McClendon Seeks a Cool Billion to Build New Energy Giant

Less than a month after "retiring" as CEO of Chesapeake Energy (NYSE: CHK  ) , Aubrey McClendon decided it was time to get back to work. In going back to what he knows best, McClendon has come to the point in the process where his new venture, American Energy Partners, is lacking one important ingredient: money. That's why it's not at all surprising that Aubrey McClendon is searching high and low for that one critical component.

According to reports, McClendon is targeting a billion dollars in capital from private equity groups and sovereign wealth funds. McClendon would use this capital to fund his plans to build American Energy Partners into a best in class exploration and production company. It's not yet known how much capital he has been able to secure, if any.

As an investor, this is an interesting story to watch as there are many lessons to be learned from studying the past. Many Chesapeake investors loathe McClendon because his lavish pay packages and aggressive approach burned them. However, he did build the company into the second-largest natural gas producer in the country trailing only ExxonMobil (NYSE: XOM  ) . In the process, he amassed vast tracks of land and data that are just waiting to be unlocked. If gas prices hadn't plunged then McClendon might be known as an energy visionary, instead his imaged has been forever tarnished.

There is a valuable lesson to be learned here for investors. Sometimes you can have the right idea, but just the wrong approach. In the case of Chesapeake, and other industry peers, the idea of growing energy production was a noble one, but the aggressive approach taken turned to be the wrong way to go about it. The growth in gas production fueled a growing bubble which when burst incinerated investor's portfolios and tarnished the reputations of some very smart men. 

That same tarnish can also be found on SandRidge Energy  (UNKNOWN: SD.DL  ) CEO Tom Ward, also a co-founder of Chesapeake with McClendon. Ward followed the same Chesapeake blueprint when he took over SandRidge which, unfortunately, didn't work there either. It's entirely possible that Ward will soon experience the same fate as McClendon – his board has until the end of this month to determine whether he remains its CEO.

Source: SandRidge Energy

While the plunge in natural gas prices crushed the stocks of both SandRidge and Chesapeake, it didn't have to be that way. Both were aggressive growers and used too much debt while not having the diversity to withstand the collapse of natural gas prices. Compare this to ExxonMobil on the other hand, which has withstood the test of time as it's been a very conservative allocator of capital while taking a more balanced approach. Not only is the energy giant the largest natural gas producer in the country, but it produces oil around the world which is complimented by strong chemical and refining businesses. That diversity comes in handy when commodity prices dip.

Neither Chesapeake nor SandRidge need to be as diversified as Exxon to be successful. The key though is having the financial flexibility to withstand plunging prices and that's where SandRidge has a bit of an advantage over Chesapeake. The company's capital plans are funded through 2015, while Chesapeake is looking to unload a couple billion dollars in assets just to fund the gap in this year's capital spending plan. Neither company has yet to embrace the idea of living within cash flow so this will always be an area to watch as an investor. Both are now taking a more balanced approach that includes both liquids and a solid balance sheet and should lead to less volatility for investors. 

Today, both companies are working diligently to remove some of the tarnish of past mistakes. That's also where we find Aubrey McClendon these days as he starts over. Few investors give him credit for leading Chesapeake to more than 1,400% gains in his 20 years at the helm of the company in the public markets; instead, we just see the 70% drop from its peak. Maybe history will remember him more fondly as he embarks on his new venture. 

As an investor, you can't invest alongside McClendon in his newest venture just yet; however, his legacy still remains very much in tact at Chesapeake Energy. While its debt issues still persist, giant steps have been taken to help mitigate the problems and the company is trading at a very compelling value. 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.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 10, 2013, at 5:39 PM, bluecollarbroker wrote:

    Sorry to McClendon...but, if you want to ride on a former great who builds top flight companies...Floyd Wilson is already up and going with around a million acres in the hottest plays. His stock is only about 5 bucks...but, he has a history of producing great returns for investors...unlike Mr. McClendon.

  • Report this Comment On June 10, 2013, at 10:08 PM, TMFmd19 wrote:

    @bluecollarbroker - Yes, Halcon is a very interesting company to watch because of Wilson. However, I beg to differ on McClendon's record. 1400% returns vs. just 250% for the S&P since taking CHK public is a history of producing great returns in my book.


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