Chesapeake Energy (CHK) formally announced founder, and current president and chief executive officer Aubrey McClendon will retire effective April 1, 2013. At age 53, McClendon was with the company for 24 years since its inception in 1989 with fellow partner Tom Ward.
The Board of Directors said McClendon’s departure is not related to CHK’s ongoing investigation into financing arrangements and alleged conflicts of interest between McClendon and the company’s Founder Well Participation Program (FWPP).
In the news release, McClendon noted “’certain philosophical differences with the new board’”. McClendon was relieved as chairman in 2012 in order to separate the president and CEO role from the board during the investigation.
At the time of posting, shares of CHK were trading up 5.87%. You can review the Chesapeake Press Release here.
What will the new CHK look like?
Archie W. Dunham, Chairman of the Board, said in the news release: “Going forward, the company will strive to continue as a low cost producer of oil and gas while further enhancing and strengthening its balance sheet. Capital allocation and operating decisions will be made with the goal of prudently growing the company’s intrinsic value per share for the long-term benefit of its shareholders. By forging ahead with a new Chief Executive Officer, the company’s strong management team and talented employees will continue to develop the industry’s best assets to create substantial value for shareholders and themselves in the years ahead.”
We believe and hope that now is the time CHK remains focused on cleaning up the balance sheet and making better capital allocation decisions to create value for shareholders.
A quick look at CHK’s debt levels and it’s easy to see the need for a re-focus on the balance sheet. As of September 30, 2012, CHK had approximately $16.2 billion in debt. On January 25, 2013, CHK’s market capitalization was $12.9 billion.
As for capital allocation decisions, let’s look at it this way: CHK’s asset intensity is 74% meaning the company needs three quarters of its free cash flow to keep production flat. CHK’s large cap peer group only needs 51% of its free cash flow to keep production flat. The company’s trailing twelve months (TTM) Capital Efficiency is 150% meaning for every $1.00 of investment, the company only generates $1.50 in EBITDA. CHK’s large cap peer group generates $2.62 in EBITDA with that very same dollar of investment. At Q3’12, CHK’S TTM capital expenditures totaled approximately $16.2 billion. Over that same time period, the company generated $4.6 billion in EBITDA.
It should be an interesting road ahead for CHK. We could see the company slim down its operations and high grade its portfolio meaning growth will be sacrificed in the near-term. Recent asset sales and JV’s show the company’s assets are valuable and more success on this front will help address debt levels.
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Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Chesapeake following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
*Wunderlich Securities (1.30.13)
Summary
Chesapeake Energy (CHK) announced that its co-founder, CEO and President (not to mention face of the company and possibly the entire shale/natural gas movement) Aubrey K. McClendon will retire on April 1, 2013. The past year has been a tumultuous one for Chesapeake and its figurehead as low natural gas prices, high-debt levels and potential scandals caused the stock to under-perform an already downtrodden group in 2012. The board of directors was shaken up in the summer of 2012 and a new Chairman was appointed in an attempt to improve shareholder confidence as Chesapeake looked to sell assets, reduce debt and focus on oily assets. We view yesterday’s move as another milestone in the company’s transition but many still remain.
Key Points
Chesapeake is changing farmers as it enters harvest mode. Mr. McClendon has undeniably built a tremendous asset base throughout the US that potentially had gotten so large it couldn’t be properly valued due to its sheer size. Recent joint ventures and asset sales have helped show some of the value of assets but as the company looks to pare down its positions and focus on the core ones new leadership will be put in as Chesapeake finally looks to reap what it has sown for so many years.
Perhaps now we can all finally focus on the operations and finances. With news of Mr. McClendon’s departure a clear change in strategy and the removal of real/perceived overhangs likely cause the stock to trade higher. However, a high debt level and an asset base with “too much good stuff” still needs to be addressed; luckily these two issues can help solve each other as monetizations in the Horizontal Mississippian, Eagle Ford, Utica, Niobrara and other regions could allow investors to focus on just the core assets while also reducing debt.
A leaner Chesapeake likely is a more valuable one. Massive positions throughout the US, as well as its valuable investments in oilfield services and other private companies, seem to actually muddy the story. We feel there is significant hidden value within Chesapeake and point to our $45 sum-of-the-parts net asset value as evidence. As the assets described above are turned into cash and Chesapeake can more efficiently attack its Eagle Ford, Utica, Granite Wash and Marcellus plays (among others) we feel investors will see the true value.
