3 Keys to the Chesapeake Energy Turn Around
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If there’s one energy company that investors love to hate its Chesapeake Energy (NYSE: CHK). With a growing liquids business, great acreage positions in some of the most intriguing emerging energy basins and what appears to be a dirt cheap stock price, what’s not to like? How about their image problems, bloated balance sheet and unfocused approach? Those three have done wonders for their stock price sending it down over seventy percent from the all-time high.
While rising natural gas prices would go a long way toward a rising stock price, it’ll take more than that to send their returns to the next level. If they want to get back there, and one would hope that’s their goal, they need to concentrate on fixing those three keys issues. To get them on their way, here are three reminders to help guide them on their way.
“Image is everything” – Andre Agassi
CEO Aubrey McClendon is one of the great champions for natural gas, but at the moment he has an image problem. Many have questioned his compensation and sweetheart deals. Many more have questioned his over reliance on leverage both personally and professionally. Those questions might never have been brought up if the natural gas bubble didn’t burst. Sans financial crisis inspired margin calls as well as the demand destroyed following the crisis and McClendon could have won the greatest bet of all time.
Unfortunately for him and Chesapeake it is a bet he’s been on the wrong side of. Chesapeake needs to make a concentrated effort to disprove the media’s portrayal that McClendon is only looking out for himself. If Apple’s Steve Jobs can get by on a buck a year, certainly Aubrey should be happy with a few less million dollars than the $303.6 million that he’s made over the past five years. That puts him as the second highest paid CEO of the past five years. If the board can come up with a compensation plan that better aligns McClendon’s pay with long term shareholder returns it would go a long way repairing their image problem.
“The borrower is slave to the lender” – The Bible
At the end of their last quarter Chesapeake had $13.3 billion of long term debt on their balance sheet. At a current market value for the company of $12.6 billion that’s a lot of enslavement to their creditors. Their debt to equity ratio of more than one, puts them at twice the industry average. While their total debt outstanding had been coming down the past few years, as of the end of last quarter it was back up to their 2008 level. For some context, $11 billion Range Resources (NYSE: RRC) has but $2.6 billion of debt on their balance sheet at the end of last quarter. Even MLP-like Linn Energy (NASDAQ: LINE) has less debt with $6 billion to their $8 billion of equity. I’m not bothered by them having debt on their balance sheet; it’s fairly standard industry practice as you can see. The problem lies in their over reliance on debt in their attempt to grow bigger as fast as possible. They really need to follow through on their effort to get their debt more in line with their industry peers. That leads me to my final point.
“Focus is a matter of deciding what things you're not going to do” – John Carmack
While I’d never heard of John Camack before I read that quote, what he said really captures what I think is the final step toward many happy returns for Chesapeake shareholders. They are currently “focused” on eleven natural gas and liquids plays and have nine key elements of their business strategy. Range for example has four core operating areas and a four part strategy. Over the past five years Range is up 90% while Chesapeake is down 40%. Chesapeake has been building an energy empire while Range has been building a focused E&P company. If Chesapeake can better focus on what they do best, that well-oiled machine will be more than enough fuel to drive up their share price.
They have made a couple of moves in the right direction of late. Almost a year ago they IPO’d Chesapeake Granite Wash Trust (NYSE: CHKR) and just a few months ago they sold off their remaining interest in their midstream assets to what is now Access Midstream (NYSE: ACMP). This has brought in much needed cash to the company while narrowing their focus. In an effort to decide what things they are not going to do, they need to think long and hard about their affiliates and figure out which ones really don’t fit into their long term plans. Finally, they need to continue to deliver on their plan for $13-14 billion of asset sales this year to focus on their drilling on the “core of the core.”
Chesapeake has begun to take the necessary steps in turning around the company. Adding five new board members and an independent chairman will help their image, and their asset repositioning program is helping narrow their focus while improving their debt profile. It’s a good start, but their ability to follow through is the only thing other than a spike in the price of natural gas that’ll put a spark in the price of their shares.
latimerburned owns shares of Linn Energy, LLC. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Range Resources. 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.If you have questions about this post or the Fool’s blog network, click here for information.