Let me start off by saying that I am not recommending the stock of Chesapeake Energy (CHK). I don't want you to own it. I don't even want you to speculate in it. I am not a bull on natural gas, and I don't like the opaque way this company is run. These afternoon filings are disastrous, because the sell-off-in-pieces strategy to keep the company going, a strategy that has worked for years, no longer seems in play because of debt compliance concerns.
Now with that out of the way, I don't know if the company can stay independent, given these filings today that say it can't sell assets in pieces. I write that because there are two countries that are so hungry for natural gas, China and South Korea, that I can see a carve-up of this company without any issue. Further, I can see how the utilities that have bought into Cheniere Energy's (LNG) plan to export natural gas would be panting for these assets.
The assumption is that can't happen because Chesapeake CEO Aubrey McClendon "owns" the board or because the board members are paid so much money they won't do "the right thing," whatever that is. The other assumption: They were clueless or "in on it."
I know a bunch of these board members. Anyone who has been around knows that there are some real heavyweights here. Pete Miller, the lead director, is the incredibly sharp chairman, president and CEO of National OIlwell Varco (NOV). Believe me, he doesn't need the money. He's about his reputation, and he doesn't need to be made to look bad. Miller is on the audit committee, meaning he needs to know the numbers. He will have limited tolerance for anything that smacks of chicanery.
Richard Davidson is also on audit. He was the CEO of Union Pacific from 1997 until 2006, a period when Union Pacific became a truly great American industrial company. Some say he woke up this sleepy giant.
You think the issue is governance? You know who is on that committee? Lou Simpson, who ran Geico for Buffett. Lou Simpson: You think he's not independent? Give me a break.
Now, I can see people saying that Burn Hargis, the president of Oklahoma State University, who chairs audit, might not have the time or inclination to be tough. You can see people saying he's a good ol' boy. Maybe you think that Donald Nickles, the chairman of corporate governance, is no better. But the president of Oklahoma State doesn't want a scandal on his hands, not after Penn State. And Don Nickles was the former head of the Senate Budget Committee, where he was considered a titan. He's on the board of Valero (VLO). He knows everybody.
In fact, almost everyone on this board knows someone. If someone wants to buy this company, mark my words, it will be bought.
Here's the problem: I don't think it will be bought at a higher price than it is now, because who would step up here and buy it? I think it could be bought for much less than it is selling for. Which makes it a real bad bet even down here.
Do not rule out these directors from taking action, though. They are way too rich and too high-profile to sit there and just take it.
They aren't piñatas. They might not have known that they were sitting on a Spindletop of controversy, but they do now. They can't afford a blow-out, which is exactly what it looks like we are having.