price fluctuations. Yet, rather than play them, McClendon is trading them because he has run into salary cap trouble. It’ll work as a short-term patch, but as is the case with most sports teams, when you let go of your key franchise players, problems can get worse rather than better with the remaining second-tier players.
Sure, there’s always a chance the tactic will solve more problems than it creates. Given that this is a “have to” situation for Chesapeake rather than a “want to” scenario, however (where the buyers have more leverage than the seller), this “shrink our way to success” approach feels a little bit like the beginning of the end of Chesapeake as we know it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.