Chesapeake Energy Corp. CEO Aubrey McClendon, whose retirement from the company he founded 24 years ago was announced late Tuesday, told employees in an email that the departure centered on some differences with the board of directors.
The board issued a statement after market hours Tuesday that said McClendon would step down effective April 1 (see Daily GPI, Jan. 30).
“By now you all should have received the press release announcing that the board and I have mutually agreed to my resignation as CEO as of April 1, 2013,” McClendon stated in the email. “Although this is due to certain philosophical differences that exist between the board and me, the separation will be amicable and smooth.
“I have the utmost confidence in you and the company’s future and I will always treasure the time we have spent together building Chesapeake into the unique and dynamic company that it is today. In many respects, our accomplishments are unique and I will always remain immensely grateful for the time I have spent with you building CHK into the industry leader that it is today.”
The search for a new CEO is said to be well underway, with the board considering internal candidates, as well as a possible heavyweight from outside the company. A successor may be named before McClendon’s April departure, a company source told NGI.
In a separate email to employees Chairman Archie Dunham, who took the mantle from McClendon last June, assured them that the company was not for sale.
The retirement is be handled as a “termination without cause,” which means McClendon could leave Chesapeake with about $45 million in total compensation, based on filings by the company.
McClendon, who oversaw all facets of the company’s operations until last May, now earns close to $1 million in base salary, which with no cause of termination, would be paid annually to him over the next four years, according to his contract. He also is entitled to a $1.95 million base bonus for the next four years, something that he agreed not to take for 2012 (see Daily GPI, Jan. 9). In addition, McClendon holds close to 1.5 million shares of stock, which depending on market conditions could be around $20/share, and that would be immediately vested on April 1.
Shareholders and analysts overall seemed to view the news as positive. When the market closed Tuesday Chesapeake was trading at $18.97/share. However, after the retirement news broke around 5 p.m. ET Tuesday, the share price climbed in after-hours trading. At 2 p.m. ET Wednesday Chesapeake had gained 8.70% to $20.62 in heavy volume, before finishing out the day at $20.11, up $1.14, or 6.01% from Tuesday’s close. More than 72 million shares traded hands on the day, versus average volume over the past three months of about 13.5 million a day.
GHS Research analysts, who met with McClendon in 4Q2012, said his departure caught them by surprise. They had come away thinking a difference of philosophies between the embattled CEO and the new board were more in line than at opposite ends.
“In fact we were told that everything positive that could come from tighter corporate discipline at Chesapeake would in fact emerge,” analysts said in a research note Wednesday.
With McClendon’s departure, Chesapeake’s asset sales to accelerate beyond $17-19 billion for 2012/2013 because the board “likely” will favor pulling the present value of Chesapeake’s 15.1 million undeveloped leasehold acreage forward, said the GHS team. There is “value” for a major that might want to make a move as well because Chesapeake has massive leaseholds that it still hasn’t developed in the Utica, Marcellus and Eagle Ford shales, as well as the Mississippian Lime and Powder River/Denver Julesburg Basin. Some of those assets already are up for sale.
“We think that a major with lower cost of capital versus Chesapeake can quickly get to a starting point of $30/share of value fairly easy,” GHS noted.
What could hinder buyers, however, is Chesapeake’s “intimidating” capital structure, which includes seven joint ventures, close to $13 billion in long-term debt, $3 billion in preferred equity and around $2.4 billion in noncontrolling interests.
BMO Capital Markets analyst Dan McSpirit said Chesapeake faces a lot of problems that basically have nothing to do with McClendon’s departure.
“What remains is a company struggling with its balance sheet,” McSpirit wrote. “What remains is a stock that’s a leveraged proxy for natural gas, highlighted by production naked to strip pricing.”
BMO’s model yields drilling capital spending totaling $6.4 billion this year, above the upper end of guidance.
“We show a cash flow outspend of $2.0 billion and leverage remaining elevated throughout the year. Proceeds from asset sales — show me something from the Mississippian [Lime], please — are expected to fund the gap. More of the same shrinking to preserve value. [But] that doesn’t do it for us.”
Chesapeake’s shares were trading at seven times BMO’s 2013 gross earnings estimate, said McSpirit. “This compares with a group median closer to six times. Not cheap, in our view. Our NAV [net asset value] analysis yields $24. An NAV of $15 results after excluding the value of the still-uncertain Utica Shale and the economically challenged dry gas operations targeting the Barnett Shale and Haynesville Shale plays. We see greater uncertainty. We see greater downside.”
Tudor, Pickering, Holt & Co. (TPH) analysts feel much the same. “In our view, the idea of change is brighter than reality and CHK still faces a steep climb,” analysts said. “Absent a big move in gas prices, we think fixing the balance sheet will require more divesting of core assets with CHK likely sacrificing growth to get a peer average valuation of 5.4 times…in 2015. Chesapeake remains relatively expensive on multiples…and we firmly believe the company is not for sale.”
One “most discussed question” for TPH’s team is, “what if CHK targeted a transformational divestment (think Marcellus) and pursued a shrink to grow strategy?
“Our view is that such an action, combined with other assets marked for monetization, improves the balance sheet near-term. However, the company struggles to maintain activity while preserving reasonable long-term leverage…Gas price leverage is still key to reevaluation…”
Schaeffers Investment Research said in a note Wednesday afternoon that Chesapeake had gained more than 5% on the day and “options traders are betting on this positive price action to continue. Roughly 115,000 calls have crossed the tape so far, or nearly nine times the average intraday volume. Near-term speculators are honing in on CHK’s front-month series of options, and are scooping up the stock’s Feb. 21 and 22 calls.”
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