Chesapeake CEO McClendon Loses Chairman Role as Thunder Face Elimination
Chesapeake Energy (NYSE: CHK) CEO Aubrey McClendon is having a June to forget. On Wednesday, the second-largest U.S. natural gas producer announced McClendon will cede his roll as chairman to former ConocoPhillips (NYSE: COP) Chairman Archie Dunham.
McClendon's loss of the chairman's title is arguably the icing on cake in what has been a trying month of June for the maverick energy executive. The Oklahoma City Thunder, the NBA franchise in which McClendon is a minority owner, are on the brink of elimination in the NBA Finals. Heading into Thursday's game five in the best-of-seven series with the Miami Heat, the Thunder trail three games to one. As some fans in Seattle, the former home of the franchise, are apt to remember, McClendon played a pivotal role in moving the team to Oklahoma City.
The appearance by the Chinese energy executive at a sporting event in Oklahoma is quite possibly about much more than a couple of energy industry titans extending some goodwill to each other. Chengyu was formerly chairman of Cnooc (NYSE: CEO), China's third-largest oil company. Between 2010 and 2011, Cnooc acquired 33% stakes in Eagle Ford and Niobrara shale acreage owned by Chesapeake for a combined $2.4 billion.
Translation: McClendon and Chengyu have a history of making deals together. Chesapeake has been a prodigious seller of assets this year, but still faces a $7 billion funding gap, according to Forbes.
Even before Reuters revealed in April that over the past three years McClendon had borrowed over $1.1 billion against his holdings in Chesapeake wells without alerting shareholders, plunging natural gas prices prompted speculation Chesapeake could be ripe for a takeover.
Age a Factor Chesapeake investors should note the appointment of Dunham, 73, as chairman is particularly relevant because he has been the road of major energy sector mergers and acquisitions before. Not only did Dunham play a major roll in Conco's spinoff from DuPont (NYSE: DD) in 1998, as the Wall Street Journal reported, he was at the helm of Conoco when the company acquired Phillips Petroleum in 2002.
In May, Chesapeake warned it could run out of cash by 2013, so it is not unreasonable to believe that Dunham's first order of business will be to find buyers for more Chesapeake assets to close the $7 billion shortfall. That is not likely to be a problem. As previously noted, Sinopec has bought billions in Chesapeake assets. So has France's Total (NYSE: TOT), Europe's third-largest oil company. So has BHP Billiton (NYSE: BHP).
One clue exists about what Dunham may have in store for Chesapeake: His age. Consider that Dunham is 73 and Carl Icahn, Chesapeake's second-largest shareholder, is 76. Age may be nothing but a number, but it is not likely that either gentleman is involved with Chesapeake for a long turnaround story.
Selling assets, shoring up the balance sheet, reducing Chesapeake's natural gas exposure, increasing its oil profile and changing the corporate culture cannot all be done overnight. All of those tasks combined are a multi-year project, implying that given Dunham and Icahn's respective ages, the path of least resistance is to find a buyer willing to roll the dice on Chesapeake.
Probably Not China
Reading the tea leaves, it is not hard to come away with the feeling that the stars are beginning to align for a sale of Chesapeake. In recent weeks, Icahn, who has never been shy about trying to force a company to sell itself, increased his stake in Chesapeake. Then a Chinese energy executive with a penchant for deals shows up in Oklahoma. Then an American energy executive with his own history of deal-making becomes Chesapeake's chairman.
Of course, it cannot be forgotten that McClendon probably does not own enough stock in his own company to stop a sale.
Then again, it cannot be forgotten the U.S. government is fine with letting Chinese firms acquire U.S. energy assets, but entire companies is another matter altogether. Uncle Sam blocked Cnooc from acquiring Unocal in 2005.
It has been said that BHP Billiton found no resistance from the U.S. government in acquiring Petrohawk Energy and that Statoil (NYSE: STO), another state-run company, (NYSE: STO) was easily able to acquire Brigham Exploration last year. Thing is there is a big difference in the eyes of Uncle Sam between a Chinese state-run company buying an American energy producer and a Norwegian government-controlled outfit doing the same.
All of that is to say cash-rich BHP Billiton, one of the largest independent oil companies in the world, remains a viable option for Dunham and Icahn to sell Chesapeake to. It is a match made in heaven because BHP CEO Marius Kloppers loves mega-deals and has not been shy about his desire to boost his company's oil and gas profile. Maybe McClendon should start with giving Kloppers some basketball tickets, that is assuming the Thunder win tonight.
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