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Chesapeake Energy Takes Its Head Out of the Sand

NEW YORK ( TheStreet) -- Chesapeake Energy's (CHK - Get Report) board of directors has finally taken its head out of the sand.

The basis for the board's decision to not renew CEO Aubrey McClendon's controversial ownership interest in company wells (once its first ten-year term ends in 2015) and set to work now on negotiating an early termination can best be described this way. It's one part the directors trying to cover their butts, one part Chesapeake acknowledging (at least for a day) just how tone deaf it has been when it comes to criticism, and one part hope that the continued descent in its shares can be reversed and shareholder confidence restored.

It's not a coincidence that the company released the announcement on the same day that press reports indicated the Securities and Exchange Commission has launched an informal investigation into Chesapeake's Founder Well Participation Program. It was also no coincidence that Chesapeake stressed in its press release today that the board had not reviewed McClendon's personal loans, a statement that the board seemingly included to counter what the company's general counsel said in a press release last week.

The release also raised as many questions as it sought to answer on the board's behalf. The language was tortured, in the opinion of Argus Research analyst Phil Weiss, a long time critic of Chesapeake's management. Chesapeake wrote in the release, "The statement that 'the Board of Directors is fully aware of the existence of Mr. McClendon's financing transactions' was intended to convey the fact that the Board of Directors is generally aware that Mr. McClendon used interests acquired through his participation in the FWPP as security in personal financing transactions."

"Fully and generally are not the same things. I don't think this is the end of the issue," Weiss said.

A Chesapeake shareholder could still ask today, after the board finally got the message, "Why did the board approve this well participation plan in the first place?"

Same board, same CEO, and the same problems for Chesapeake -- problems more fundamental than the controversial compensation program for the CEO -- still exist.

The company is still levered to the hilt - two times the size of Exxon Mobil's debt at a size 27 times smaller than Exxon. Natural gas prices are still at a decade low , and Chesapeake removed all of its hedges headed into 2013, leaving its cash flow exposed to the depressed spot market.

Chesapeake's balance sheet and ability to fund its far flung asset development is still in question. Its ability to monetize assets as a way to stay ahead of its funding gap and pay down debt is as complicated as the volumetric production payments and preferred share offerings in which it has tied up much of its assets.

Chesapeake has legitimate catalysts for its shares, from a deal to sell its Permian basin assets and joint venture its Mississippian Lime shale, to an eventual IPO of its oil services business, but recently, McClendon has not been able to work his usual headline-rally magic by talking up the company's ability to monetize assets. It was a fitting irony that on the same day last week that McClendon said at a conference a deal for the Permian assets should be completed in the third quarter, Reuters published its investigative piece on the links between the well investment program and the CEO's personal loans.

In addition, it's hoping to IPO the oil services company at a time when oil services is going through a pricing and margin downturn. And did we mention it's still the same CEO and same board running the shop?
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