Tuesday, January 29, 2013

CHK: Out With The Old...

Aubrey McClendon's Exit May Pave The Way For A Sale

After running into a cashflow shortfall and years of ethical failings, Chesapeake Energy attracted the attention of activist investors last year and the problems plaguing the company began to be resolved (see http://lifeinvestmentseverything.blogspot.com/2012/05/chk-little-help-from-your-friends.html among other past posts).  Today after the close of the market the company announced that its founding CEO Aubrey McClendon will be stepping down.  To be fair to Mr. McClendon, he and former partner Tom Ward (now at SandRidge Energy and also attracting activist attention) built a monster exploration and production company out of nothing.  However, the long track record of poor corporate governance and the aggressive manner in which a big oil and gas company came to be run have held back the market valuation of CHK.  Now that the firm has bid adieu to Mr. McClendon it would appear that there is room to change how the company is run and the valuation it receives.

I think there are three plausible outcomes for the company.  First and simplest is a sale to a larger firm.  There are a number of large oil majors which would find CHK's collection of drilling assets to be extremely attractive and they all have the financial wherewithal to complete the deal.  Since the company's balance sheet has been backed away from the proverbial cliff, a sale could presumably be done in a non-distressed manner.

Second, the firm could simply get a new CEO more accustomed to running a firm like this in a more conservative "harvest" strategy and emerge as a credible, long term oil and gas player.  Such a CEO could come from the executive ranks of an oil major and over time allow the firm to attract a higher valuation.  Something similar happened to the firm now known as EOG.  EOG was originally named "Enron Oil & Gas" and for obvious reasons was considerably beaten down by the market.  A change of management and name plus the passage of time and EOG is now viewed as a credible oil and gas play that does not trade at a hefty discount to peers.

The third possibility is that the long-running Board investigation into Mr. McClendon's entanglements with CHK uncovered something particularly bad.  If it is significant enough to affect the firm, the future might not be so bright for CHK investors.  Since there appears to be no such disclosure as of this evening I am inclined to discount this possibility, but it is still possible.  The stock is up some 10% after hours, so others seem to be optimistic.

In any event, it has been entertaining to watch CHK over the years and present times are no exception.  I suspect that anyone who bought shares over the last year will find the outcome of the Aubrey McClendon saga to be profitable.

As always, do your own due diligence, consult your advisors and be careful.  You can lose money on this stuff.  Not intended as investment advice.

Disclosure: I am long CHK equity and call options.

No comments:

Post a Comment