Oil and gas analysts ponder a Chesapeake without McClendon

Citing “philosophical differences,” Chesapeake Energy Corp. (NYSE: CHK) co-founder and CEO Aubrey McClendon announced yesterday that on April 1, 2013, he will step down from the CEO post after 24 years. The news is a talking point for many in the oil and gas industry, including the analysts that cover it.

McClendon has been at the forefront of the oil and gas industry and an argument can be made that the Oklahoma City, OK-based natural gas company—second in natural gas production behind ExxonMobil—set the stage for the North American shale boom with its widespread use of hydraulic fracturing to recover hydrocarbons trapped in some of the most talked about unconventional resource plays.

Widely known for its many deals to help fund its oil and gas drilling, Chesapeake, and more so McClendon himself, has come under fire for borrowing hundreds of millions of dollars from companies with which Chesapeake and McClendon struck deals, thus raising concerns of shareholders.

As a result, the company’s audit committee began reviewing loans made to McClendon and sweeping changes were made to the company’s board of directors, including the removal of McClendon as chairman. In June, Chesapeake appointed Archie Dunham, the former chairman and CEO of ConocoPhillips, as the company’s new independent, non-executive chairman. The board also named four new directors, including three proposed by Southeastern Asset Management, its largest shareholder, and investor-advocate Carl Icahn, the company’s second-largest investor.

And, while the press release about McClendon’s resignation stated that the action is not related to the ongoing review of his financing arrangements (final results are expected to be released by the company on February 21), analysts believe the move reflects the power of the new board and its determination to change the status quo.

Analysts’ views

“We’ve been adamant that the new CHK Board has some teeth, but we admit, this took us by surprise,” said Global Hunter Securities (GHS) analysts in a note to investors Wednesday. “In a sit down we had with Aubrey in OKC during Q4, we came away thinking that these philosophies were more in line than worlds apart. In fact we were told that everything positive that could come from tighter corporate discipline at CHK would in fact emerge.”

“The power of the new Board becomes evident with CEO McClendon's imminent departure. We believe a more conservative Board style is likely to result in reduced spending that is more closely aligned with cash flow,” said Tim Rezvan, an analyst with Sterne Agee.

And, while an internal email sent by Chesapeake chairman Dunham assured employees that the company was not for sale, said GHS analysts, “the question of the potential breakup value for CHK is worthy of addressing.”

This isn’t the first time Chesapeake has been painted as an acquisition target, and it may or may not materialize, but an increase in asset sales appears likely.

“We would buy CHK shares on the expectation that the announcement of the CEO stepping down could lead to the whole company being put into play or at least, and more likely, a more aggressive shrinking of the asset base, relative to prior expectations,” said Stifel Nicolaus analysts, noting the $17 billion to $19 billion in asset sales slated for 2012/2013 “could get upsized as the Board will likely favor pulling the present value of CHK’s massive 15.1MM undeveloped acres forward.”

These undeveloped acreage positions sit in the Utica Shale, Marcellus, Eagle Ford, Mississippian, Cleveland/Tonkawa, Granite Wash, Haynesville, Marcellus, Barnett and Powder River/DJ Basin plays. The challenge, noted GHS analysts, is to offset the value against “an intimidating capital structure (seven JV’s, 10 VPP’s, $12.6B in long-term debt, $3B in preferred equity, $2.4B in non-controlling interests). We think that a major with a lower cost of capital vs. CHK can quickly get to a starting point of $30/share of value fairly easy.”

Previously, noted Stifel Nicolaus, Chesapeake tried to control debt by selling the minimum amount necessary – noncore upstream assets and midstream assets. With McClendon’s departure however, “we believe that no assets will be considered sacred and a more aggressive asset sale or even an increased probability of a corporate sale could result.”

So the search for a new CEO is on, but as Rezvan noted, “The departure of CEO McClendon does not change the major challenges facing the company: 1) a need to sell at least $4 billion of assets over the next two years to fund spending needs, 2) a limited inventory of premier oil assets, and 3) unhedged exposure to natural gas.”

 

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