Getting Chesapeake Back on Track is Easy: Say Goodbye to Aubrey
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As if Chesapeake Energy (NYSE: CHK) didn’t already have enough problems – one of the softest natural gas markets in a decade, an overwhelming amount of debt, and plans to sell assets and issue yet more debt in an attempt to get a handle on the company’s finances are but a few. The article posted a couple months ago – in case you missed it – goes into all the sordid details. At least they seemed sordid at the time. Now - with the latest revelations of CEO Aubrey McClendon apparently using the company as his own private investment firm - February’s problems pale in comparison.
A Quick Re-cap
You’ve probably heard it all by now, but just to make sure we’re all on the same page here’s a synopsis of the fiasco that first surfaced about this time last week. Turns out Aubrey cut himself a deal with the company – at first acknowledged by the Board of Directors, which has since been changed to a “Deal? What deal?” stance. The essence of the agreement gives the CEO the right to a 2.5% cut of the company’s new wells until 2015. A little odd right there, but then it got much worse.
Aubrey then used his new-found asset to borrow as much as $1.4 billion. And then it got even worse from there – the funds were borrowed from a private equity firm that had completed deals totaling in the hundreds of millions the past year alone. That has a funny smell to it, and many shareholders are catching the same nasty odor.
Chesapeake’s response to all of this nonsense was today’s announcement that `the Board and McClendon have reached an agreement to terminate the deal early. Ya’ think? If today’s price movement is any indication investors and shareholders are taking the right stance. This isn’t about the slew of financial problems the company has – nor the economic uncertainty surrounding the natural gas sector in general – this is about a company with little for no fiscal oversight. Personally, I’m not sure what’s more frightening – that the CEO would enter into what has all the makings of a series of unsavory, if not, downright shady deals, or the Board (supposedly – at least as of today) had no idea of the particulars of how their own CEO gets paid.
One of the reasons companies have a Board of Directors is to oversee executive compensation. These are supposedly well-intentioned business folk that exist to protect shareholder’s interests. They’re compensated for their time, expertise and oversight with nice vacations, sweet stock options and access to great catering at the annual meeting - not bad for what is generally not that much work. Chesapeake’s Board didn’t even earn those little perks.
But based on what we know thus far, we should'nt let Aubrey off the hook here – at all. At this point there’s only one thing shareholders should demand – the door hitting McClendon on the way out. For contrarian investors looking for opportunities in natural gas, take a look at $7.9 billion Linn Energy (NASDAQ: LINE). Not much in the way of topside growth is likely as the company is near it’s 52-week high and trades at a pretty steep multiple for the industry. But the 7.34% dividend in and of itself is awfully attractive.
Cimarex Energy (NYSE: XEC) is another alternative. Nothing like Linn Energy’s dividend, but Cimarex is a value by most all measures relative to the sector, has great margins, and is priced on the low-end of its trading range.
As for Chesapeake, here’s hoping investors keep up the good work and continue to let this stock languish until Aubrey's left the building. Unfortunately, that’s what it’s going to take to push him out – and out is where he belongs.
timbrugger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.