Chesapeake Energy misstep puts credibility at riskReuters, Wednesday December 10 2008 By Anna Driver
HOUSTON, Dec 10 (Reuters) - Chesapeake Energy Corp must stick to its latest drilling budget or the natural gas producer could face a round of sharp stock losses and another hit to its management's credibility.
Earlier this week, Chesapeake quickly backtracked on a plan to raise cash by selling new shares after investors pummeled the Oklahoma City company's stock price, sending it to its lowest level in at least five years.
Outspoken and charismatic Chief Executive Aubrey McClendon apologized to investors on Monday for misjudging the market and again said the company had no plans to issue shares or debt to raise capital in 2009 or 2010.
But the company may issue 25 million shares to pay for acreage -- part of the strategy that lifted Chesapeake to its spot as the nation's top natural gas producer earlier this year.
The executive's reassurances about Chesapeake's finances and a new round of budget cuts prompted a rebound in the shares, but many analysts say they remain skeptical.
"They do have a credibility issue here," said Phil Weiss, oil and gas analyst with Argus Research.
After cutting its drilling budget for the fourth time since September and canceling a possible share issue, investors are fearful the company will not be able avoid stock or debt sales in the future.
"They now know that they have to live within their means," said Jeb Armstrong, analyst with Calyon Securities. "If all of a sudden in the next six to 12 months they issue equity, the stock is going to get killed. They've backed themselves into a corner."
Armstrong downgraded the company's shares to "underperform," from "buy" last week.
Marshall Carver, an analyst at Capital One Southcoast, said in a research note the company's announcement reminded him of a scene from the movie "Raising Arizona," in which a character tells a parole board he's been reformed only to hasten his exit from prison.
BOARD SUPPORT
The company boosted its debt load in 2008 and issued shares to secure drilling rights in shale plays such as Haynesville in Louisiana in what McClendon has described as an extraordinary year.
Chesapeake said it should end the year with $12 billion in net debt.
"Have we had some setbacks this year? Yes, we have," McClendon told Reuters this week. "But I don't know too many CEOs who apologize for losing people money. But I've built a resilient business, and this too shall pass."
He added he has made people "plenty of money in the upcycle" when natural gas prices were rising.
A 60 percent slide in natural gas prices and global credit crisis forced the highly leveraged company to shore up its liquidity by repeatedly slashing its ambitious drilling budget and cutting deals to sell stakes in its assets and projects.
While all energy stocks have been hurt by steep declines in crude oil and natural gas prices, Chesapeake has been among the worst, falling 60 percent so far this year, or double the slide of its peers.
That has tested investors' patience.
"If the stock doesn't recover, people are going to start calling for his (McClendon's) head," Calyon Securities' Armstrong said.
Another knock to McClendon's image was a margin call in October that forced him to sell nearly his entire stake in the company, which totaled more than 31 million shares.
That has not dented his support from Chesapeake's board of directors, McClendon said.
"I think our board is very pleased with the management team's performance this year," McClendon said.
Shares of the company continued to recover on Wednesday, rising 22.7 percent, or $3.29, to $17.76 in late trading on the New York Stock Exchange. (Reporting by Anna Driver, editing by Gerald E. McCormick)

What concerns me is they fail to post their well results.

Buck