Several weeks ago, Chesapeake (CHK) announced its new chairman to replace its founder. The company chose Archie Dunham, previously the chairman of ConocoPhillips (COP), as its new leader, and we can only help that this experienced, albeit aging, leader will be able to take control of the company and get it back on the right track. As one source puts it, the company is struggling with "falling energy prices and mistrust of its management", and a new leader has long since been needed. We just have to wait and see whether or not Dunham is the right man for the job, and if he can turn the company's fortunes around for the better. The original chairman and founder of the company, Aubrey McClendon, will no longer serve as chairman, but will maintain his position as the company's CEO. This is despite the fact that his personal finances and potential conflict of interests are under close scrutiny at present.
In fact, the situation is so bad that Chesapeake was facing a shareholder revolt. Shareholders are simply not happy about the current state of the company and see bad management, especially on the part of McClendon, as the cause for the company's current position. They have been clamoring for new management for a while now, and now they have it. We, and they, have yet to see if this will be enough to get the company back on its feet, and, more specifically, get Aubrey McClendon under control.
Apart from electing a new chairman the company has also put some other measures in place to counteract the severe and adverse effects of its CEO's risk taking and spending. For one thing, the company plans to sell a number of its assets. In fact, to be exact, it wants to get rid of $7.4 billion by the end to this year. This is in order to avoid an imminent "cash crunch". Secondly, the company has also replaced four of its directors. These members were selected by the company's biggest investors, and the hope is that this will signify a change in how the company is managed that will lead to a significant turnaround in the company's fortunes.
However, as McClendon is still around, any new chairman that is brought in will have to face the challenge of controlling McClendon and his spending. Dunham will now be faced with the task of achieving this as quickly and effortlessly as possible. It does not promise to be a smooth ride, especially while McClendon is still under scrutiny.
The first test for Dunham may be a legal one as the Justice Department announced an investigation into Chesapeake's dealing with EnCana (ECA). The investigation will focus on the possible collusion between the companies on a deal two years ago in Michigan. Of course, McClendon is right in the middle of the fire, as it seems he may have very specific knowledge of the events that occurred.
Chesapeake is not the only oil and gas company working through changes in leadership. ATP Oil & Gas (ATPG) tried to hire a new leader at the beginning of last month, but the new CEO quit almost immediately. ATP stock tumbled and recovery seems bleak. ATP is trading just above $3, barely above its 52 week low of $2.80. The stock was trading over $7 at the beginning of 2012 and has dropped steadily since. Needless to say, Chesapeake is hoping to avoid such an event.
Of course, Chesapeake is a long way from catching the largest driller in America, Exxon Mobil (XOM). Exxon's market cap is more than 30x larger than Chesapeake's, but the same can be said for most companies compared to Exxon. At this point, Chesapeake investors should just hope that Dunham turns out to be the stable CEO presence that Rex Tillerson, Exxon's CEO, turned out to be. He's been leading the ship since 2006 and has continued Exxon's success through the years. Recently, Tillerson drew some scorn for brushing off climate change by explaining to a crowd that humanity will adapt when the time's right. Exxon will get some fury from environmental groups for sure, but it won't stop it from raking in profits as it's near the top of its 52-week range (this high is near $88 and it's just over $86).
A change in management is what stockholders in Chesapeake have been waiting for. There have always been a few important questions surrounding this situation. The first question is whether replacing the chairman will be enough, and the second is whether or not the new chairman will be made of the right stuff to turn the company around. With Dunham, I think investors have struck it fairly lucky as he is a veteran in the industry and should be able to make some significant changes, provided CEO McClendon does not try to stand in his way. It's too early to predict whether or not Chesapeake is headed for a revival, but I do not think that there is any harm in being cautiously optimistic about the stock, especially if it's still trading under $20.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
