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Is This CEO a Crook?

Wealth Daily's Weekend Edition

By
Saturday, May 5th, 2012

Aubrey McClendon was once a Wall Street and investor favorite as he grew Chesapeake Energy (NYSE: CHK) to be the second largest natural gas company in America, after ExxonMobil (NYSE: XOM).

His seemed like a “can't miss” business plan...

In 2008, as natural gas traded for $14 per mcf, the stock hit $70 a share.

Even in 2011, Chesapeake netted nearly $2 billion in profits. 

As CEO of Chesapeake, McClendon cashed in. In 2009, his compensation was better than $100 million.

McClendon is currently a billionaire... but he may not be for long.

Not much has gone right for Chesapeake — or for McClendon — lately...

The natural gas behemoth has been on the wrong side of plummeting natural gas prices.

To make matters worse, Chesapeake has spent more than $10 billion of natural gas and oil leases over the last five years.

The company now carries $13 billion in debt, for an awful debt-to-equity ratio of 69.

Analysts' estimates for future profitability have been falling just as quickly as natural gas prices, and the stock price has been falling as fast as Aubrey McClendon's credibility.

From Bad to Worse for Chesapeake

As if saddling Chesapeake with an incredible amount of debt wasn't bad enough, the SEC and the IRS are now investigating the fact that McClendon has taken out more than $1 billion in loans from his company.  

One of McClendon's perks as CEO was that he could buy 2.5% of the output of all of Chesapeake's well operations.

It has come to light that he borrowed the money to fund the purchases from Chesapeake, and used the wells as collateral. Not only that, but McClendon reportedly ran a $400 million hedge fund that traded the very same energy futures that Chesapeake used as hedging mechanisms.

If that's not a conflict of interest, I don't know what is.

Aubrey McClendon has already been removed from Chesapeake's Board of Directors. Personally, I don't think he'll survive as CEO much longer.

And with Chesapeake's scattershot plan to fix its debt problems by selling natural gas assets and buying oil assets, investors have to wonder if the company itself will survive.

All this just as natural gas prices appear to be putting in a very important bottom for prices...

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Natural Gas Prices Bottoming? 

I want to be clear: I do not recommend owning the U.S. Natural Gas Fund (NYSE: UNG) for anything but a short-term trade.

The strategy of this ETF is broken and it perpetually loses value over the long term.

Still, in the short term it is useful for tracking important shifts in natural gas prices. 

UNGchart
This is a two-year chart for the U.S. Natural Gas Fund.

It's ugly. Real ugly. But it's virtually impossible to miss the “V”-shaped bottom natural gas is making.

Why are natural gas prices moving higher? Because prices FINALLY reached the point where they were simply too low to ignore.

Where companies once depended on incentives to convert to natural gas, the cost savings of natural gas compared to other energy sources are now driving investment.

Manufacturers are switching to natural gas to run factories.

Utilities are buying natural gas turbines from General Electric (NYSE: GE) to generate electricity.

Truck and bus fleets are using more natural gas vehicles, because nat gas can save as much as $2 a gallon over diesel fuel. And natural gas pumps are cropping up at gas stations in states from Texas and Oklahoma to Florida and Illinois.

What's more, the U.S. government may limit natural gas exports to encourage use (and supply) here in America.

We are the very start of a huge bull market for natural gas.

Aubrey McClendon and Chesapeake may miss the coming boom time for natural gas, but you don't have to...

There are some terrific values in natural gas stocks right now. Some of these companies have very low debt and will do very well as natural gas prices rise.

These are the companies you want to position yourself in now.

Good investing,

Briton Ryle
Analyst, Wealth Daily


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