With Its CEO Stepping Down, What’s Next For Chesapeake?

After more than two decades at the company he founded, Chesapeake Energy's (NYSE: CHK  ) Aubrey McClendon is stepping down from his role as CEO of the Oklahoma City-based oil and gas company. According to yesterday's announcement, McClendon will be resigning on April 1.

In an email to Chesapeake employees, McClendon cited "philosophical differences" between him and the board as the reason for his abrupt departure. He will receive his full compensation, as well as other benefits to which he is entitled, according to a company release. However, if it's any consolation to irate shareholders, the size of his pay package was recently reduced and he will not be receiving his 2012 bonus.

A year dominated by controversy
It would be an understatement to say that McClendon has been the subject of major controversy over the past year. Last April, a Reuters investigation found that he took out personal loans of more than $1 billion from EIG Global Energy Partners, an institution that also had business transactions with Chesapeake. The loans were secured by his interest in Chesapeake's oil and gas wells, as part of a usual compensation plan known as the Founders Well Participation Program (FWPP). The program permitted McClendon to take up to a 2.5% stake in every well his company drilled.

Shortly thereafter, allegations surfaced that he managed a hedge fund, the Heritage Management Company LLC, with SandRidge (NYSE: SD  ) CEO Tom Ward, which traded in natural gas and other commodities that Chesapeake produces. According to Reuters, the fund operated from at least 2004 to 2008 and listed Chesapeake's Oklahoma City headquarters as its mailing address.

Needless to say, shareholders were not happy. McClendon was subsequently stripped of his chairman title, though he stayed on as CEO. The allegations also prompted a major board shake-up. In June, swayed by its two largest shareholders at the time -- Southeastern Asset Management and investor Carl Icahn -- Chesapeake decided to reconstitute its board of directors.

A look back at McClendon's tenure
Say you what you will about his ethical conduct, but McClendon does deserve major credit for transforming Chesapeake from a tiny gas company in 1989 to a dominant player in the exploration and production space and a force to be reckoned with by the mid-2000s. Known as a fearless risk-taker, he ensured that Chesapeake emerged as a pioneer and leader in unconventional oil and gas exploration.

In the mid-2000s, he led the company in executing its rapid expansion strategy, called the "gas shale land grab," which involved aggressively amassing large acreage positions in budding shale plays that have since become well known. The assets acquired during this time have proved invaluable and are a major reason why many investors still have faith in the company.

Chesapeake's Chairman of the Board Archie Dunham said : "Under Aubrey's strong leadership, Chesapeake has built an unmatched portfolio of natural gas and oil assets in creating one of the world's leading energy companies. He has been a pioneer in the development of unconventional resources, and he has also been a leader in the effort to make the United States energy independent."

What does the future hold for Chesapeake?
So now for the big question on investors' minds – what's next for Chesapeake?

It's tough to say but it appears that changes are definitely afoot at Chesapeake, many of them encouraged by activist investors. Activists are taking on an increasingly larger role, especially in the energy space, and making recommendations as to how companies can be improved. Recent examples include Third Point's Dan Loeb and his comments on Murphy Oil (NYSE: MUR  ) and investor Carl Icahn and his recommendation that Transocean (NYSE: RIG  ) raise its dividend.

Icahn, who recently made headlines for his entertaining squabble with Bill Ackman over that hedge fund manager's massive short position in Herbalife (NYSE: HLF  ) , and Southeastern Asset Management's O. Mason Hawkins, who control a combined 22% of outstanding Chesapeake shares, have exerted tremendous influence over Chesapeake's recent actions.

Not only did they help instigate the board shake-up last year, but they also pushed for McClendon's departure on the grounds that his role as CEO was negatively impacting Chesapeake's share price -- the so-called "Aubrey discount." Judging by the fact that shares soared 11% this morning, the largest intraday gain in nearly half a year, they may have been right.

While Chesapeake hasn't determined the name of McClendon's successor, it released a statement yesterday saying that the "search process will include a full review of internal and external candidates" and that "the Board also intends to consult with Mr. McClendon in connection with this search."

Given McClendon's reputation as a flamboyant entrepreneur and fearless risk-taker, I would guess that his successor would be quite the opposite. An experienced E&P executive with a solid track record in risk management is probably what the company needs now, in my opinion.

Final thoughts and remaining concerns
But regardless of who takes over, one shouldn't overlook Chesapeake's precarious debt situation and concerns regarding its liquidity.

Despite last year's asset sale program, which was met with reasonable success, the company remains heavily indebted. To shore up its balance sheet and ensure that future funding gaps will be met, it will likely have to sell more of its oil and gas assets. But even then, it wouldn't exactly be smooth sailing.

Even a sale of its highly desirable Marcellus acreage, which analysts at TPH Energy Research reckon could bring in $8 billion before taxes, would have to be accompanied by major reductions in spending. According to TPH, selling off acreage in the Marcellus would also have major downside, including a marked reduction in the company's cash flow for this year as well as in aggregate  production.

It looks like whoever succeeds McClendon has their work cut out for them.

While Chesapeake no doubt has its fair share of problems, recent changes bode well for the company's future. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.


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