Chesapeake Shareholders Say "Bye Bye" to Mr. McClendon

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Jan 29, Chesapeake Energy (NYSE: CHK), announced that its Co-founder, Chief Executive Officer and President, Aubrey K. McClendon, has agreed to retire from the company on April 1, 2013. Following this announcement, shares immediately responded with a 7% jump. Mr. McClendon is regarded as one of the most influential CEOs of his generation, credited for pioneering the drilling technique known as hydraulic fracturing, or fracking. The controversial method has led to a vast boom in U.S. natural-gas production. But that is not everything this famous billionaire CEO is credited for.

The "'Aubrey Discount"

In the past recent months, the famed CEO was has been heavily critiqued for mixing his personal life with his business, professional life. For instance, McClendon was charged, though never convicted, of self-dealing: allegations he gave out business to firms that made personal loans to him and ran a hedge fund that traded the same commodities Chesapeake manufactured. Add these allegations to a variety of other lavish stories such as buying a stake in an NBA team and using the company's aircraft for personal trips by his wife and you get yourself a CEO that shareholders should be highly concerned about.

This very concern led to the so called 'Aubrey Discount'. McClendon’s actions hung on the stock price for the past two years. Since 2011, shares are off 32%, erasing billions of the company’s market value. Just for a comparison, During that same time period, shares of SPDR S&P Oil & Gas Exploration, an ETF which tracks the oil & gas industry, have held untouched.

Apparently, various active investors such as Carl Ichan and David Dreman, long standing shareholders of the company, have decided that McClendon's exit will serve shareholders best. The question now remains - how will Chesapeake perform in the post- McClendon era?

The future of Chesapeake

Chesapeake is a diversified oil and gas exploration company. Its well known competitors in the industry include EOG Resources (NYSE: EOG), Marathon Oil (NYSE: MRO), Apache (NYSE: APA) and Newfield Exploration. All of the above companies have taken a serious hit once the price of natural gas plunged, and they are now beginning to benefit from the reverse in this very trend. Take a look at the table below to see how they compare to Chesapeake by the numbers:

<table> <tbody> <tr> <td> </td> <td>forw. P/E</td> <td>Price/Book</td> <td>Price/Sales</td> <td>PEG</td> <td>Current market price</td> </tr> <tr> <td>CHK</td> <td>16</td> <td>1</td> <td>1.1</td> <td>6</td> <td>$20.1</td> </tr> <tr> <td>EOG</td> <td>20</td> <td>2.5</td> <td>3.2</td> <td>0.9</td> <td>$126.3</td> </tr> <tr> <td>MRO</td> <td>10</td> <td>1.3</td> <td>1.6</td> <td>2.7</td> <td>$33.55</td> </tr> <tr> <td>APA</td> <td>8.8</td> <td>1.1</td> <td>2</td> <td>1.3</td> <td>$84.36</td> </tr> <tr> <td>NFX</td> <td>12.5</td> <td>1</td> <td>1.5</td> <td>0.8</td> <td>$29.7</td> </tr> </tbody> </table>

As you can see in the table above, Chesapeake stands out as the cheapest company both in terms of price/ book and price/sales. EOG, on the other hand, is the most expensive company on the list judging by the same parameters, but it compensates for it by its rapid growth rate, as implied by its PEG. Apache is the cheapest company based on earnings, with a forward P/E of only 8.8x, and Newfield Exploration is the fastest growing company of them all.

But there is one very important figure that makes Chesapeake a great potential for a business turnaround: It is the only company on the list whose net debt exceeds its equity value. This is a direct result of McClendon's buying spree and will now be amended by its replacement. Such an excessive debt adds tremendous risk to any investment in the company and causes the market not to appreciate it accordingly. But once the company begins to unload some debt from its balance sheet, as it is currently doing, the market is likely to give it a much higher price tag.

The Fool looks ahead

A departure of such a dominant CEO always has an impact on a company, and Chesapeake is no exception. But I believe that McClendon's exit will give an opportunity for the company to show its true strength points to the market - it is competitive, cheap and sitting on a hoard of gas fields. In that regard, the CEO's departure is music to shareholders' ears.


shmulikarpf owns shares of Chesapeake. The Motley Fool owns shares of Apache 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!

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