Wild Ambition Is A Young Man’s Thing

“You need to change your style of leadership as you grow.”

There is no doubt that Chesapeake Energy, an oil and gas company located in Oklahoma City, USA, has done rather well for itself since it was founded by Aubrey McClendon and Tom Ward in 1989. It now owns over 15M acres of hydrocarbon licences in the US, half of which are unconventional deposits, its trademark acreage of choice. With a particular emphasis on natural gas the development of the business, over the intervening years, has been strongly influenced by the somewhat volatile natural gas price. The price went down in the late 1990’s then surged again 2003-7 and now it has fallen once more.

With such a history of fluctuating gas prices you might have expected the company to be a little better protected against the current lower prices. Natural gas prices hit a 10-year low earlier this year. This doesn’t appear to be the case and it is now under considerable pressure from investors to sell assets in order to plug a pretty impressive funding gap.Chesapeake’s own forecast shows a $10bn gap between its plans and its cash flows for 2012 alone.

The company seems to be planning to sell off $4bn of pipeline assets and something like a quarter of its acreage at the same time as rebalancing its portfolio away for natural gas and towards oil and other liquids. This isn’t going to be as easy as it seems. In spite of owning some very attractive assets and some of the best undeveloped acreage in the US the oil price has fallen since March and the company’s tenuous financial position and need for some quick deals hardly puts it in the driving seat.

The last decade has been an exciting time for the oil industry and Chesapeake has benefited greatly from this but also from the drive and ambition of its founders, in the early years at least. The problem is that assuming continuing high hydrocarbon prices and using that to fuel an overly ambitious expansion plan always had a pretty big downside to it. To my mind this was strategically rather naïve: a young head on a middle-aged corporate body. Chesapeakes’s share price fell by 39% in the last year and things have got so bad that shareholders now seem to be taking charge.

There are so many sporting analogies I could quote here that I am spoilt for choice. Once you’re ahead maybe its time to bring on another defender to protect your lead, perhaps. Or, more relevantly, I was told once that the average age of people who have stood on the top of Mount Everest is 28, but the average age of people to get to the top and down again, alive, is 44.

Chesapeake has suffered from not realising that with scale and success comes a need for a degree of leadership maturity. Behaviour that was once essential for success can put at risk all you have already achieved. In part this is the reason why some people say that you need different types of leaders for different stages of a business’s lifecycle. It is also why, in the continuing debate about CEO remuneration, the heroic business builders of the past may not demand the same remuneration as they did, because the emphasis of their roles is now more to protect, rather than to create, wealth.

Mark

 

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