The Roundup

Ups and Downs at Chesapeake Energy Corp.

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Posted 05.14.12

UPDATE: This story was updated at 10:25 a.m. on Friday, May 25.

Courtesy Chesapeake Energy Corp.

Though its cash flow is still floundering and its public image perhaps irrevocably tainted, Chesapeake Energy Corp.’s stock is rising today as shareholders anticipate the return of former investor Carl Icahn.

Icahn bought and sold shares in 2010, The Wall Street Journal reported today, but if he buys again, he’ll likely take a more active role than the one he held previously.

“Last time around, Icahn was passive,” Morningstar analyst Mark Hanson tells Dow Jones. “This time, if he is taking a position, he may not be.”

After plummeting 14 percent on Friday—and reaching an all-time low—Chesapeake’s stock is up about 6.3 percent today, even as other energy stocks are dipping, WSJ’s MarketWatch blog reported. On Friday, Chesapeake lost $1 billion in 46 minutes after shareholders learned the company had filed a notice with the Securities Exchange Commission that its first-quarter report would be late.

Icahn-related rumors, along with assurances by the company that it’s moving forward with plans to sell $11 billion in assets this year, are the reasons for today’s rise in price.

According to WSJ, the company is expected to embrace Icahn’s return as shareholder, even if he does shake things up.

In the end, though, even embattled CEO Aubrey McClendon welcomed Icahn back into the fold, regardless of what pressure it puts on him. McClendon put a positive spin on it, noting that Icahn turned a nice profit the last time he invested.

“He called me to thank me when it was all over,” McClendon said. “If he comes in I’m pretty confident he’ll make a lot of money.”

Investors hope he isn’t the only one.

Another shareholder attempting to shake things up is Gerald Armstrong, a Denver-based, 70-year-old investor with little patience for e-mail or McClendon’s financial shenanigans. “Aubrey McClendon is not walking on water,” he told Reuters.

Armstrong is pushing for the company’s reincorporation in Delaware, which would allow shareholders to “back proposals for annual elections of directors, something he said would make them more accountable.”

He proposed the governance change—and convinced a majority of shareholders to agree to it—in 2008 and 2009, Reuters reported, but then “Oklahoma adopted a law that effectively undermined his victories.”

One supporter of changing where Chesapeake is incorporated is New York State Comptroller Thomas DiNapoli, who oversees about $140 billion in state pension funds, a spokesman said. Armstrong hopes other big investors will follow suit…

Asked about Armstrong and the push to reincorporate Chesapeake in Delaware, a Chesapeake spokesman referred to language in the company’s proxy. In that regulatory filing, Chesapeake argued there are business advantages for the natural gas company if it remains incorporated in Oklahoma and that its current structure has its own governance benefits such as making it easier to defend against a hostile takeover bid.

Guarding against a hostile takeover is probably in the company’s best interests, as several are calling for the board of directors to fire McClendon, and others are suggesting a total board replacement.

Courtesy Chesapeake Energy Corp.

“In an open letter to the board of directors, Pedro de Noronha, managing partner and portfolio manager at Noster Capital, said Aubrey McClendon should be fired with immediate effect and that other CEOs would have been removed for ‘far lesser infraction[s],’” CNBC reported.

Writing for The Wall Street Journal on Friday, John Bussey quoted Philip Weiss, an analyst at Argus Research, who said: “”The board and/or the CEO need to go. All these things going on, the board should have known. It’s the board’s responsibility.”

Unlike Noronha, whose company invests in Chesapeake, Weiss has no stake in the company, but his sentiments are echoed by some shareholders who do. “Mason Hawkins, the head of Southeastern Asset Management, which owns 13.6% of Chesapeake, wrote a ‘Dear Aubrey and Board of Directors’ letter recently,” Bussey reported. “In it he chastised management for losing its focus and said he wants it to rethink the company’s debt and production targets.”

“We urge the board to be open to any offers to acquire the whole company,” Mr. Hawkins wrote.

Though an investigation into McClendon’s use of his stake in the company to borrow personal loans is what set off the media frenzy in Oklahoma City, new reports emerge daily that eat away at the shroud surrounding Chesapeake’s—and McClendon’s—financial practices. For example, Reuters released a new report Friday attributing its growth to “more financial engineering than petroleum engineering.” The company took in approximately $850 million last year by selling natural gas futures on Wall Street, enlisting a team of more than 40 bankers, lawyers, and traders—dubbed “Glenn Pool”—to make the deals. From the report:

In an especially creative twist, the borrowings were chopped into two slices and sold to investors – akin to the way subprime housing loans were turned into securities and sold last decade. …

The financial-engineering strategy began as a way for CEO Aubrey McClendon to expand the company. Now, Chesapeake has become so reliant on deals like Glenn Pool that more such transactions may be necessary just to tread water.

Today, the Oklahoma City company is taking in more money from bankers, other investors and its own financial bets than it is from its oil and gas. Most big energy companies, such as Exxon Mobil Corp, typically earn more selling oil and gas than they spend on investments, financing and other costs, making them cash rich. Chesapeake is expanding so fast that it takes in much less revenue from its oil and gas than it spends, leaving it stretched.

So far, McClendon’s only response has been to apologize to employees for “recent distractions” and maintain that “a great deal of misinformation has been published.” And Chesapeake’s board, though it removed the CEO as chairman, has been otherwise supportive of its leader. Bussey wonders how much longer shareholders will support the lot of them.

…(T)he media have raised new questions about personal use by Chesapeake executives and directors of company-financed jets, about Chesapeake’s complex financial dealings, and about a hedge fund Mr. McClendon once ran while he was CEO and whether it also created the possibility of conflicts of interest.

All that may give Chesapeake stakeholders more reasons to wonder when enough is enough, and if it’s time for fresh leadership at the top.

Holly Wall, News Editor

CORRECTION: In the original post, we wrote that Chesapeake “took in approximately $850 billion last year by selling natural gas futures on Wall Street.” We should have said $850 million. We apologize for the error and have corrected it above.