Download now: Oil Price Outlook 2024

Chesapeake (NYSE: CHK) Turnaround Ahead

Brian Hicks

Written By Brian Hicks

Posted May 21, 2013

A change in leadership could be just the thing to save Chesapeake (NYSE: CHK).

The Oklahoma-based company announced that Robert Douglas Lawler will take over as CEO on June 17. Lawler will leave his most recent position as Senior Vice President of International and Deepwater Operations at Anadarko Petroleum (NYSE: APC).

chesapeake energyHe has 25 years of onshore and offshore experience in exploration and production. Before Anadarko, his career started at Kerr-McGee in 1988 – a company that was purchased by Anadarko in 2006.

Lawler’s entrance comes as a relief to shareholders, who were fed up with former CEO and co-founder Aubrey McClendon’s performance as leader of the company. Chesapeake was hit hard when natural gas prices dipped as a result of the shale drilling boom around the country, and shareholders have not been enthused by how McClendon has handled spending and other company matters.

Chesapeake was also plagued with various scandals under McClendon’s helm, hurting the company’s overall image.

But declining revenue is the main problem for the company, with a projected shortfall of $3.5 billion this year, Reuters reports.

Chesapeake will also have to sell around $7 billion in assets to cover lacking cash flow.

McClendon was ousted on April 1 by shareholders O. Mason Hawkins of Southeastern Asset Management and billionaire investor Carl Icahn.

Both men wrested control of the board and were crucial in reducing spending, focusing on the company’s most valuable gas fields, and developing more crude oil.

But even that wasn’t enough.

The company still has a debt pile amounting to $13.5 billion over the past two years.

Chesapeake Problems

Basically, Chesapeake’s energy problem boils down to this: too much spending, not enough income.

No matter how large a company grows, it is always a bedrock rule in business not to outpace revenue with spending too much.

Much of the company’s expenses were in land purchases.

McClendon was right to do some land-grabbing, but the problem was his overzealousness in purchasing so much land in such a short time span. Over the course of five years, Chesapeake engaged in 600,000 lease contracts covering 9 million acres of shale territory – spending an additional $9 billion in lease bonuses to land owners.

It was enough territory for Chesapeake to drill over the next thirty years.

McClendon wanted buy as much as possible when prices were low, and this may sound like the right thing to do until you factor in the interest that will accumulate over the next few decades on the debt necessary to purchase those lands.

Chesapeake will be paying excess interest on undeveloped land they will not get around to drilling for years to come. It was money wasted. And the more shale the company discovered, the more land they bought.

McClendon was good at raising capital to fund these land-grabs, but the company’s borrowing and capital spending outweighed income.

Another problem lies in the fact that Chesapeake has placed too much focus on natural gas.

Chesapeake is the second largest natural gas producer in the United States behind Exxon Mobil (NYSE: XOM).

Diversifying the company’s portfolio to include a larger stake in crude production would have given Chesapeake the necessary cash flow to remain on steady ground. There is nothing inherently wrong with focusing on only one type of commodity, but there is always risk with a lack of diversification.

And the low natural gas prices didn’t help. In fact, Chesapeake was losing money, paying a high cost to produce the natural gas that was selling cheaply.

Another thing that has Chesapeake losing ground is its strictly domestic operations. Many companies dealing in natural gas have been affected by low domestic prices, but the saving grace for companies like Exxon is its international dealings.

Shell (NYSE: RDS-A) has been wildly successful in the liquefied natural gas market – holding one third of the world’s business in that field alone.

Even though Chesapeake is drilling in some of the hottest shale areas in the U.S., its limited domestic scope prevents the company from expanding any further.

But Lawler once oversaw a Mozambique LNG operation during his stint with Anadarko. Could his international experience take Chesapeake in a global direction?

It is possible, but the company has some in-house cleaning to do before it would be able to fund international campaigns.

Company Solutions

So what can Lawler bring to the table?

Whereas McClendon was a land-man first and foremost, Lawler is an engineer and knows the ins and outs of extracting reserves. Besides engineering, the new CEO has experience in strategic and corporate planning, along with operations management.

His corporate background could be a useful tool in getting Chesapeake’s fiscal tent back in order, and it will undoubtedly be one of his first priorities to win the confidence of shareholders.

He gained familiarity with shale hotspots in Texas and the East Coast when he was Chesapeake’s competitor under Anadarko.

The only real solution to Chesapeake’s problems is for natural gas prices to return to profitable levels. Right now, it is more lucrative for natural gas and LNG drillers to ship the commodity abroad for higher profit – getting rid of excess gluts in the process.

But the Department of Energy is not approving enough export terminals for every energy company to cash in on natural gas and LNG exports.

However, this is the hand that Chesapeake was dealt, and it will take sound leadership to navigate the company through troubled waters.

With Lawler’s comprehensive background in petroleum engineering and business management, it appears the company chose the right CEO.

We will have to wait and see if Lawler can make the necessary turnarounds. 


If you liked this article, you may also enjoy:

Angel Pub Investor Club Discord - Chat Now

Brian Hicks Premium


Hydrogen Fuel Cells: The Downfall of Tesla?

Lithium has been the front-runner in the battery technology market for years, but that is all coming to an end. Elon Musk is against them, but Jeff Bezos is investing heavily in them. Hydrogen Fuel Cells will turn the battery market upside down and we've discovered a tiny company that is going to make it happen...

Sign up to receive your free report. After signing up, you'll begin receiving the Energy and Capital e-letter daily.