Chesapeake Energy Corp. (NYSE:CHK) is parting ways with trailblazing founder, president and CEO Aubrey K. McClendon when he retires April 1, though he will continue to guide the company until a successor is appointed, the company announced Jan. 29.
Dogged by recent financial inquiries, McClendon, 53, has been CEO since the company’s inception in 1989 and served as chairman of the board until 2012.
McClendon cited differences with the board in his retirement. The company is attempting to stabilize itself with several moves, including committing to a $6 billion drilling and completion budget for 2013. It will continue asset sales to reduce debt.
McClendon said his time with Chesapeake was a privilege and that he thinks the company is on good footing for the future.
“While I have certain philosophical differences with the new board, I look forward to working collaboratively with the company and the board to provide a smooth transition to new leadership for the company,” he said in a news release.
In the view of many analysts, McClendon’s retirement marks the end of an era.
“We believe Mr. McClendon has been a visionary and leader during the great unconventional boom, and he helped raise the public awareness of the industry,” said David Tameron, senior analyst for Wells Fargo Securities.
“While not all the publicity was positive and he was often a lightning rod, in our opinion McClendon’s contributions to the industry and to communities such as Oklahoma City were profound,” Tameron said.
However, McClendon was a source of distraction due to personal financing arrangements and his ability to invest in Chesapeake’s Founder Well Participation Program (FWPP). The program gave McClendon the opportunity to invest in individual company wells, said Bob Brackett, senior analyst for Bernstein Research.
The board said it expects to release results of a previously announced review of McClendon’s financing arrangements on Feb. 21. The review partly concerns financing between McClendon and any third parties that had or have a relationship with Chesapeake.
“The board’s extensive review to date has not revealed improper conduct by McClendon,” the company said. The decision to search for a new leader is not related to the pending review of his financing arrangements and other matters.
Brackett said that putting aside any feelings about his strategy and style, McClendon has “the heart of a landman, a leadership style that fit Chesapeake's days of building up an enviable U.S. resource land position through stealth acquisition” and later joint ventures.
However, Brackett said that the land-grab phase of North American unconventionals appears to be waning.
If Chesapeake is serious about entering a “harvest” mode and living closer within its means, the company is better off with a leader who “embodies that strategy,” Brackett said.
Chesapeake board chair Archie W. Dunham, said that for 24 years McClendon created one of the most valuable and innovative companies in the energy industry.
“Under Aubrey’s strong leadership, Chesapeake has built an unmatched portfolio of natural gas and oil assets,” Dunham said. “However, as the company moves toward more fully developing the value of its outstanding assets, Chesapeake is at an important transition in its history.”
In April, McClendon and the board ended the FWPP, which was to have run until Dec. 31, 2015. The program, which was approved by shareholders in 2006 in conjunction with McClendon's employment agreement, gave him the contractual right to participate and invest as a working interest owner (with up to a 2.5% working interest) in new wells drilled on the company's leasehold.
Tameron said the company’s stance is that the departure is amicable, but McClendon’s differences with the board are also notable.
“Bottom line is we believe Mr. McClendon was forced out by the board,” Tameron said.
The $83 million question, Tameron said, is why McClendon retired.
The company's proxy statement says McClendon would receive no cash severance and would be subject to a $30 million clawback. However, if terminated without cause, he would be entitled to $53 million in cash and stock benefits. That adds up to an $83 million swing, Tameron said.
“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 McClendon would ‘retire’ rather than wait to be terminated,” Tameron said.
Baird Equity Research analyst Michael Hall also called McClendon a visionary, but said McClendon’s exit should strengthen the company’s stock in the near term. In early trading, the stock was up about 6%.
“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,” Hall said.
Chesapeake’s future is likely to be rocky for some time.
The company forged its identity through an aggressive acquisition and development strategy. During the past few years, Chesapeake has built itself into a dominant natural gas producer in the U.S.
But Tameron said “historically low natural gas prices will provide headwinds for CHK shares for the near future.”
Brackett agreed the company isn’t out of the woods yet.
“While demonstrating a sincere shift in strategy by changing leaders is positive, Chesapeake still faces a $5 billion order-of-magnitude funding gap and crucial strategic decisions in 2013,” he said. “In addition, investors still remain in the dark about many CHK issues, including but not limited to long-term midstream commitments following the recent divestitures.”
Though some investors have assumed the worst and might be surprised to the upside, there are still many “unknowns to the CHK story that need to be clarified in the coming quarters,” Brackett said.
The board has retained Heidrick & Struggles to assist in its search of McClendon’s successor and will also consult with McClendon. The search process will include a full review of internal and external candidates.
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