Is Chesapeake The New Enron? Value Investor Considerations

Chesapeake Energy Corp (CHK) is in the market for a new boss. We’ve all heard the twisted and conflicted governance story. It’s not good. Calls to replace the entire board are only just starting up. Shareholder class action lawsuits are gearing up. My god the world is coming to an end. So is this the ultimate value investor play. Value investing is a buy ugly sell pretty formula. You have to have courage and correct analysis.

Well the price is down. The corporate governance story has destroyed shareholder value. The company is a huge gas play and the market price for gas is down. Very down. So isn’t this the time to buy? Buy low sell high. That’s the formula isn’t it? Well the price of gas is historically low. We do have a domestic surplus and last winter was very mild so the consumer home owner did not come through as needed. That issue is the same for dozens of other gas opportunities. If you are patient, you can make the cycle work for you.

So we default to the governance storm. The recent resignation of Aubrey K. McClendon - Chairman and CEO will not extinguish the firestorm. Who would want to take the job? Too many ghosts and skeletons in the closet. So you can go through the executive search, which is time-consuming and expensive, to come up with what? My thoughts are, if a recruiter calls you for the job go to the interview. It’ll be one of the most interesting interviews you’ll ever have. How will the search be conducted? Who makes the ultimate decision? The shareholders will be wanting pristine pureness. Will the candidate fit into the corporate culture or will he need to reshape it? Reshaping cultures is more difficult than finding oil and gas. Another good old boy will not do. By the way, the board needs to be revamped. They have their finger prints on this problem as well.

Then you have to consider corporate momentum. The governance issue will be the mother of distractions. Instead of exploiting oil and gas, the senior leadership team will be swatting away pesky governance flies. They will not be working full-time on maximizing shareholder wealth. So if you are looking at Chesapeake and wanting to buy when the storm clouds are the darkest, wait up. Do not click the buy button yet.

My personal prediction will be to bring in a neutral caretaker type for one year to help stabilize. He should have a personal fixation about opening closet doors and checking out the contents. If we see the caretaker then it’s time to consider being a value investor. If we see someone who fits in with the corporate culture, well, lets just say shareholder wealth will not be maximized.