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What is Chesapeake Energy CEO Aubrey K. McClendon new plan?

By Amarendra Bhushan for CEOWORLD Magazine Updated:October 16, 2008

Several companies are caught in the credit crunch and putting production plans on hold. Deep water projects are being delayed. The oil sands need $80 oil for their profitability. Alternative energy needs high oil prices to be competitive and drive demand to them.

There is a lot of production that if kept on hold will eventually cause a shortage in supply and much higher prices for oil. The time between when prices rise and production is stepped up is normally bad enough but, in a declining supply environment, it could be even worse.Oil companies don’t cap wells and stop production plans as soon as oil prices drop and they don’t start up again as soon as oil prices rise. They wait to see if the trend will continue.

I look for after the elections to see a lot of changes in many things and that includes energy prices.

The chief executive of the nation’s largest producer of natural gas says he wants to begin rebuilding his stake in the company after being forced to sell nearly all of his shares to meet margin loan calls. The company will also cut production further if prices keep falling, CEO Aubrey McClendon said a presentation in Oklahoma City, where Chesapeake is based. With $1.1 billion in cash currently on hand, the company is on track to sell up to $3 billion of leasehold and producing properties during the fourth quarter, and reduce leasing expenditures from about $10.6 billion to approximately $3.2 billion in 2009 and 2010.

Chesapeake Energy co-founder and Chief Executive Aubrey McClendon made the comments Wednesday at the beginning of a 2-day investor conference at the company’s sprawling headquarters in north Oklahoma City. The whole business model has just imploded,” Ben Dell, energy analyst at Bernstein, said. “Equity markets rewarded delivering growth at any cost, and that’s what Aubrey did. He delivered growth at any cost.

McClendon says being forced to sell his nearly 6% stake in the company was a “tough deal,” but that he’s put it behind him and is moving forward. The billionaire used margin loans to buy Chesapeake stock. Brokers offer these loans, with securities used as collateral. When a stock falls below a certain point, the investor must sell stock or pony up more cash to cover losses.

Shares of Chesapeake have been whacked since hitting a 52-week high of $74 on July 2 and closed down another 24%, or $5.24, to $16.34 Wednesday amid a broader market plunge. The shares hit a 4-year low of $11.99 on Friday. Chief Financial Officer Marcus Rowland said during the presentation that the company has enough cash even if the asset sales fail, and he doesn’t foresee investing in any new shale plays. The price per acreage will probably plummet in 2009, McClendon said. Chesapeake stock closed at $16.34 Wednesday, down 24.28 percent from the previous day’s close, with a trading volume of more than 70.4 million shares. Since July, the company’s stock price has seesawed from a high of $74 in July to a low of $11.99 last week.

Aubrey K. McClendon bio (Profile)

Chairman of the Board, Chief Executive Officer and Director

Aubrey K. McClendon has served as Chairman of the Board, Chief Executive Officer and a director since co-founding the Company in 1989. From 1982 to 1989, Mr. McClendon was an independent producer of oil and gas. Mr. McClendon graduated from Duke University in 1981.

Marcus C. Rowland bio (Profile)

Executive Vice President
and Chief Financial Officer

Rowland.jpg Marcus C. Rowland was appointed Executive Vice President in 1998 and has been the Company’s Chief Financial Officer since 1993. He served as Senior Vice President from 1997 to 1998 and as Vice President – Finance from 1993 until 1997. From 1990 until he joined the Company, Mr. Rowland was Chief Operating Officer of Anglo-Suisse, L.P. assigned to the White Nights Russian Enterprise, a joint venture of Anglo-Suisse, L.P. and Phibro Energy Corporation, a major foreign operation which was granted the right to engage in oil and gas operations in Russia. Prior to his association with White Nights Russian Enterprise, Mr. Rowland owned and managed his own oil and gas company and prior to that was Chief Financial Officer of a private exploration company in Oklahoma City from 1981 to 1985. Mr. Rowland is a Certified Public Accountant. Mr. Rowland graduated from Wichita State University in 1975.

These small companies like CHK have never learnt to manage cash flow. They should know that oil and gas prices are cyclical. They saw it in 1973, 1980, 1990, 2007. Therefore, debt to equity can not exceed 20%. Their projects need to be based on low gas prices for break even cash flow. IRR AFIT needs to be at least 12%.

If they can not figure this out, they need to hire somebody from Exxon, Chevron, etc to help their companies. Not some Wild West guy who Wyatt Earp mentality.
Didn’t these guys sell gas futures when they were high? If not , why not?

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