How Will Chesapeake CEO's Departure Affect the Stock?
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Chesapeake Energy (NYSE: CHK) announced the retirement of CEO Aubrey McClendon on Jan. 29. Billionaire McClendon is a co-founder and former chairman of Chesapeake. This news came amongst charges of improper use of the company’s resources for personal gains. Media and Investor investigations forced him to quit as chairman of the company last year. However, in an official statement, the company said that this decision is not related to the Board’s pending investigation of his financial arrangements.
Chesapeake stock saw an increase of 11% and reached as high as $21.15 in the after trading hours on Jan. 29. This reaction from the market clearly gives an idea of investors’ expectations from the company.
Investors are very much upset with the idea that the company’s leadership was focusing on developing wealth for themselves through improper means. They feel that it is high time for a change and believe that letting go of McClendon will give the company a fresh start.
Analysts also feel that a new business strategy can help Chesapeake in balancing its assets against the rising market debt given the volatile economic conditions around the world. The strong brand image of Chesapeake can drive the company away from the present circumstances provided the leadership is committed to increasing shareholder value and profitability.
What Went Wrong?
McCledon built this company from scratch along with the company’s former president Tom L. Ward and today Chesapeake is the second largest producer of natural gas, among the top 15 oil producers and most active drillers in the United States. Even after such an achievement, his so-called retirement is being seen as a positive sign for the future of Chesapeake. Analysts believe that this is mainly because investors have lost their confidence in McClendon's leadership. Media news regarding his personal loan on his minority stakes of 2.5% in the company-owned wells further deteriorated his market standing and credibility. Moreover, some of these companies from which loans were issued to him were involved in separate financial transactions with Chesapeake. The stock fell by 20% when these findings went public.
Adding more to the chaos, Reuters reported that McClendon was running a $200 million hedge fund that traded in the commodities produced by Chesapeake. This made the company’s largest investors Carl Icahn and Southeastern Asset Management use their voting power for appointing new directors to the board, and they eventually rooted out McClendon from the position of chairman. The new company board launched investigations against him and reduced his compensation by 20%.
In the year 2012, the success of drilling methods in North America lowered gas prices. Chesapeake had to reduce capital spending and sell assets to bridge the gap between cash flows and expenses. McClendon was forced to sell 90% of his shares in Chesapeake worth $2 billion. This caused a huge drop in the market value of the company. Chesapeake has developed a large debt since then.
McClendon has raised more than $30 billion since 2008 selling assets to companies like Exxon Mobil (NYSE: XOM), Total SA (NYSE: TOT) and CNOOC (NYSE: CEO) to reduce the company’s debt. Chesapeake expects to continue selling its assets in near future to bring down debt levels further.
Exxon Mobil is the world's largest company by revenue. It has a clear competitive advantage in areas like refining and chemical production. The company is performing quite well on the financial front and good growth is expected in the coming years. Its high market capitalization makes it the largest traded public company.
Total SA is an oil and gas company with expertise in refining, exploration and chemical manufacturing. Total acquired a 25% of Chesapeake’s assets for $2.25 billion. It gave an annual return of 7.1% for the year 2012. Its stock has increased by over 7% in last one year.
80% of Chesapeake’s revenue comes from the natural gas sector. Natural gas is the fuel of the future, as it burns without pollution, is more efficient and can be cheaper than oil. This gives Chesapeake a competitive advantage over its oil dependent competitors like Devon Energy. Natural gas has the potential of reducing the dependence of Chesapeake on debt to finance its activities. In this way it will be able to save some of its invaluable assets that are being sold away at present in the name of future strategy.
McClendon did manage to build a strong company which contributed a lot to the growth and development of oil and natural gas extraction in North America. His failure to keep a balance between personal aspirations and the company’s objectives led to heavy downfall in market standing of the company. His actions sparked a rare phenomenon of investors stepping in to manage the failing market credibility of a company. Chesapeake lost huge wealth as its stock lost much value in light of investigations regarding personal use of the company’s wealth. In the last years of his career, his decisions were not competitive enough and saw the company building up huge debt and reduced cash flows. This gave a tremendous opportunity to competitors to gain ground and capture Chesapeake's market share as a tarnished brand image and lack of faith in leadership forced industry partners to look for alternatives.
In the years to come, the new leadership faces the tough challenge of rebuilding the lost credibility and brand image.
StockRiters.com has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). The Motley Fool owns shares of Devon Energy and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!