Steffy: Chesapeake CEO leaves mixed legacy

It’s still all about Aubrey.

Even with Aubrey McClendon’s spontaneous “retirement” this week, Chesapeake Energy can’t easily disentangle itself from its former chief executive’s legacy.

McClendon may define the company’s past, but he also laid the foundation for its future.

He leaves behind a conundrum of corporate governance, a past of runaway executive pay and perks, yet also a prime array of oil and gas properties that will likely form the basis of the company’s turnaround.

“The portfolio of assets are the best set of assets of any company in the world,” Chesapeake Chairman Archie Dunham told me in an interview. “We have the sweet spot. You have to give Aubrey and the board great credit for that.”

Before the Oklahoma City-based company could capitalize on those assets, though, it had to deal with McClendon, whose continued presence has weighed on the stock.

He isn’t likely to leave without a final insult to shareholders. Although the company said McClendon would retire on April Fool’s Day, in regulatory filings it said the departure will be treated as “termination without cause,” which entitles him to $11.7 million in severance pay over the next four years and $33.5 million in previously granted stock awards, according to regulatory filings.

Negative return

Chesapeake’s stock crested at more than $65 a share in 2008, but it’s languished since, generating a negative return for the past two years of almost 32 percent. If you bought 1,000 shares and reinvested the dividends, your loss would exceed $8,660.

McClendon, meanwhile, got almost $57 million in total compensation for 2009 through 2011, according to company filings.

Clearly, the directors want to close the door on the McClendon era and move on, and despite the cost, investors believe McClendon’s departure is worth the price. The day his departure was announced, Chesapeake’s shares jumped 6 percent, to $20.11. They were $20.18 Thursday.

Private deals

Chesapeake’s stock has stubbornly traded between $16 and $22 a share since June, despite a board shakeup and sweeping governance changes. Those changes came after reports last year that McClendon had invested privately alongside the company in lucrative well deals and borrowed more than $840 million from companies that did business with Chesapeake.

A board shakeup, led by investor Carl Icahn, followed.

Dunham, the Houston-based former CEO of ConocoPhillips, was brought in to add some big-company credibility to Chesapeake, which is the country’s second-biggest natural gas producer after Exxon Mobil. In a stinging referendum on McClendon’s tenure, the new board adopted sweeping governance changes that included slashing his annual bonus, cutting his incentive package and realigning his pay with industry peers.

Clinging to natural gas

In other words, the new board made all the right moves, but it wasn’t enough. The stock didn’t respond, a sign that investors wouldn’t be satisfied until McClendon left.

It hasn’t helped that Chesapeake, under McClendon’s direction, clung to natural gas developments even as commodity prices sank. Others, such as crosstown rival Devon, were quicker to switch their focus to more lucrative oil wells.

“Aubrey and the board agreed that it’s time for a change,” Dunham told me.

In a letter to employees, McClendon referred to “philosophical differences.”

McClendon’s philosophy could be a case study in the cost of bad governance, yet for all his gunslinging, he put together an impressive company and engendered intense loyalty from employees. Chesapeake was an early adopter of hydraulic fracturing and gobbled up prime leases across the country. It dominates 11 of the 12 hottest plays in the continental U.S., which at some point ought to turn the company into an earnings machine.

‘Right to be proud’

Even the irascible Icahn was generous in praising the company’s portfolio, saying that “Aubrey has every right to be proud of the company he has built.”

Dunham and the board must capitalize on the assets and strengthen the company’s balance sheet. While Chesapeake faces a tough turnaround, it doesn’t need a finance guy to fix things so much as it needs a strong executive with exploration experience to extract value from its properties.

Now that McClendon’s leaving, investors’ best hope rests on the legacy he left them.