Chesapeake Energy Corporation (CHK): Should You Invest In Its New CEO?

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After months of searching, Chesapeake Energy Corporation (NYSE:CHK) has found a new CEO. The company’s board announced on Monday that Robert Douglas (“Doug”) Lawler, senior vice president of Anadarko Petroleum Corporation (NYSE:APC)‘s successful international and deepwater business, will be replacing Aubrey McClendon, who stepped down as chief executive last month.

New CEO’s background
Chesapeake Energy CorporationLawler is a petroleum engineer with 25 years of experience in the upstream industry. He has served in increasingly senior leadership roles at Anadarko Petroleum Corporation (NYSE:APC) and has expertise in asset development, operations management, and engineering as well as in corporate and strategic planning.

Prior to joining Chesapeake Energy Corporation (NYSE:CHK), Lawler was most recently involved in Anadarko’s efforts to develop a liquefied natural gas export facility from a gas field off the coast of Mozambique. He also has extensive experience with shale oil and gas production – which is central to Chesapeake Energy Corporation (NYSE:CHK)’s business – in Texas and Pennsylvania.

Speaking on Lawler’s expertise and ability to lead the company forward, Archie Dunham, chairman of the board, said:

Doug is a talented and proven executive with the ideal skill set to lead Chesapeake forward and capitalize fully on our world-class assets. Throughout his 25 years in the upstream E&P industry, Doug has earned a reputation as a highly engaged and knowledgeable leader who delivers superior operational performance and capital efficiency. The Board is confident that Doug’s deep technical upstream and engineering expertise as well as his strategic and financial skills will serve Chesapeake well. We look forward to working with him to create value for Chesapeake shareholders.

Major hurdles remain
Analysts were generally optimistic about Lawler’s appointment as CEO, suggesting he would help bring much-needed capital discipline to the company. However, he inherits a company that – despite having made solid progress in cutting costs and boosting oil production – still has some daunting tasks ahead of it, the most urgent of which is reducing its leverage.

“[Lawler] is coming into a company that has serious challenges,” said Fadel Gheit, a senior energy analyst at Oppenheimer. “It’s a mine field that he has to navigate through, but he’s very experienced and I feel he will live up to the challenge.”

During McClendon’s tenure as CEO, Chesapeake Energy Corporation (NYSE:CHK) accumulated a ton of debt through the acquisition of new shale oil and gas assets as part of its aggressive expansion strategy. But now, the company is focused on a new strategy of “value realization”, whereby it aims to unlock value from its existing asset base, instead of acquiring new properties.

Central to its new strategy is growing its oil production, an area in which the company has made impressive progress over the past couple of quarters. Total oil production increased 56% year over year in the first quarter, bolstered by solid performance from the company’s Eagle Ford and Greater Anadarko Basin assets.

What’s next?
With solid growth in its oil output, Chesapeake Energy Corporation (NYSE:CHK) now expects to generate operating cash flow of about $5.25 billion this year, up from $4.05 billion last year. The increase should help the company fund a larger chunk of its ambitious drilling program internally, as opposed to relying on debt.

Additional asset sales should also help the company eliminate its funding gap – the difference between its spending and expected cash flow – for the year, which should be under $1.5 billion by now. If Chesapeake can generate at least that amount of money via asset sales, it reckons that it will be able to fully fund its spending program for the year, while keeping long-term debt at or below the level it reached at the end of 2012.

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