Energy executives have enjoyed incredible market conditions for most of the past decade. High oil prices drove drilling, shale discoveries exploded, and renewable energy finally found the footing it was looking for. But a decline in energy markets over the past year has exposed the warts some companies were hiding. Here are our picks for the worst company leaders in the energy sector this year.
If you want to see how not to run a renewable energy company, look no further than Ahmad Chatila, CEO of SunEdison (NASDAQOTH:SUNEQ). He went on an acquisition spree over the last three years, adding billions of dollars of debt to SunEdison's balance sheet, on the theory that he would be able to drop renewable energy projects down to two yieldcos indefinitely.
The model counted on debt and equity markets having an insatiable appetite for renewable energy at low rates of return, which for a while the market bought into wholeheartedly. But when you're a leveraged company counting on capital markets to be open, it can leave you with nowhere to turn when they shut you out. That's exactly what happened starting in the summer, and the decline was fast and furious.
To make matters worse, SunEdison is losing money like crazy, so there wasn't a solid business to fall back on when financial markets turned against the company. The massive bet Chatila made on the future of renewable energy backfired quickly, and the pain might not be over yet.
SunEdison's turnaround plan involves selling renewable energy projects to third parties, which probably won't create enough profit to service $11.7 billion in debt on the balance sheet. Chatila now has his hands full just keeping SunEdison alive, a far cry from a company that was once supposed to be the largest renewable energy company in the world.
While there are quite a few candidates to choose from, I really had high hopes for Chesapeake Energy (NYSE:CHK) CEO Doug Lawler after he took over for ousted founder Aubrey McClendon in 2013. He was expected to bring financial discipline to a company that had a history of wild spending. He promised disciplined capital spending, which was expected to "drive [the company] toward top-quartile operational, financial and shareholder return performance among [its] peers." Instead, he made a number of missteps, causing the stock to sink nearly 80% since he took the reins.
One of the more notable blunders was the botched early redemption of $1.3 billion of notes due in 2019. The company waited one month too long to tell investors of its planned redemption, which cost Chesapeake $438.7 million in additional interest and penalties after it lost a lawsuit brought against it by bondholders.
Making matters even worse was the decision to revert to the company's free-spending ways, with Chesapeake projected to burn through more than $2 billion in cash this year. While some of that is due to a crash in oil and gas prices, Lawler has pushed the company to grow its adjusted production by 6% to 8% this year, despite the fact that the oil and gas markets remain vastly oversupplied. Instead of leaving that incremental production in the ground, the company burned through more cash than it needed to this year, which is causing significant financial stress, with some of its bonds now trading at distressed levels.
While Lawler inherited a tough situation, he hasn't engineered the turnaround many expected. Instead, his slip-ups have incinerated cash and shareholder value, which now has the company in a precarious financial position.
I've been very disappointed in Greg Armstrong's performance as chairman and CEO of Plains All American Pipeline (NYSE:PAA) and its general partner, Plains GP Holdings (NYSE:PAGP), for three main reasons.
First, in recent months two accidents on the master limited partnership's crude oil pipeline systems, and the state and federal investigations that followed as a result, have shown that Plains All American has a history of shoddy maintenance and safety standards.
In fact, as Robert Bea, a civil engineering professor at University of California, Berkeley, who has reviewed the company's safety and maintenance records, told the Associated Press, Plains All American not only has a track record of failing to properly inspect its pipeline assets, but also seems to have failed to have a satisfactory plan in place should spills and accidents occur.
The investigation has resulted in the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration ordering Plains All American to purge oil from its 903 pipeline due to "similar corrosion characteristics" as the 901 pipeline that recently ruptured.
Not only does this apparent improper maintenance mean that accidents like this are more likely to happen -- which exposes Plains All American to criminal and civil lawsuits and potentially large regulatory fines -- but it can also force the MLP to shut down its pipelines, which hurts distributable cash flow at a time when Plains All American has been struggling to cover its distribution in the face of the worst oil crash in a generation.
This brings me to the other two reasons I'm critical of Armstrong. In recent years, when oil prices were high and growth funding was cheap, Plains All American failed to diversify its business away from crude oil and natural gas liquids, which has left it far more exposed to plunging energy prices than many other midstream MLPs whose natural gas pipeline businesses still remain in good shape.
Yet despite an unsustainable full-year coverage ratio of just 0.87, Plains has continued to raise its distribution in 2015, which is one reason management was forced to recently announce a 30% capital expenditure cut for 2016 and potential asset sales next year.
Energy blunders galore in 2015
It hasn't been a good year for energy CEOs, and these three show just a few of the mistakes executives are making. It's easy to look good when energy is booming and prices are high, but when the market turns against you, it can show a company's flaws quickly.