Since the early 1900's, but especially over the past decade, energy has been the hottest ticket in Oklahoma. It supports our economy and community recreation, arts and sports. With their phenomenal expansion Chesapeake Energy (CHK) and CEO Aubrey McClendon have been the cornerstone of the "new" energy giants. As a graduate of the University of Oklahoma and a resident of Tulsa I have been able to witness this firsthand.
I am a Value Investor -- a stock investor who buys "undervalued" companies and sells them when the stock price rises to equilibrium, or their "correct" price. Michael Price, the benefactor of the University of Oklahoma's School of Business, and Warren Buffett are two well-known and successful value investors. I have consolidated my value investing formulas and strategy on my website, ValueMyStock.com. I use the tools on ValueMyStock.com to find undervalued candidates and to calculate the value of target companies.
I have found a few undervalued energy and energy-services companies that returned a handsome profit. Chesapeake is not one of them. In fact, I never invested in Chesapeake. Some of my local investing colleagues kept hammering me for my opinion of Chesapeake -- I could tell they wanted me to approve of their infatuation with it. It appeared undervalued a number of times over the past seven years and in Oklahoma City their community presence is undeniable (Chesapeake Arena, Chesapeake Boathouse, and more). I never invested in them for two reasons -- McClendon seemed like an unnecessary gambler and Chesapeake carried unreasonably large amounts of debt. Just enough other investors felt the same to keep their price held to reasonable levels.
When they should have been investing in revenue-generating assets, McClendon and Chesapeake were busy buying shopping mall real estate and other non-energy related items all over Oklahoma City. In 2005 and 2006 they were busy buying up assets from other energy firms when oil was approaching $150 per barrel.
Well, now it looks like I can say "I told you so." McClendon has Reuters, the SEC and the IRS breathing down his neck for a controversial Founder Well Participation Program where he receives a small but significant ownership in all wells owned by Chesapeake. He was taking out personal loans against his ownership to help support a now-revealed $200 million hedge fund he was running out of the Chesapeake headquarters. Sounds like distractions and conflicts of interest to me.
Shares of Chesapeake were down almost 14% on news of the hedge fund, their largest drop in three years. Even though they have contributed a lot to the Oklahoma City community in jobs and public works, as a value investor I am glad I never bought into this company. Some are claiming that the large drop in price has pivoted Chesapeake to a deeply undervalued stock, but as long as McClendon is steering the ship, I'm not sure the reward outweighs the risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.