Aubrey McClendon is out -- or at least he's on his way out -- as CEO of Chesapeake Energy (CHK).
But his real legacy is the destruction of the natural-gas market, where he was the ringleader in the shale-gas land-grab and the cratering of well prices -- and the market is not likely to recover any time soon. While McClendon will go into a very wealthy retirement, he leaves behind a decimated market and a long road to making natural gas a true transition fuel to energy independence and a renewable future.
The market failed us -- failed us as a nation -- because it couldn't prevent McClendon and Chesapeake from poking holes randomly throughout Texas and Western Pennsylvania in search of shale gas and, ultimately, flooding the market with it, cratering price and profitability. We know, of course, that it is margins and profitability that make markets work.
While McClendon made himself one of the best-paid CEOs in the nation, he assured that the necessary and important U.S. transition to natural gas would be made much more difficult, if not impossible. You can't support innovation without profits. "Cheap" gas isn't the answer to spurring economic growth. It isn't the answer for growing manufacturing and selling natural gas as a transport fuel, or even as an export fuel here in the U.S. The answer is margins and profits.
Chesapeake destroyed that for everyone in the gas game with forced development of leases, multiple joint ventures with foreign oil companies, over-leverage, over-production and destruction of shareholder value to the benefit of the CEO. Natural gas is no longer a good business to be in; there are too many players, too many wells and no ready demand sources to soak up the surplus. We are further away from a natural-gas future -- a cleaner, greener and more independent future -- and we have Aubrey McClendon to thank for it. So, good riddance to the Bernie Ebbers of energy.
Where does that leave us? We have a surplus of natural gas that's not likely to deplete any time soon and a price that will languish well under "excitement" levels for exploration-and-production companies. Without that excitement, we won't see incentive to move any closer to a future involving natural gas, neither as a transport fuel nor as a supplement to the electrical grid. It may be counterintuitive, but it's true: Cheap gas hasn't done anything to promote natural gas. Recent proposals to convert liquid-natural-gas import terminals into export plants are a bizarre market reaction to a natural gas bust -- and a silly solution to what really is a U.S. natural-resource bonanza.
But that legacy is what we're saddled with now, and it makes practically everything in the natural-gas space difficult to invest in. I haven't recommended a natural-gas company (save for EnCana (ECA) at an opportune low), and I won't until the numbers in the market can generate excitement again. I have no interest in E&P in natural gas, or even transport, and I do not believe in the projected export business, except for Cheniere Energy (LNG), the lone working export terminal in the U.S.
For 2013, and perhaps through 2014, natural gas will greatly underperform most of the energy sector. That's the unfortunate legacy of Aubrey McClendon.
