It’s pretty safe to say that Chesapeake Energy (NYSE:CHK) shareholders have had a rocky past year. The second-largest producer of natural gas and the most-active driller of new wells fell hard as a slew of factors conspired against it.
Sustained lower natural gas prices brought on by robust drilling and high levels of debt didn’t help its cause, but Chesapeake’s worst problem was internal.
And that problem is headed out the door.
CEO Aubrey McClendon just announced he would be stepping down from his post effective April 1. Secret hedge funds, a controversial Founder Well Participation Program and personal loans backed by the program were just some of internal financial issues facing the driller under McClendon’s watch. Those revelations about the firm’s finances and inner dealings of McClendon sparked massive stock losses, civil and federal probes and a hefty dose of shareholder activism.
Investors cheered the move, sending CHK shares up 8% as of late Wednesday. That’s because McClendon’s departure could be the final puzzle piece that leads to better times ahead — including a potential buyout.
A History of Perks
McClendon is credited with helping create the modern natural gas industry and built Chesapeake into a monster through a series of deals. While a high level of compensation is certainly warranted for an important figure in the natural gas industry, McClendon’s package bordered on ludicrous.
What he did to supplement that compensation package was even more troubling.
McClendon blurred the line between personal and company dealings. After a series of investigations, Reuters uncovered that McClendon had arranged to personally borrow more than $1 billion from a firm that also is a big investor in Chesapeake. By using personal shell companies, the loans were secured by his interest in company wells via the Founders Well Participation Program. McClendon is allowed to take up to a 2.5% stake in each well Chesapeake drills.
Reuters later reported that McClendon partially owned and helped run a $200 million private hedge fund from within Chesapeake’s Oklahoma headquarters between 2004 and 2008. This led to concerns about McClendon’s ownership of the NBA’s Oklahoma Thunder, which Chesapeake sponsors.
Under pressure from shareholders, the company replaced more than half of its directors and the former head of ConocoPhillips (NYSE:COP) was brought in to quell the shareholder revolt. Major investors Carl Icahn (with a stake of nearly 9%) and Mason Hawkins (at 13.5%) pushed hard for the changes.
McClendon’s departure was seen as necessary to move the focus back to natural gas drilling, rather than internal politics. The founder and former CEO said that his retirement “will be amicable and smooth.”
A Buyout a-Brewin’?
Chesapeake’s stock surge Wednesday can largely be interpreted as a sigh of relief from struggling shareholders. Chesapeake can finally get back to fracking some shale.
However, that doesn’t do anything to help its struggling balance sheet.
To get to be one of the biggest producers of natural gas in the country, Chesapeake spent some serious dough. However, a prolonged period of low natural gas prices has left the energy firm saddled with debt and a funding shortfall.
Chesapeake sold or agreed to sell about $12 billion in oil and gas properties last year and is planning on selling another $7 billion in 2013. With McClendon gone, analysts estimate the speed at which asset sales will occur will increase, and some think the whole company is firmly on the selling block. (For example, Morningstar has the firm among its 11 most likely acquisitions of 2013.)
Of course, current Chairman Archie Dunham said in a memo to employees that the company is “not for sale.”
That said, I’m not so sure Chesapeake really isn’t for sale.
Leverage and debt issues remain a huge problem at CHK, and debt reduction goals have been pushed back. In addition, the amount of asset sales that analysts had been expecting to be completed by now still has not gone through. Point blank: Buyers are aware of Chesapeake’s liquidity issues and could be playing hardball with prices. That could mean an all-out kit-and-caboodle sale could be the firm’s best shot at redemption.
Given Chesapeake’s size, that means an integrated major or foreign state-owned energy firm would need to do the buying.
Bottom Line
Either way, the tide might finally have turned for troubled CHK shareholders. McClendon’s dark cloud was a major issue hanging over the company and its stock; now that he’s gone, investors can focus on the firm’s drilling activity and/or potential sale.
Chesapeake’s not out of the woods just yet, but it’s getting closer.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
