Former CEO McClendon Is Chesapeake Energy’s Ghost of Christmas Past

Source: Thinkstock

Source: Thinkstock

Chesapeake Energy Corp. (NYSE:CHK) Chief Executive Doug Lawler is doing the yeoman’s work. Lawler became the boss effective June 17, filling shoes vacated by co-founder and former CEO Aubrey McClendon. McClendon led the company through a period of tremendous growth, buying thousands of acres of North American shale properties, drilling aggressively, and racking up about $14 billion in the process. He was ousted at the beginning of 2013 amid a governance scandal, and to date, Lawler’s tenure has been defined by his unwinding of McClendon did. Lawler has aggressively sold assets, cut costs, and has steered the company toward a more rifled business and away from McClendon’s shotgun approach.

McClendon was one of those businessmen who identified the tremendous value of shale gas early, and he ended up outbidding competitors for fields because of his willingness to take on debt. As natural gas boomed and while prices remained high, Chesapeake and McClendon both prospered enormously. At one point, he had a net worth of more than $1 billion. However, 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 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.

The upset marked the beginning of the end for McClendon as Chesapeake’s chief executive. But McClendon’s involvement with the company is far from over — he remains one of the largest shareholders and has interest stakes in most of Chesapeake’s wells.

This is a legacy of him being a co-founder of the company. At the heart of 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 the wealth he accumulated at Chesapeake, McClendon founded Larchmont Resources LLC, a company that just recently engaged Chesapeake in legal proceedings over the drilling of new wells in the Haynesville Shale in Louisiana.

The story is that McClendon wants the wells drilled, arguing that it would be irresponsible not to. Chesapeake currently only has four wells there, but McClendon’s lawyers argued that as many as 12 more would be needed to recover the maximum amount possible. Chesapeake’s lawyers argue that there is no legal ground for McClendon to make his case and that Chesapeake’s resources would be better spent elsewhere. Chesapeake operates in Eagle Ford in Texas, Mississippi Lime, Niobrara Shale in Wyoming, the Utica Shale in Ohio, and the Marcellus Shale in Pennsylvania. Louisiana regulators are expected to rule on the issue in about a month.

There is a little bit of weight to McClendon’s argument because Chesapeake has suffered from a decline in production. Some of it was due to cold weather and some of it was from operational challenges, but the bad news still hurt the stock earlier this week, when Chesapeake reported earnings.

Fourth-quarter average daily oil production increased 15 percent on the year but decreased 7 percent sequentially, average daily natural gas liquids (NGL) production increased 26 percent on the year but just 9 percent sequentially, and natural gas production decreased 3 percent on the year and 1 percent sequentially. Some, if not most, of the slowdown was due to planned reductions in output, but a harsh winter has taken its toll on the company.

According to Chesapeake, operational issues and infrastructure construction delays had a negative impact on the production ramp in the Utica shale. According to a company report, “As a result of the infrastructure and operational issues, the vast majority of Chesapeake’s wells that are connected to sales lines are on restricted choke and have not been producing at full capacity.”