Dunham is working quickly to catch up on the company's operations and finances. He is in Oklahoma City this week to meet with Chesapeake's senior executives.
“I've done some research on some individual members of the management team, and I'll withhold judgment on them until I meet with them and see them function in their respective positions,” he said.
Dunham expects Chesapeake's new board to meet for the first time in the next couple of weeks. It also has a meeting scheduled for Aug. 1.
“Our primary focus has to be the balance sheet and the cost structure. I think that's what the board will be grappling with short-term,” he said. “I would imagine the board would have all of its due diligence done in the first 90 days.”
Chesapeake has taken a number of hits to its reputation over the past couple of months as media reports have raised questions about potential conflicts of interest and lax oversight.
Dunham was reticent to discuss much of the media coverage that has been blanketing Chesapeake.
“I don't want to comment too much because I haven't been here long enough, but I think in the investment community there are always some who would like to drive the price of a stock down for all kinds of financial reasons,” he said.
Dunham said Chesapeake's board should be focusing on increasing the company's share price “because that is in the long-term best interest of shareholders.”
He said now is the time for Chesapeake to be in “create-value-for-shareholder” mode after it has amassed an impressive portfolio of oil and gas assets.
“That probably means more focus. That certainly means rationalization of assets,” Dunham said. “Hopefully we'll be selling the assets that are not core to the future of Chesapeake.
“I think that's Aubrey's plan, and clearly that's what the board will want to do.”
Some industry analysts have criticized Chesapeake for having too broad of a focus and have said 10 core areas are too much for a company its size.
Dunham said that is not necessarily true.
“I don't think it's too big,” he said. “The fact that we're going to be a North American company, that's just not an out-of-bounds focus. We were in 55 countries (at ConocoPhillips). A focus on North America, to me, whether it's 10 fields or 15 fields, really doesn't make any difference.
“What we want to do is focus on our best assets. I don't know if that's 10 fields or 12 fields, eight or 15. Aubrey does know. The board will get to understand that over the next several weeks.”
While the company has announced plans to sell up to $21 billion in assets over the next two years, Dunham said it will not be a fire sale.
“The assets the company is going to sell are outstanding assets,” he said. “They're going to command an excellent price, a fair price.”
He said the board's most important responsibility is to review Chesapeake's planned asset sales and solve its financial woes.
Chesapeake is trying to offset a capital issue of up to $21 billion as the company shifts its operations to focus on more profitable oil and liquids production amid low natural gas prices. The company has said it plans to sell up to $14 billion in assets this year and half that amount next year to help fund its drilling operations until increased oil and natural gas liquids production can increase cash flow.
“We need to understand why those assets and not other assets. We need to understand the value of the assets,” Dunham said. “We need to have an absolute firm commitment that we're going to get the balance sheet where it needs to be as quickly as possible.
“We need to be running far down the street toward that objective by the end of the year.”
Dunham said the board's review also will include comparing Chesapeake's spending and staffing levels to competitors like Anadarko Petroleum Corp., Devon Energy Corp. and other industry peers.
“To me the best way to look at your cost structure is to benchmark your organization with your competition,” Dunham said. “That's what I did when I was running Conoco. We benchmarked our best competition. We looked at layers of management. When you're benchmarking against your very best competition and your cost structure is out of line, you have to ask yourself why. There's usually not an excuse. So then you have a tough job of cutting costs.”
The market capitalization for each of those companies is more than twice that of Chesapeake's, which employs more than Anadarko and Devon combined. Chesapeake has a market capitalization of $10.9 billion and about 12,600 employees, while Devon has a market cap of $22 billion and 5,200 employees and Anadarko is worth $30 billion with 4,800 employees.
“Unlike the federal government, which never reduces staff, public companies have to reduce staff, have to cut costs, have to sell assets during different times in the history of the company in order to remain viable,” he said.
“I think the experience of all the board members in doing that at various times in their careers will help us make the right decisions on the assets that need to be sold and the right decisions around the cost structure of the company.”
Good corporate citizen
Dunham said he hopes Chesapeake can continue to be a supporter of civic organizations and causes.
“I think that's one of the responsibilities of a corporation,” he said. “It is not the primary responsibility, but they do have a social responsibility to the community and the state, as well as a responsibility to their employees to be the kind of company they can be proud of.”
He said he understands the company is important to Oklahoma City and Oklahoma, but he believes it is vital to the United States, as well.
“I think we need a strong, vibrant natural gas industry. I think the leadership that companies like Chesapeake — especially Chesapeake — have provided in the gas and oil shale plays over the last five years has been significant,” he said. “They focused on that while the majors were focusing on other things.
“That's a real plus and a real tribute to Aubrey and people like Aubrey who continue to focus on opportunities in the United States.”
The unprecedented exploration and production success Chesapeake and other independent producers have experienced surprised everyone in the industry, including the producers themselves, Dunham said.
Improved technology and drilling techniques allowed the companies to flood the market with natural gas, driving down the price to below profitable levels.
“If you had gone into the board room of every major oil company in the world three years ago and they were getting ready to do their long-term plan and set their capital budget, I would guess with you that there probably was less than 1 percent of those presentations that would have had natural gas at less than $2.50 per million BTU (British Thermal Unit),” Dunham said.
“I would guess that 80 percent of them would have said three years ago or five years ago that natural gas in 2012 would be $7.50 per million BTU.”
A BTU represents the heat energy generated from burning roughly 1,000 cubic feet of natural gas.
The price of natural gas has tumbled from more than $5 one year ago to less than $2 this spring. The price has since recovered in recent months but still remains below comfortable levels for the industry. The price gained 7 cents Tuesday to close at $2.77.
While the flood of newly available natural gas has hurt the industry in the short-term, the discovery promises to be beneficial to the country for many decades to come, Dunham said. Increased domestic oil and natural gas have made it possible for North America to approach energy independence by 2020, he said.
“We need to have regulation, we need to have incentives, we need to have tax laws that encourage domestic production and domestic exploration,” Dunham said.
“If we do, I think we can continue to dramatically increase the production of oil and gas in the United States. That has to be good for our country and our economic well-being.”
In the short term, however, prices appear tied to the strength of the American and global economies, he said.
“I think we're in a $2.50 to $3 range for the short term, and I don't know whether that's 12 months or three years,” he said. “What we need is a dramatic improvement in the global economic activity so that can raise the demand for natural gas globally.”