Is Chesapeake Sitting on Massive Growth Potential Without McClendon?

chesapeakeOn Tuesday, Chesapeake Energy (NYSE:CHK) announced that co-founder, CEO, and president Aubrey McClendon would retire from the company effective April 1. McClendon, who has been the company’s only CEO and, until 2012, the company’s only chairman, is stepping down flanked by praise and controversy.

On one hand, he is hailed as one of the most innovative energy businessmen in the world. Under his leadership, Chesapeake grew to become the second-largest gas producer in the United States, bested only by Exxon Mobil (NYSE:XOM). McClendon identified the tremendous value of shale gas early, outbidding competitors for fields and drilling aggressively. As natural gas boomed, and while prices remained high, Chesapeake and McClendon both prospered enormously. At one point, he had a net worth of over $1 billion.

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But his aggressiveness is also what led to his having to resign from the company he founded. After the shale gas boom entered second gear and production skyrocketed, prices fell. Alongside them, so did the value of Chesapeake’s assets and equity. The company, which had borrowed billions to fuel its aggressive exploration and drilling campaign, soon found itself crushed by debt and forced to sell $12 billion in oil and gas fields to relieve some pressure.

At the heart the controversy surrounding McClendon is his participation in the Founders Well Participation Program, a mechanism that allowed him to buy up to 2.5 percent stakes in every well drilled by Chesapeake. Using these stakes as collateral, he supposedly borrowed over $1 billion from EIG Global Energy Partners, a major investor in Chesapeake…

As of the last quarter, the company still carried $16.22 billion in long-term debt and just $298 million in cash. When compared against competitors like Devon Energy Corp. (NYSE:DVN) and EOG Resources (NYSE:EOG), Chesapeake’s balance sheet looks highly unattractive.

Debt-To-Equity

Cash

Long-Term Debt

CHK

0.92

$298.00 Million

$16.22 Billion

DVN

0.52

$7.50 Billion

$11.24 Billion

EOG

0.46

$1.11 Billion

$6.31 Billion

But that was the sacrifice the company made to acquire a phenomenal portfolio of energy assets. In fact, Carl Icahn, who is one of the company’s largest shareholders, suggests that Chesapeake’s portfolio is the best in the country. While his bias may be obvious, it doesn’t make him totally incorrect.

Many investors agree that Chesapeake is sitting on valuable assets and that, despite all of the great things he did for the company, McClendon had become a roadblock to growth. Investors didn’t want to get involved with a company that had the air of an SEC investigation hanging around it. However, with McClendon’s departure, much of that downside risk is gone…

The company’s stock surged as much as 10 percent following the news of the succession plan. The stock has been on a tear since the start of 2013, climbing nearly 15 percent. That said, its rally is shadowed by an 11.7 percent year-over-year decline, and a 5 percent drop in the stock price last quarter. The company’s trailing twelve-month return on equity is -6.02 percent, which is unfortunately paired with an operating margin of -14.9 percent.

Chesapeake Energy Corporation C Stock Chart - CHK Interactive Chart - Yahoo! Finance

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