Possibly an even better way to play a natural gas stabilization. While natural gas prices have fallen hard of late due to expected warmer weather, and natural gas-weighted stocks like Chesapeake have fallen in tandem, we would point out that our figures are run using $3/mcf natural gas for 2013; which is well below the current levels. We are not natural gas bulls but feel the growing liquids production and just stabilized natural gas prices around $3/mcf provide investors with significant upside potential in 2013 and beyond.
Reiterate Buy rating and $25 price target. Chesapeake shares trade at just a 3.5x 2013 P/CFPS multiple while the group trades at 5.4x. We use a 4.6x multiple to calculate our $25 target but feel this multiple could expand further if Chesapeake can deliver on its asset divestitures, debt reduction and liquids growth plans under new management; any stabilization or improvement in the natural gas prices or outlook could also provide a catalyst.
*Global Hunter Securities (1.30.13)
Chesapeake Energy Corp. (NYSE: CHK; $18.97; Buy; $22.00 PT) CHK announces retirement of Aubrey McClendon
Citing “philosophical differences” CHK Co-Founder Aubrey McClendon is stepping down from his CEO post after 24 years, effective April 1, 2013.
We’ve been adamant that the new CHK Board has some teeth, but we admit, this took us by surprise. In a sit down we had with Aubrey in OKC during Q4, we came away thinking that these philosophies were more in line than worlds apart. In fact we were told that everything positive that could come from tighter corporate discipline at CHK would in fact emerge. Additionally, we were instructed that the Board was on the right track in terms of setting management’s 2013 bonus criteria in which return on capital, efficiency gains, and hitting budgets would be the favored incentives vs. prior year targets that centered almost entirely on growth.
While Chairman Archie Dunham told CHK employees in an email yesterday that the company was not for sale, the question of the potential breakup value for CHK is worthy of addressing. While there are certainly a lot of variables to contend – mainly how to value CHK’s massive undeveloped acreage positions in the Utica, Marcellus, Eagle Ford, Mississippian, Cleveland/Tonkawa, Granite Wash, Haynesville, Marcellus, Barnett and Powder River/DJ Basin, and offset this value against an intimidating capital structure (seven JV’s, 10 VPP’s, $12.6B in long-term debt, $3B in preferred equity, $2.4B in non-controlling interests). We think that a major with a lower cost of capital vs. CHK can quickly get to a starting point of $30/share of value fairly easy.
Takeaway: What we expect now is for CHK’s asset harvest-mode to accelerate – don’t be surprised to see the $17B-$19B in asset sales for 2012/2013 to get upsized as the Board will likely favor pulling the present value of CHK’s massive 15.1MM undeveloped acres forward. If a major wants to make a play on CHK, the value is there ($30/share NAV is relatively easy), but so are the complications.
*Howard Weil (1.30.13)
Chesapeake Energy $18.97 (SO): Announces Chief Executive Officer Succession Plan
Quick Take: Citing philosophical differences between CHK’s Board of Directors and its Chief Executive Officer, Aubrey McClendon, the Company announced that Mr. McClendon will retire on April 1, 2013. The Company does note that the decision to replace McClendon is not related to the Board’s pending review of his financing arrangements. In fact, the Board’s extensive review regarding McClendon’s financing arrangements has yet to reveal any improper conduct. The Board currently expects to release the results of its review in conjunction with the Company’s 4Q12 and FY2012 earnings release, which is schedule for release before the market’s open on February 21, 2013. The retirement of McClendon comes after a year of scrutiny from shareholders and media, which ultimately prompted a revised Board and Chairman that were put in place last year. To facilitate the search for a successor, the Board has retained executive search firm Heidrick & Struggles. In the meantime, Mr. McClendon will work closely with CHK’s COO and CFO to transition management responsibilities in advance of the completion of the search process. The Company notes that upon appointment of a successor, Mr. McClendon will receive his full compensation and other benefits in accordance with his employment agreement.
