Is Chesapeake Recovering From The CEO Debacle?

Chesapeake Energy (NYSE:CHK) shares soared as much as 11 percent Monday after the company announced late last week it had entered into a $3 billion unsecured loan from Goldman Sachs (NYSE:GS) and affiliates of Jefferies Group (NYSE:JEF). The net proceeds from the loan will be utilized to repay borrowings under the company’s existing corporate revolving credit facility.

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Chesapeake plans to complete asset sales totaling $9 billion to $11.5 billion, using a portion of those proceeds to repay the loan. The company has already received strong interest from prospective buyers of its Permian Basin and Mississippi Lime assets.

The energy giant sought to calm worries about its financial position in light of falling natural gas prices, telling investors Monday that it was confident it would be able to complete asset sales to plug a funding gap. When coupled with a report that activist investor Carl Icahn would take a stake in the company, the news seems to have assuaged investors’ concerns and reinvigorated trading.

“We will get our assets sales done,” Chief Executive Aubrey McClendon told analysts and investors on a conference call.

However, McClendon has been at the center of a corporate governance controversy since Reuters reported last month that he had mortgaged his personal stakes in the company’s oil and gas wells to companies that lent money to Chesapeake. Disclosures of his financial dealings have prompted the U.S. Securities and Exchange Commission to start an informal inquiry into McClendon’s compensation program. McClendon has already been stripped of his chairmanship, and many investors have been calling for him to be removed as CEO as well.

But the bigger issue seems to be the company’s aggressive land purchases in recent years, which have left it short of cash. Additionally, the sharp decline in U.S. natural gas prices, which reached their lowest level in more than a decade, has left the company scrambling to cover a funding shortfall estimated at about $10 billion this year. And while analysts say the $3 billion loan may ease short-term pressure, they contend it comes at a high cost.

“To me it’s a really big concern because they are spending about $200 million to borrow this money,” said analyst Phil Weiss at Argus Research. Weiss also noted that the interest rate on the debt increases if it is not paid back this year.

Chesapeake would not confirm that Icahn would announce he had taken a stake in the company, as reported by the Wall Street Journal. In 2010, he had bought a stake in Chesapeake only to sell it a few months later after the company raised nearly $5 billion through an asset sale that pushed shares sharply higher.

“We have seen that (report) and wouldn’t be surprised if Carl became a large shareholder,” McClendon said on the Monday conference call. “He made, I think, over $500 million, and he called me to thank me” after the last year’s deal.

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