In May, I wrote that Aubrey McClendon needed to be shown the door as Chesapeake Energy's (NYSE: CHK) CEO. Given the historical precedent of shareholders inexplicably supporting McClendon and his merry band of board members, I didn't think his departure was possible. Today, I'd be surprised if it didn't happen.
A good deal has happened in two months. The most recent revelation -- that Chesapeake may have colluded with competitor Encana (NYSE: ECA) in land auctions -- was covered by Brian Stoffel earlier this week. The accusation is no joke. Brian noted:
Colluding with a competitor to hold prices down for land would be in direct violation of the Sherman Antitrust Act and carry stiff penalties. Companies could be fined up to $100 million -- and individuals $1 million -- for each offense. Additionally, victims of the rigging can receive up to triple what they missed out on.
That follows a tsunami of other reports detailing questionable dealings by McClendon -- from borrowing more than $1 billion against personal Chesapeake well interests to running a commodity hedge fund while at the helm of the natural-gas producer.
It's a laundry list of missteps that shareholders simply couldn't let slide, and as a result they've taken a hatchet to Chesapeake's board and governance practices. McClendon was stripped of his chairman title. Under pressure from the company's two largest shareholders -- Southeastern Asset Management and Carl Icahn -- four directors were replaced by new directors named by Southeastern and Icahn. It was a massacre at the annual shareholders' meeting:
- The two directors up for election, Burns Hargis and Richard Davidson, received 26% and 27%, respectively, of the votes cast. They both tendered their resignations.
- Majority voting for directors was approved with 97% of the votes cast (replacing supermajority voting, which requires two-thirds of outstanding shares to vote for a change).
- Approval of executive compensation was rejected with only 20% of the votes cast.
- Approval of the annual incentive plan was rejected with only 31% of the votes cast.
- Reincorporation in Delaware -- which would improve shareholders' rights -- was approved with 53% of votes cast.
- Majority voting for all shareholder proposals -- again replacing supermajority voting -- was approved with 86% of the votes cast.
- "Shareholder proxy access," which allows substantial, long-term shareholders to nominate directors for the company's board, was approved with 60% of the votes cast.
Clearly, shareholders were ready for a change.
Still CEO... for now
Carl Icahn didn't sink a pile of his cash into Chesapeake to play patty-cake. He's in it to make money, and right now Aubrey McClendon is a significant impediment to that. Regardless of whether there's a near-term end to new reports about his shenanigans (thus far it has seemed bottomless), his presence at the head of the company will likely provide an overhang on the stock for some time to come.
If he steps down -- voila! -- overhang gone. Or, at least, shares may look incrementally attractive to investors who have been turned off by the wild scrum at the top of the company.
And it's questionable whether McClendon is still needed at this point. When investors wax optimistic about Chesapeake these days, it's typically about the value of the company's assets -- often cited as undervalued by the stock's current market value. In a recent Chesapeake press release, Icahn said: "With the Board providing strong oversight, the management team will be sharply focused on realizing the value of its assets and the company will be well positioned to create substantial value for shareholders going forward."
If that's all true, let us give credit where credit is due: McClendon gathered up those assets. But is he needed to sell them?
Apart from all of that, there's a good chance McClendon doesn't even want to stick around. The halcyon days of outsized paydays and using huge amounts of debt to gamble on Chesapeake stock are gone. There's a near-term end for his sweet scheme of getting in directly on Chesapeake's wells. And now he has to deal with angry shareholders and a brand-new board of directors brought in specifically to babysit him. Why not just bow out to enjoy his extensive wine collection and the success of the Oklahoma City Thunder team he championed?
The grand exit
Archie Dunham, the 73-year-old former chairman of ConocoPhillips (NYSE: COP) and CEO of Conoco, was named as Chesapeake's new independent chairman to replace McClendon. A recent Reuters article quoted Morningstar analyst Mark Hanson as saying:
Given (Dunham's) age, I'm left wondering if his appointment doesn't signal something bigger is afoot. At 73, he obviously is a very accomplished guy. If this is his last hurrah, it's not going to be waiting for gas prices to recover, it's going to be a sale.
Recent reports note that China's Sinopec may be looking at certain Chesapeake assets, but there should be plenty of potential buyers for the entire company. ExxonMobil (NYSE: XOM), the only natural-gas producer larger than Chesapeake, is an obvious candidate. Chevron (NYSE: CVX) is another distinct possibility, as is overseas interest from Royal Dutch Shell.
If there's one card -- and this is a biggie -- that McClendon still holds tight, it's the complex financing he has set up at Chesapeake. As Reuters put it: "McClendon effectively booby-trapped the firm with a monstrously complex configuration that includes seven joint ventures, 10 volumetric production payment agreements and multiple separate holding companies. The architect may be required to unwind these structures."
Of course, if Chesapeake's assets are as good as touted, a deep-pocketed buyer may be willing and able to tackle that financial labyrinth.
Another way to play this space
If you aren’t sold on Chesapeake as an asset play for the long run, or you just aren’t interested in owning anything associated with McClendon, there are alternatives, including one that could be "The Only Energy Stock You'll Ever Need." It's a well-positioned equipment provider that's poised to make today's investors rich off the next energy spike. Read more about it.
