Why McClendon's Demotion At Chesapeake Energy Is Bearish

May. 2.12 | About: Chesapeake Energy (CHK)

Shares in Chesapeake Energy (NYSE:CHK) jumped nearly 10% yesterday on news that founder and CEO Aubrey McClendon would lose his title of chairman amid a probe by the SEC into his dealings with the company.

This has to be one of the dumbest moves up in a stock I've seen in many a year.

Fact is, McClendon IS Chesapeake, just as surely as Jeff Bezos is Amazon.com or Steve Jobs was Apple Inc. Who is going to deal with the company's weak cash flow and its declining credit rating better?

The story here is that McClendon bet big on natural gas prices remaining strong and lost the bet. This happens in business.

The recent rise in natural gas prices - to $2.40/mcf on the futures market and $2.11 on the spot - are not enough to turn the financial situation around. Most industry experts figure they need a price of $3.50/mcf to be profitable with fracking technology.

McClendon knew this and has spent the last year backpedaling from his big bet, as fast as ever he could. He was de-emphasizing his plays in the Marcellus Shale and drilling heavily in oil-heavy plays like Eagle Ford in Texas. But the change in strategy took a long time to execute, time CHK didn't have.

The SEC investigation is another thing. I don't know where that's going. All I know is the charges can't be good for the stock.

Whatever you think of McClendon personally, or of a possible case against him, he was executing the correct strategy for CHK in 2012. The only possible strategy for the remaining board members is to continue along the same path, or to seek a buyer for the company. They can double-down on a tainted CEO or sell the whole thing out from under him. But at what price?

As I wrote before, the bullish case on Chesapeake was based either on faith in McClendon or faith that natural gas prices would rise. Gas prices have risen, but very little, and summer is coming.

I don't see a bullish case for CHK at this point. Maybe others can enlighten me.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.