Chesapeake Endgame

The news flow surrounding Chesapeake is so heavy I have taken the ticker off my screen.  Everything else was being drowned out.  With every generalist having an opinion this situation looks to last for some time.  Chesapeake has always been widely followed by E&P investors because of flamboyant former Chairman but still CEO Aubrey McClendon.  As a long time observer, I speculate the endgame is coming very soon.

Chesapeake has always pushed the envelope with aggressiveness and has a storied history.  Over the last two decades the share price has had several booms and busts.  The recent screaming over the FWPP and VPP’s have long been understood and known by investors.  In fact, many investors have specifically avoided Chesapeake shares because of their concerns.  Shareholders have long been unhappy and almost pulled off a coup at the shareholder meeting last year.  This year things will change.

This years meeting was announced as I wrote this essay.  Aubrey (known by his first name) and perhaps the board as constructed will not survive.  The already cantankerous individual shareholders will now be joined by the institutions.  Largest shareholder Southeastern Asset Management has turned on the Aubrey and the board.  If the board does not fire Aubrey, my speculation is the directors up for election will not receive the majority votes required to be elected.  Proposals put to the shareholders and supported by the board are in trouble too.

This end to Aubrey’s Chesapeake career stands in stark contrast to his nemesis Bob Simpson from XTO Energy.  Aubrey beat Simpson in the gas land grab.  Simpson considered his outstanding two decade run, looked at the natural gas landscape and sold out to Exxon Mobil.  Then Aubrey did well in the oil land grab!  Hubris and over aggression will be marked as the reasons for Aubrey’s fall.

The endgame did not have to occur in disgrace.  Participation agreements are common place for promoters in the oil patch; they need to stand in the place of out-sized cash and share compensation, especially since they do not fit with large companies.  Why was the news Aubrey borrowed against his well interests so big?  I always assumed he borrowed to fund drilling!  The additional conflicts of interest should never have occurred, thus the board is in trouble.  The VPP‘s have always been known and are legitimate business practice.  The company should treat them as debt; but the media ought not act as though the VPP’s are surprises.  Additionally, the off-balance sheet discussion needs to include the drilling carries for Chesapeake’s account, which are not on the balance sheet either.

Thus the endgame.  Aubrey goes, and maybe the board too.  The assets will be rationalized.  Minority JV partners may take over asset plays.  Complicated transactions will be wound down.  Soon results will rival peers.  Remember when the stock soared for a day over Aubrey losing Chairmanship?  The asset base is ridiculous for the share price.