CEO departure to push Chesapeake into new era
Citing "philosophical differences," Chesapeake Energy Corp. (NYSE: CHK) co-founder and CEO Aubrey McClendon announced that he will retire from the company on April 1, 2013. In doing so, he steps away from the CEO post he has held for 24 years. The news is a talking point for many in the oil and gas industry, including the analysts that cover it.
McClendon has been at the forefront of the oil and gas industry and an argument can be made that the Oklahoma City, OK-based natural gas company—second in natural gas production behind ExxonMobil—set the stage for the North American shale boom with its widespread use of hydraulic fracturing to recover hydrocarbons trapped in some of the most talked about unconventional resource plays.
Widely known for its many deals to help fund its oil and gas drilling, Chesapeake, and more so McClendon himself, has come under fire for borrowing hundreds of millions of dollars from companies with which Chesapeake and McClendon struck deals, thus raising concerns of shareholders.
As a result, the company's audit committee began reviewing loans made to McClendon and sweeping changes were made to the company's board of directors, including the removal of McClendon as chairman. In June, Chesapeake appointed Archie Dunham, the former chairman and CEO of ConocoPhillips, as the company's new independent, non-executive chairman. The board also named four new directors, including three proposed by Southeastern Asset Management, its largest shareholder, and investor-advocate Carl Icahn, the company's second-largest investor.
With changes now reaching the executive leadership level, Chesapeake has undoubtedly entered a new era.
"Under Aubrey's strong leadership, Chesapeake has built an unmatched portfolio of natural gas and oil assets in creating one of the world's leading energy companies. 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. 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."
McClendon, Chesapeake's CEO, said: "It has been an honor to work with my outstanding management team and the company's 12,000 very talented and dedicated employees. 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. 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."
In addition to these statements, the company press release regarding McClendon's departure states clearly that the move is unrelated to the ongoing review of his financing arrangements. Final results of the review are expected to be released by the company on February 21. The review to date has not revealed improper conduct by McClendon, but analysts believe the departure reflects the power of the new board and its determination to change the status quo.
Analysts' views
"We've been adamant that the new CHK Board has some teeth, but we admit, this took us by surprise," said Global Hunter Securities (GHS) analysts in a note to investors Wednesday. "In a sit down we had with Aubrey in OKC during Q4, we came away thinking that these philosophies were more in line than worlds apart. In fact we were told that everything positive that could come from tighter corporate discipline at CHK would in fact emerge."
"The power of the new Board becomes evident with CEO McClendon's imminent departure. We believe a more conservative Board style is likely to result in reduced spending that is more closely aligned with cash flow," said Tim Rezvan, an analyst with Sterne Agee.
And, while an internal email sent by Chesapeake chairman Dunham assured employees that the company was not for sale, said GHS analysts, "the question of the potential breakup value for CHK is worthy of addressing."
This isn't the first time Chesapeake has been painted as an acquisition target, and it may or may not materialize, but an increase in asset sales appears likely.
"We would buy CHK shares on the expectation that the announcement of the CEO stepping down could lead to the whole company being put into play or at least, and more likely, a more aggressive shrinking of the asset base, relative to prior expectations," said Stifel Nicolaus analysts, noting the $17 billion to $19 billion in asset sales slated for 2012/2013 "could get upsized as the Board will likely favor pulling the present value of CHK's massive 15.1MM undeveloped acres forward."
These undeveloped acreage positions sit in the Utica Shale, Marcellus, Eagle Ford, Mississippian, Cleveland/Tonkawa, Granite Wash, Haynesville, Marcellus, Barnett and Powder River/DJ Basin plays. The challenge, noted GHS analysts, is to offset the value against "an intimidating capital structure (seven JV's, 10 VPP's, $12.6B in long-term debt, $3B in preferred equity, $2.4B in non-controlling interests). We think that a major with a lower cost of capital vs. CHK can quickly get to a starting point of $30/share of value fairly easy."
Previously, noted Stifel Nicolaus, Chesapeake tried to control debt by selling the minimum amount necessary – noncore upstream assets and midstream assets. With McClendon's departure however, "we believe that no assets will be considered sacred and a more aggressive asset sale or even an increased probability of a corporate sale could result."
So the search for a new CEO is on, but as Rezvan noted, "The departure of CEO McClendon does not change the major challenges facing the company: 1) a need to sell at least $4 billion of assets over the next two years to fund spending needs, 2) a limited inventory of premier oil assets, and 3) unhedged exposure to natural gas."
— Mikaila Adams
WPX Energy makes natural gas discovery in Niobrara formation
Tulsa, OK-based oil and gas exploration and production company WPX Energy (NYSE:WPX) said January 22 that a recent Niobrara gas discovery in western Colorado has the potential more than double the company's current 18 trillion cubic feet equivalent of 3P reserves.
The discovery well produced an initial high of 16 million cubic feet per day at a flowing pressure of 7,300 pounds per square inch.
The well has since been choked back substantially to optimize reservoir performance and ensure maximum resource recovery. Over the past 30 days, it produced at an average rate of 12 million cubic feet per day.
WPX has the lease rights to approximately 180,000 net acres of the Niobrara/Mancos shale play that underlies the company's leasehold position in the Piceance Basin.
Substantial gathering and processing infrastructure is in place to accommodate additional gas volumes from the area, as is take-away capacity from the basin. Gas produced from the Niobrara and Mancos shales can be processed without modification to existing gas treatment facilities.
"We have a large-scale position in the Piceance, where we are the lowest-cost, most efficient producer in the basin. We know the Piceance is a world-class asset. Now the results of our Niobrara well are showing that our acreage has even greater reserves potential," said Ralph A. Hill, president and CEO.
"This exploratory work in the Niobrara and Mancos shales of the Piceance was a logical follow-on to our previous Mancos shale discoveries in the San Juan Basin.
"In the latter half of 2010, we drilled two horizontal discovery wells there that produced at high rates from the same reservoir that we're delineating in the Piceance. The San Juan results already added 1.3 trillion cubic feet of proved, probable and possible reserves to WPX," Hill added.
The Niobrara and Mancos shales are generally located at depths of 10,000 to 13,000 feet. The Williams Fork is a shallower formation, generally located at depths of 6,000 to 9,000 feet. In the Piceance Basin, WPX holds an average working interest of 66% in the Niobrara and Mancos shales.
WPX plans to drill at least two more horizontal Niobrara wells in the Piceance Basin this year, pending permits, starting within a six-mile radius of the first well.
WPX's first Niobrara horizontal well is located on the company's existing Piceance Valley acreage in Garfield County. It was drilled to a total vertical depth of 10,200 feet with a 4,600-foot horizontal lateral.
Drilling operations commenced in August 2012 during which the company successfully recovered 535 feet of continuous core. Completion operations, including 17 frac stages, were completed in December.
Steven G. Natali, senior vice president of exploration for WPX, commented, "Advances in horizontal drilling and the way that our completions engineers apply multi-stage fracture technology means that much of this gas can eventually be brought to the surface at an economic rate."
