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Chesapeake: the CEO is the wild card



October 13, 2008 – Comments (4) | RELATED TICKERS: CHK

The Wall Street Journal writes a bit more about Chesapeake Energy CEO Aubrey McClendon and his mother of all margin calls. It turns out that McClendon was forced to sell 33 million shares as prices tumbled. Average daily volume in CHK is 28.5 million shares, so he contributed quite a bit to the (probably temporary) slide.

Now, maybe WSJ has some sort of agenda against McClendon. However, the articles bring home the point that McClendon is a visionary and a heavy risk taker. He may not be as high-profile as Steve Jobs,  butit seems that it's his vision that's driving the company's future

Mr. McClendon has deep roots in the oil and gas industry. His middle name, Kerr, is one of the most famous in the Oklahoma oil patch -- but he and a partner built Chesapeake from scratch. They founded it in 1989, took it public in 1993, and nearly drove it into the ground in 1999 after betting heavily on a Louisiana gas formation that didn't work out.

He made big changes after that debacle, but his basic strategy of borrowing to buy lots of drilling acreage, often at high prices, has never varied.

Charles Maxwell, an energy analyst who has been on Chesapeake's board since 2002, said he and other directors sometimes see their role as keeping Mr. McClendon's enthusiasm in check. So when Mr. McClendon earlier this year asked to increase spending by nearly $1 billion to pursue a new opportunity in Louisiana, Mr. Maxwell was skeptical.

But Mr. McClendon convinced him that someone would spend the money and lease the land. Mr. Maxwell became a believer, saying "We just decided it would be us."

Mr. McClendon has become not just the face of his company, but also of the entire U.S. natural-gas industry. Handsome and charismatic, with unruly blond hair and an informal manner, he has appeared before Congress promoting natural gas and starred in television ads endorsing T. Boone Pickens' plan for natural-gas-powered cars.

He also has a record of stirring up controversy, sometimes far from the energy industry. He has been a major contributor to conservative causes, including Swift Boat Veterans for Truth, which ran ads attacking Democratic presidential nominee John Kerry in 2004.

And he is part of the ownership group that infuriated sports fans in Seattle by buying the Supersonics basketball team in 2006 and moving it to Oklahoma City.

His company shares Mr. McClendon's penchant for publicity. Chesapeake has sponsored ads attacking coal-fired power plants as "filthy," hired actor Tommy Lee Jones to promote its drilling efforts in Fort Worth, Texas, and announced plans to launch a daily online news program about natural-gas production that a spokeswoman once called "Aubrey's personal idea."

Mr. McClendon said he and Chesapeake had good reason to make their case vocally. "We've got more skin in the game than anybody else," he said. "I personally have more skin in the game than anybody else."

I sent a letter to Chesapeake's investor relations department, urging them to consider the risky credit environment they were operating in. McClendon's aggressive nature and personal investments raise questions for me about whether he might make a misstep with his company. Note, though, that none of CHK's debt comes due before 2012. And of course one cannot help but be impressed by McClendon's (over)zealousness in putting his money where his mouth is.

Nonetheless, I have a feeling I may sell my Chesapeake stock when I make a profit. The wild swings and stories of McClendon's aggressiveness have left my stomach a bit queasy.


4 Comments – Post Your Own

#1) On October 13, 2008 at 10:11 PM, awallejr (28.75) wrote:

Trying to figure out how the heck he found himself in such a personal margin squeeze with 33 million shares.

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#2) On October 13, 2008 at 10:57 PM, XMFSelzhanik (99.76) wrote:

Fantastic blog post! 

From what I hear from people in Oklahoma, he is paying way too much for land, maybe even more than usual.  I love enthusiasm in a CEO, but he seems to take it to a reckless level.

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#3) On October 14, 2008 at 12:26 AM, nuf2bdangrus (< 20) wrote:

Visionaries like that eitehr make it big or bust.  I bought a small lot at 13 on Friday and sold at 17 AH.  SHould have held.  They do have some debt though, and APA or APC may be a better pick.

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#4) On October 14, 2008 at 9:30 AM, weiwentg (97.78) wrote:

Re the first comment, the WSJ article I linked mentions that large scale margin calls had become fairly common at the depths of the selloff last week.

Re the last comment, I think that TMF's Inside Value has Chesapeake as an active pick. Morningstar's energy analysts seem to prefer XTO Energy (XTO). XTO does some oil but is still mainly natural gas. They have built up an attractive acerage position while still keeping a lid on debt and operating costs. Their end of 2007 current ratio of 0.8 was better than Chesapeake's 0.5. 

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