America’s natural gas champion is calling it quits.
Chesapeake Energy Corp. CEO Aubrey McClendon, who co-founded the small Oklahoma City-based land holding company that became the nation’s second-largest natural gas producer after Exxon Mobil, will step down following a year of plummeting revenues and growing debt.
McClendon, 53, came under intense criticism over the last year as shareholders lambasted his leadership strategy that left Chesapeake heavily invested in natural gas when prices crashed to their lowest level in a decade last year.
Amid a severe cash shortfall, McClendon was then forced to take on more loans to fund an aggressive effort to expand oil production, increasing the company’s debt to more than $16 billion. Chesapeake had planned to cut its debt to $9.5 billion by the end of 2012, but appears to have failed and instead added to that total.
Falling natural gas prices led the company to report losses of as much as $2.1 billion in the third quarter of 2012. At one point last year, Chesapeake’s market value had fallen 47 percent, shrinking by about $8 billion.
McClendon was also was the subject of several investigations, including an internal probe, related to questionable financial perks and allegations of collusion. The company lost more than $1 billion in market value within days on two occasions following reports of questionable decisions by McClendon.
Those developments could have led to McClendon’s demise at the company he co-founded in 1989, said Phil Weiss, a senior energy analyst for Argus Research Group.
“I would assume that all of the allegations or representations about finances pushed it over the edge,” Weiss said.
McClendon, in a statement, referenced “philosophical differences” with the company’s new board of directors, which was transformed after an uproar from investors.
McClendon will receive $11.7 million in severance pay over four years, based on his contract terms published in filings with the U.S. Securities and Exchange Commission. He will also retain about $33.5 million in previously granted stock awards along with other perks, as detailed in SEC filings.
His total compensation for 2011 was $17.9 million and included $13.6 million in stock awards, according to SEC filings. The company has not yet published McClendon’s full compensation for 2012, although it plans to eliminate his 2012 bonus.
As part of corporate changes following investor criticisms, McClendon was pushed out as chairman of the board and replaced with former ConocoPhillips Chairman Archie Dunham, one of five new directors added to the board.
“I am extremely proud of what we have built over the last quarter of a century, and I am confident that Chesapeake is in a great position to continue to grow and achieve great success in the future as it realizes the full value of its outstanding assets,” McClendon said. “While I have certain philosophical differences with the new board, I look forward to working collaboratively with the company and the board to provide a smooth transition to new leadership for the company.”
The company said McClendon will retire April 1, about one year after natural gas prices fell to around $1.90 and the company’s stock price began to tumble.
“He has been a pioneer in the development of unconventional resources, and he has also been a leader in the effort to make the United States energy independent,” Dunham said in a statement. “However, as the company moves towards more fully developing the value of its outstanding assets, Chesapeake is at an important transition in its history and Aubrey and the board of directors have agreed that the time has come for the company to select a new leader.”
Dunham, in an internal email to Chesapeake’s 12,000 employees, celebrated the company’s progress since its founding and attempted to quash rumors of instability at the company.
Chesapeake has attempted to trim its operations in recent months, even offering buyouts to 275 employees as part of its efforts to cut costs. Dunham insisted that “the company is not for sale” and added that “the board has no intention of eliminating childcare, shutting down the fitness center, or selling the company cafeterias.”
McClendon led Chesapeake to become one of the nation’s leaders in natural gas production from shale and other resources. He was an early adopter of horizontal drilling and helped to lead the way in plays that became major sources of natural gas.
Chesapeake is attempting to transition from its prior strategy of acquiring large swaths of oil and gas drilling leases into what McClendon has called “harvest mode,” in which the company will attempt to become more of a production operation.
“Going forward, the company will strive to continue as a low cost producer of oil and gas while further enhancing and strengthening its balance sheet,” Dunham said in the statement.
The company will likely be looking for a leader that will be able to better lead a fossil fuel producer, rather than someone like McClendon, whose expertise was mainly as a land man, Weiss said.
“He built the company basically from nothing as a land man to what it is today,” Weiss said. “So he certainly created a lot of value. But at the same time … I think I wouldn’t have used all of the creative and aggressive financing that he did to get there.”
McClendon drew the ire of investors after a Reuters report raised questions about an executive perk that allowed him to take a personal ownership stake in wells that Chesapeake drilled. McClendon funded those stakes with loans from some of the same banks to which Chesapeake owed money, according to the report.
In a statement, the company said McClendon’s retirement was not related to the company’s review of his “financial arrangements and other matters.” An internal review has so far “not revealed improper conduct” by McClendon, the company said.
The company had previously focused on building up the value of its land holdings by supporting exploration and production that proved whether the regions were rich in oil and gas.
Chesapeake’s plan was to market those land assets for sale to other production companies.
But although the Chesapeake’s portfolio has swelled to one McClendon has valued at more than $60 billion, the company had heavily funded its operations through debt and was left struggling to keep business moving when natural gas prices fell. That fall left the company’s largest revenue stream in a downward spiral last year, making its expansion strategy more challenging.
McClendon adjusted his approach amid investor outrage, but stuck to his aggressive plan of boosting production while cutting debt by 25 percent each. Investors, including pension funds in New York and California, questioned the targets and called for the company to slash its debt-funded expansion plan.
According to the company’s most recent production reports, Chesapeake has succeeded in shifting its production into more lucrative oil, growing its oil production by 96 percent over the last year. But natural gas production still makes up 79 percent of the company’s production mix, denting the company’s revenue stream until natural gas prices rise substantially.
The company’s large investment in natural gas production led it to call itself “America’s Champion of Natural Gas” and promote the fuel as an alternative to gasoline and diesel. But with gas prices falling over the last year, the company has all but given up on the resource. It cut its total number of rigs exploring for gas from a projected 47 in 2012 to less than eight by the end of the year.
Although Chesapeake’s stock has rebounded recently, it remains down 14 percent over the last year. Through much of 2012, Chesapeake shares were down close to 30 percent from their mark at the start of the year.
McClendon will continue to serve as CEO until his successor is appointed, according to a Chesapeake news release.