You've likely already heard the news, Chesapeake Energy (CHK +0.00%) CEO and co-founder Aubrey McClendon has agreed to retire. The language from the press release makes it seem a bit like this decision wasn't exactly his choice.
Chairman of the Board Archie Dunham hinted at it when he said in the press release: "Chesapeake is at an important transition in its history and Aubrey and the Board of Directors have agreed that the time has come for the company to select a new leader." McClendon went a bit further when he was quoted in the release as saying: "While I have certain philosophical difference with the new Board, I look forward to working collaboratively with the company and the Board to provide a smooth transition to new leadership for the company."
The announcement by the nation's No. 2 natural gas producer sent shares up by more than 10% in after hours trading on Tuesday, suggesting that the market agreed with the move. The movement in the stock makes me wonder if another beleaguered energy company might realize that it could also be time for a similar move at the top. Could SandRidge Energy (NYSE: SD) CEO Tom Ward be next?
One of the company's top shareholders, TPG-Axon, is in the midst of a very public proxy battle with that endgame in mind. In fact, in the firm's "Fight Letter" to shareholders it said that restructuring the board of directors and replacing the CEO would be among its priorities. One of the points in the letter says: "The current board has presided over remarkable destruction of value, and transfer of wealth from the company to Mr. Ward ... Without dramatic changes at the top, we do not believe the company can restore the confidence of capital markets (necessary to reduce cost of capital) or seriously address profligacy in expenses."
Those dramatic changes would have the new board replace the CEO and engage in several other value enhancing moves that the current management team appears unlikely to consider. TPG-Axon's overall criticisms of SandRidge are very similar to those that investors and the media have previously made of Chesapeake. That company ended up bowing to its critics and restructured the board which now appears to be behind the change at the top. If I were a betting man, I'd see this news from Chesapeake as a fairly clear sign that Tom Ward might be next.
To avoid this fate the company needs to do something that would unlock value to alleviate this pressure. Topping the list would be either the sale of its Gulf of Mexico assets or a large joint venture deal for some of its Mississippi Lime acres. Not only that but the board must address the perceived problems at the top. Whether that's a slap on the wrist or something more substantial, it likely won't survive the proxy if it doesn't do something.
Finally, the board also needs to do a better job in its direct responses to TPG-Axon. The investment firm is waging a very public battle and is not satisfied with the board's responses to date, especially in regard to related party transactions. SandRidge needs to go on the offensive as well with a very public point-by-point rebuttal. Otherwise, Ward will be planning his own retirement party in the near future.
