CEO Problems Show Why Chesapeake Is a Bad Bet

NEW YORK ( TheStreet) -- Chesapeake Energy ( CHK) proved it isn't entirely deaf to shareholders' concerns and today announced it would appoint a new chairman of the board, replacing founder Aubrey McClendon. The only problem is that changing the chairman won't change the unhappy fundamentals at work. Chesapeake remains a natural gas company under pressure, and not one to own.

Founder, CEO and current Chairman Aubrey McClendon has come under fire as it was revealed he has racked up personal loans of up to $1.1 billion, secured by his stakes in thousands of wells Chesapeake has drilled under their very unique "Founders Well Participation Program." This program allowed McClendon to invest and own 2.5% of every well Chesapeake drills. With natural gas prices dropping and leverage increasing from breakneck drilling at the company over the past several years, McClendon has been forced to secure loans to pay for the development costs for his share of the wells -- but no one on the board apparently knew just how extensive these loans had become. The questions surrounding these loans and the possible conflict of interest for the CEO have brought the IRS and SEC sniffing around the company and have sent shares reeling in recent weeks.
A program at Chesapeake Energy means every well Chesapeake drills can be invested in and 2.5% owned by founder, CEO and current Chairman Aubrey McClendon.

In response to the obvious loss of shareholder confidence, Chesapeake also announced it will end the FWPP early, although not until 2014. But questions remain and will remain about the program: Will McClendon be allowed to continue to invest for the next two years? And what about the huge stakes the CEO already owns? Will the board request or demand that McClendon divest himself of those stakes? It seems unlikely any real restraints will be put on the Chesapeake leader, and much of these moves are just window dressing in front of a quarterly report today that looks likely to disappoint.

Neither the end of the FWPP, no matter the timing, nor the appointment of a new chairman -- Eric Rosenbaum of has slyly recommended ex- Exxon Mobil ( XOM) chairman Lee Raymond -- will do anything to change the fundamentals of the company. Chesapeake remains a highly leveraged and financially opaque company; a mass of joint ventures, volumetric production payments, leveraged leases and forward contracts that tend to make it difficult to understand the true value of the company. While natural gas remains the inevitable future of energy in the United States, this vanguard company of U.S. production remains the wrong place to invest in that future.

Don't get me wrong. If natural gas magically moves back from just over $2/mcf to trade above $5, Chesapeake will be just fine, McClendon's loans will disappear and the CEO will go from being hundreds of millions in debt to being a very wealthy billionaire. But what should you care as an investor? Why should you bet on this rogue of a CEO and his company instead of finding a natural gas company you can believe in -- one that will rocket and triple a lot quicker than Chesapeake if natural gas makes that magical double of price?

You shouldn't -- look at some real natural gas companies to bet on the future of U.S. energy: EnCana ( ECA), SandRidge ( SD), Ultra Petroleum ( UPL), Devon ( DVN), Anadarko ( APC), even Exco Resources ( XCO) is a better play, banking on a savvy investor such as Wilbur Ross, instead of Aubrey McClendon. Any of these would be better bets than Chesapeake over the long run.