Indispensability of Chesapeake CEO is exaggerated
By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Chesapeake Energy’s Aubrey McClendon has managed to ride out scandals that would have dislodged any ordinary chief executive. The gas firm’s boss owes this remarkable staying power in large part to a myth of unsackability. McClendon’s groupies claim his talent and natural wildcatting instincts make him indispensable. Even some investors disgusted by his numerous abuses fear he has created a firm so complicated that only he can manage it. Both place too high a value on the CEO and too little on Chesapeake’s vast asset portfolio.
There was a time when respect alone would have held McClendon in place. A pioneer of the fracking revolution, McClendon turned a firm valued at $62 million at its listing in 1993 into a $36 billion titan by mid-2008. Since then, however, the firm’s market capitalization has dropped by two-thirds. Meanwhile, McClendon himself has come to be seen as a liability for the firm after a stream of revelations over conflicts of interest – including his running a private hedge fund that dealt in the very commodity his firm produces.
Arguments for keeping him after such bad behavior are both positive and negative. Fans rightly point out that McClendon has an impressive record as a salesman – a valuable skill at a time the firm needs to flog about $14 billion of assets by the end of 2013 to avoid a cash crunch.
Still, if the firm’s assets are “the best in the industry,” as McClendon claimed in a recent investor call, they should require no special genius to sell. Chesapeake boasts vast landholdings in America’s hottest energy fields. McClendon’s tarnished reputation largely explains why these are valued so cheaply by investors. Bank of America valued the firm’s underlying net assets at $25 billion – more than double its $12 billion market capitalization.
The negative reason for keeping McClendon is no more convincing. He has certainly created a firm that is hard to understand, starting with seven joint ventures and nine volumetric production purchase agreements. Still, McClendon is not the only person who can unravel this mess. An outsider may even be better placed to simplify the Chesapeake cat’s cradle, with help perhaps from Chief Operating Officer Steven Dixon, a 20-year veteran of the firm.
Chesapeake has at times looked like a one-man band. In fact, McClendon may be easier to do without than either his friends suggest, or would have his detractors believe.