Future Scenario
In the year 2012, the success of drilling methods in North America lowered gas prices. Chesapeake had to reduce capital spending and sell assets to bridge the gap between cash flows and expenses.
McClendon was forced to sell 90% of his shares in Chesapeake worth $2 billion. This caused a huge drop in the market value of the company. Chesapeake has developed a large debt since then.
McClendon has raised more than $30 billion since 2008 selling assets to companies like , and to reduce the company’s debt. Chesapeake expects to continue selling its assets in near future to bring down debt levels further.
Exxon Mobil Corporation (NYSE:XOM) is the world’s largest company by revenue. It has a clear competitive advantage in areas like refining and chemical production. The company is performing quite well on the financial front and good growth is expected in the coming years. Its high market capitalization makes it the largest traded public company.
Total SA is an oil and gas company with expertise in refining, exploration and chemical manufacturing. Total acquired a 25% of Chesapeake’s assets for $2.25 billion. It gave an annual return of 7.1% for the year 2012. Its stock has increased by over 7% in last one year.
80% of Chesapeake’s revenue comes from the natural gas sector. Natural gas is the fuel of the future, as it burns without pollution, is more efficient and can be cheaper than oil. This gives Chesapeake a competitive advantage over its oil dependent competitors like Devon Energy Corporation (NYSE:DVN). Natural gas has the potential of reducing the dependence of Chesapeake on debt to finance its activities. In this way it will be able to save some of its invaluable assets that are being sold away at present in the name of future strategy.
Conclusion
McClendon did manage to build a strong company which contributed a lot to the growth and development of oil and natural gas extraction in North America. His failure to keep a balance between personal aspirations and the company’s objectives led to heavy downfall in market standing of the company. His actions sparked a rare phenomenon of investors stepping in to manage the failing market credibility of a company. Chesapeake lost huge wealth as its stock lost much value in light of investigations regarding personal use of the company’s wealth. In the last years of his career, his decisions were not competitive enough and saw the company building up huge debt and reduced cash flows. This gave a tremendous opportunity to competitors to gain ground and capture Chesapeake’s market share as a tarnished brand image and lack of faith in leadership forced industry partners to look for alternatives.
In the years to come, the new leadership faces the tough challenge of rebuilding the lost credibility and brand image.
The article How Will Chesapeake CEO’s Departure Affect the Stock? originally appeared on Fool.com and is written by Sujata Dutta.
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