*Baird Equity Research (1.30.13)
Chesapeake CEO Aubrey McClendon “agreed to retire.” We have mixed feelings about Mr. McClendon’s departure as CEO (he did create a lot) but expect strength in the stock near term on short covering. This pivotal development clearly requires a revisiting of the thesis. The key read-throughs from our perspective are the lateral implications for the broader group around successful investor activism, which likely emboldens further activism across the group. We expect stocks that screen as cheaply on an NAV basis to get a short covering (near term) bid on this news such as FST, GDP, SFY, and perhaps APA from our coverage. Mr. McClendon’s departure likely represents a strategic step-change for Chesapeake with corporate focus now squarely on execution and achieving an investment grade credit rating (likely hinged on asset sales). We outline completed/potential asset sales below in Figure 1 but are now more inclined to think that all assets (and even the whole company) are fair game for sale given the new management’s focus.
*Wells Fargo Securities (1.30.13)
Summary. In an announcement likely to surprise industry and investors alike, Chesapeake stated that CEO Aubrey McClendon, will retire from the company on April 1, but will stay on until a successor is found. Mr. McClendon is the founder of the company and has run CHK since 1989.
Resignation Cites “Philosophical Differences.” Mr. McClendon resigns, citing an amicable departure, but notes certain “philosophical differences” with the board. Bottom line is we believe Mr. McClendon was forced out by the board.
$83MM Question. According to the company’s proxy statement, in the event of retirement, Mr. McClendon would not receive any cash severance and would be subject to a $30MM clawback. If he was terminated without cause, he would be entitled to $53MM in cash and stock benefits. Swing is $83MM. The press release stated retirement, but we have to believe there is a termination agreement different than the proxy–if not, it raises serious questions as to why Mr. McClendon would “retire” rather than wait to be terminated.
Final Conduct Review Findings In Late February. The board is to release results of Mr. McClendon’s conduct review with earnings on February 21, and pointed out that the Board’s extensive review to date has not revealed improper conduct. Within the release, board also reiterated CHK’s 2013 $6.0 billion capital budget and said it will continue to pursue asset sales.
Stock Thoughts. CHK shares spiked as much as 12% after hours and we would continue to expect shares to trade higher on Wednesday (1/30), reflecting combination of CHK taking new direction, big short interest, and speculation that CHK is now on the block. However, on the other side, there is still no conclusion given from the various legal investigations and we are still unsure about CHK’s unhedged gas production. Lots of unknowns for a stock that has gained 15% this year (EPX up 7%) plus another 10% post announcement. From a longer-term perspective, there likely is a lot of value in CHK’s massive onshore U.S. portfolio, but the stock is still trading at a premium, with big capital requirements needed to bridge the gap. So while recognizing that there will likely be a bounce and some follow-through, fundamentally we remain on the sidelines.
*UBS Investment Research (1.29.13)
Co-founder & CEO Aubrey McClendon agrees to retire on April 1, 2013
CHK announced that Aubrey McClendon will retire as President & CEO, effective 4/1/13, & will resign from the board upon selection of a successor. Importantly, the board notes the resignation is unrelated to its current investigation of alleged conflicts of interest concerning Mr. McClendon’s financing arrangements & the company’s FWPP, & will release final results of its review with 4Q results (2/21).
New leadership should pave the way for strategic change
Mr. McClendon noted “philosophical differences” w/ the new Board, which today reiterated its goal of strengthening CHK’s balance sheet & more fully developing the value of its assets. Thus we expect new mgmt & the recently revamped board to focus on investor concerns regarding CHK’s ongoing material FCF deficit, including a re-evaluation of its ’13 spending plan (current guidance of $6bn) & a larger scale asset sale program (currently targeting $5.0-$7.0bn in ‘13 divestitures).
Shares up >10% after market close, but stock is not cheap
CHK’s shares are up >10% AMC on the combination of change in mgmt & the massive short position; the short interest ratio of 9 days is 3x the 3-yr avg, and the 88MM borrowed shares represent >13% of shares outstanding. Despite the initial positive reaction, we note that CHK is not inexpensive, already trading at a 3 point premium to peers on ‘13 EV/DACF, & would require material divestitures of non-producing assets (above the $5-7bn target) to bring its valuation in line w/ peers.
Valuation: material premium to peers on EV/EBITDX and EV/DACF
Our $18 price target assumes 5.7x normalized 2013E EBITDX or ~0.6 NAV.
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