Aubrey McClendon’s Legacy

Last week 56-year-old Aubrey McClendon, the cofounder and former CEO of Chesapeake Energy (NYSE: CHK) was killed in a one-car accident in Oklahoma City. On the day he died, McClendon had been due to appear in court after he was indicted the previous day by federal prosecutors on charges that he rigged bids for oil and gas leases.

Although the investigation is ongoing, early indications are the crash may not have been an accident. McClendon’s car sped into a bridge embankment and he wasn’t wearing a seat belt. “He pretty much drove straight into the wall,” said Oklahoma City Police Capt. Paco Balderrama. “There was plenty of opportunity to correct or go back to the roadway. That didn’t occur.”

Oilman T. Boone Pickens noted McClendon’s impact on the U.S. energy industry: “He was a major player in leading the stunning energy renaissance in America. He was charismatic and a true American entrepreneur. No individual is without flaws, but his impact on American energy will be long-lasting.”

In 1989, then 29-year-old McClendon co-founded Chesapeake with Tom Ward, who would later go on to found and head SandRidge Energy. Chesapeake drilled its first wells in Oklahoma, and was among the pioneers of the horizontal drilling and hydraulic fracturing techniques that would usher in the shale boom.

Bloomberg reported last week that Ward was the rival executive who, according to the federal indictment, conspired with McClendon to rig oil and gas lease auctions in Oklahoma between 2007 and 2012.   

Chesapeake had gone public in 1993, and in 1997 the Wall Street Journal declared it the best-performing stock in its “Shareholder Scoreboard.” In the three-year period following its IPO, Chesapeake registered a total return of 275%.

But McClendon was a controversial figure. As a businessman, he was an inveterate gambler who borrowed heavily to finance Chesapeake’s growth. This worked out a few years ago when natural gas prices were still relatively high, but the shale boom was so successful that it wasn’t long before supply exceeded demand and prices crashed. Forbes eventually dubbed him “America’s Most Reckless Billionaire.”

As Chesapeake grew, McClendon became one of the country’s highest paid CEOs, but the slump in gas prices left his company struggling under a mountain of debt. Further, there were media reports that accused Mcclendon of mingling personal and business expenses, and of improperly using Chesapeake to enrich himself. Investors finally had enough, and in 2013 McClendon was ousted from the company he founded. Ward was fired from SandRidge the same year.   

McClendon’s legacy is much bigger than Chesapeake, which at one time had grown to become the largest producer of natural gas in the country. Many others emulated his success at extracting gas from shale formations, which along with his colorful persona turned him into an icon of the country’s shale boom. Some will praise him for that, and others will blame him for it. Regardless of which side you come down on, you have to agree that he made a mark.      

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Where the Sun Don’t Shine

SunEdison’s (NYSE: SUNE) struggle to close the ill-advised Vivint Solar (NYSE: VSLR) acquisition that’s all but ruined it is finally over.

Earlier today Vivint backed out, accusing SunEdison of “willful breach” in failing to complete the deal. And though SunEdison’s shares are up on the news, those gains are more an exit cue than a recovery signal.

SunEdison must now prepare for the high likelihood that Vivint will sue, adding to its legal troubles just as these seemed to be receding.

The former Brazil partners who had pursued SunEdison over some of its scuttled deals have settled for a relatively modest sum.

The hedge fund suing the company over the decisions to involve its yieldcos in the Vivint merger and later to replace their CEO has been denied a preliminary injunction that would have prevented the deal from closing, though it will still get its day in court.

Last week, just as it seemed as if the deal might finally proceed, SunEdison disclosed that its annual filing with the Securities and Exchange Commission will be late because the board’s audit committee is investigating a former employee’s claims of financial inaccuracies. These have not been substantiated to this point, but could potentially further strain SunEdison’s painfully stretched liquidity.

Until the annual report is filed (by sometime next week, the company hopes) its bankers refused to release the loans they committed for the Vivint buyout, which was supposed to close by March 18.

Should that filing arrive without any more nasty surprises, SunEdison’s savaged shares might rally further. And as we have seen recently with some nearly bankrupt oil and gas producers, savaged stocks can go on quite a run.

Unfortunately, in SunEdison’s case, any relief is likely to prove temporary. The company diluted its shareholders by more than 20% in January just to refinance the most pressing debt maturities for two years at a double-digit interest rate. Management has been thoroughly discredited and its promises to unlock the value of SunEdison’s assets sound highly dubious given the tremendous value it’s already destroyed.

We’re bullish on the renewable energy’s commercial prospects, as reflected in our Buy recommendations on industry leader First Solar (NYSE: FSLR) as well as SunEdison’s TerraForm Power (NASDAQ: TERP) yieldco.

But we’re not going to stick around for SunEdison’s potential short squeeze, or for the subsequent asset carve-outs by its secured creditors. This turkey will never turn back into an eagle, Sell SUNE.   

— Igor Greenwald

Stock Talk

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