Chesapeake Energy’s (NYSE:CHK) beleaguered CEO, Aubrey McClendon, announced his resignation Tuesday, citing differences with the firm’s board of directors. McClendon has been under fire from investors following allegations that he used his position in the company to further his personal interests and is currently being investigated by the firm’s board as well as federal regulators.  McClendon,who co-founded the company in 1989 and led it since its inception, will resign from his position of CEO on April 1, and will continue until a successor is appointed. Chesapeake’s stock reacted very positively to the news, gaining nearly 9% in aftermarket trading. We believe that McClendons departure will help alleviate concerns of the firm’s corporate governance practices and will help turn the focus on improving the firm’s balance sheet and performance.
Corporate Governance Issues Led To The Departure
Chesapeake had a program called the Founder Well Participation Program, which allowed the McClendon to buy 2.5% stake in the company-operated wells as part of his compensation. As a result, McClendon has had to invest significantly towards his share of capital expenditure and operating expense relating to all the wells drilled to date. To pay for this, he allegedly borrowed around $1 billion from EIG Global Energy Partners, a firm that also is a big investor in Chesapeake, through a group of shell companies controlled by him, raising issues of a conflict of interest.
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Another investigation revealed that McClendon was running a secretive $200 million hedge fund along with co-founder Tom Ward, which traded in the same commodities Chesapeake produces. The hedge fund also hired people who were simultaneously employed by Chesapeake. These allegations, compounded by falling natural gas prices caused the stock to fall by over 50% during the first half of 2012. This caused a revolt of sorts by the firm’s shareholders, led by Carl Icahn and Southeastern Asset Management, two of the firms largest investors (combined holding of around 22%), resulting in a shakeup of the firms board and McClendon losing his chairmanship.
Where Does Chesapeake Go From Here?
McClendon steered the firm to become the second largest natural gas producer in the U.S., leveraging hydraulic fracturing technology, which unlocked vast natural gas reserves trapped in shale rocks. However, his free spending ways and high appetite for risk did not resonate well with the shareholders. During his tenure, the firm built up some of the largest natural gas assets in North America along with the equipment required to harness them. The firm’s capital expenditures have exceeded cash flow for 19 of the past 21 years. As of Q3 2012, the firm’s long term debt stood at around $16 billion, while cash and cash equivalents were less than $300 million. 
We believe that McClendon’s departure will help clear up some of the dark clouds that were hovering around the Chesapeake’s corporate governance practices, and could help the firm improve its perception with investors who were becoming increasingly skeptical of the firms high risk levels, mounting debt and free-spending ways.
The industry picture has been looking brighter over the last few quarters, with gas prices rising significantly from the lows seen in early 2012, and demand is also picking up as power plants are switching to gas from coal. However, we believe that a complete recovery for the firm will be contingent on its ability to monetize assets and payoff debt. The firm’s new CEO will need to focus on improving operational efficiency, reigning in capital spending and accelerating the the firm’s asset monetization process.Notes: