From John Kemp at Reuters:
McClendon's exit will not solve Chesapeake's problems
Shareholders must be hoping the removal of Aubrey McClendon as Chesapeake's chief executive will end the corporate governance discount attached to the company's share price and unlock superior returns. They are likely to be disappointed.
Removing McClendon does not the resolve the company's basic problem: it is the second-largest producer in a market (U.S. natural gas) which has been transformed by the advent of a new technology (hydraulic fracturing) and now faces years of oversupply as well as a radical change in the cost of production which has left many old assets stranded and devalued.
Shareholder activists like Carl Icahn have focused on governance issues. But even a quick look at the performance of Chesapeake's share price compared with the price of the main product it produces shows the company has been felled by the drop in natural gas prices rather than governance problems.
TRACKING GAS PRICES DOWN
Chesapeake's shares have broadly tracked changes in gas prices and peers like Devon Energy where no governance problems have been alleged ().
Chesapeake's shares rose sharply following the announcement of McClendon's departure. Chesapeake is up by about 20 percent since the recent low on Jan 10, more than the 7 percent increase in Devon's share price over the same period.
But it hardly qualifies as a "surge". Chesapeake's share price is still down 7 percent compared with the same time last year, about the same as Devon's 11 percent loss. Both companies have seen their share prices fall by 30-35 percent over the last two years. Natural gas prices have dropped around a quarter over the same period.
Icahn has been generous in his praise following McClendon's decision to quit the company, but like other activists he now needs to accentuate the positive: he owns a large number of the company's shares.
"Aubrey has every right to be proud of the company he has built, the world class team of people at Chesapeake and the collection of assets he has assembled, which in my opinion are the best portfolio of energy assets in the country," Icahn said in a statement released on Tuesday.
"While it is known that some of these assets will be sold by the company in due course, I do not believe that this will in any way effect the ultimate realisation of Chesapeake's potential. I am confident that history will prove Aubrey has been correct about the value of natural gas in general and the value of Chesapeake in particular."
History is unlikely to prove any such thing. Chesapeake does indeed have fantastic assets. But their value has been drastically changed by the shale revolution. Chesapeake's new chief executive will confront the same problem as his predecessor.
STRANDED ASSET PORTFOLIO
Like Exxon, which bought XTO in 2010, and Shell, which bought East Resources in 2010, Chesapeake's strategy was designed for a world where gas prices averaged $6 or $8 per million British thermal units in the long-term....MORE
