Would You Call This UnAmerican?
6/23/2012 4:10 AM
Rumors swirled Friday that Chinese oil and gas company Sinopec may want to buy some or all of the shares of Oklahoma City-based Chesapeake Energy Corp., Bloomberg News reported. Bloomberg cited a story in investment publication The Deal that said the combination would make sense because Sinopec chairman Fu Chengyu's former company, CNOOC, has two joint ventures with Chesapeake. Bloomberg also noted that Chengyu was in the front row last week at Game 2 of the NBA finals in Oklahoma City, using tickets allegedly given to him by Oklahoma City Thunder co-owner and Chesapeake CEO Aubrey McClendon. The Financial Times also reported that Chengyu was in Oklahoma this week to perform due diligence on Chesapeake assets, according to Bloomberg. An outright sale to Sinopec could be difficult, however, because of Chesapeake's many joint ventures, the news service said. On May 17, the Financial Times reported that Chesapeake could be a takeover target and listed as possible suitors Chevron Corp., Total SA of France and BP Plc. Morningstar also has mentioned the possibility of a merger, naming San Ramon, Calif.-based Chevron and Oklahoma City-based Devon Energy Corp. Sinopec Group is a super-large petroleum and petrochemical group incorporated in 1998 based on the former China Petrochemical Corp. The state-funded company is the largest shareholder of Sinopec Corp., one of the largest integrated energy and chemical businesses in China. Meanwhile, investors and analysts were still talking Friday about the appointment of former ConocoPhillips leader Archie Dunham as chairman of Chesapeake, replacing McClendon, who will remain CEO. Observers said Dunham's biggest challenge may be keeping McClendon focused on selling $7.4 billion of assets this year to plug a widening cash-flow shortfall. Dunham, who was named to his post Thursday, will need to curb the CEO's penchant for costly expansions into uncharted oil and gas fields while overseeing corporate belt-tightening under a mandate from Chesapeake's biggest investors, analysts said. The Oklahoma native brings expertise in shedding oilfields and pipelines from his days at ConocoPhillips to a company facing a cash-flow shortfall almost twice the size of its $12.5 billion market value. A chairman with more than three decades of experience at a global oil company will strengthen a board that failed to restrain almost 20 years of overspending by McClendon, said Ed Hirs, a professor of energy economics at the University of Houston. "They need a sober uncle or grandfather to guide the adolescent along," Hirs said. Chesapeake replaced more than half its board Thursday with Dunham and four other independent directors, in addition to stripping its CEO of the chairman's role. McClendon has been shifting some drilling away from gas to more profitable crude and cutting thousands of jobs after outspending cash flow in 19 of the past 21 years. Chesapeake has said it wants to sell as much as $14 billion in assets this year. Its agreement this month to sell its pipeline assets for $4 billion brought it about halfway to that goal for a total $6.6 billion in sales so far this year. The company must sell at least $7 billion in assets this year to avoid a credit downgrade and a breach of debt covenants, Moody's Investors Service says. Chesapeake also is seeking to sell its drilling acreage in Texas' Permian Basin oil fields, and to form a joint venture for its acreage in the Mississippi Lime. Chesapeake's profit squeeze from gas prices that declined to 10-year lows this year was compounded by concerns that McClendon's use of personal stakes in company wells to obtain more than $800 million in private loans conflicted with his professional duties. Investors have punished Chesapeake, driving the share price down as much as 39 percent earlier this year. Dunham, a 73-year-old University of Oklahoma-trained engineer, isn't new to sweeping divestiture programs or tough commodity-price environments. During his tenure at the head of what became ConocoPhillips, he sold pipelines, refineries, filling stations, gas-processing plants, fuel-storage terminals and a deep-water drilling rig to shore up the balance sheet. Dunham also steered the company through two boom-and-bust cycles in the oil market, including the December 1998 collapse of U.S. crude to a 12-year low of $10.35 a barrel. When he departed ConocoPhillips in October 2004, oil had rebounded to $50 for a new record. He collected a $26.6 million bonus in 2002 tied to the merger that created ConocoPhillips. That was more than twice the bonus that Exxon Mobil CEO Lee Raymond received for that company's 1999 acquisition of Mobil Corp. Dunham needs to show he kept up to speed on developments in the oil industry since his departure from ConocoPhillips, said John Parry, an analyst with IHS Herold in Norwalk, Conn. "What's he been doing in the interim?" Parry asked. Dunham certainly has broad experience, having run a very diversified oil and gas giant, said Jake Dollarhide at Longbow Asset Management in Tulsa. "He's a legend, like Aubrey, although more seasoned. He'll bring a calming presence, some helpful perspective."
The Tulsa World Business staff contributed to this story by Bloomberg News. By Staff and Wire reports