Chesapeake's Boss Faces Tall Order

November 26, 2015, 12:30:00 PM EDT By Dow Jones Business News

Read more: http://www.nasdaq.com/article/chesapeakes-boss-faces-tall-order-201...

By Erin Ailworth

OKLAHOMA CITY, Okla.--Two years ago, Doug Lawler stepped into a maelstrom.

When Mr. Lawler took over as chief executive at Chesapeake Energy Corp., the company, an icon of the U.S. energy boom, was in turmoil: financially, operationally and culturally.

Chesapeake was deeply in debt and spending billions of dollars it didn't have. It faced hundreds of lawsuits and investigations challenging its business practices. And activist investors, including Carl Icahn, had forced out its charismatic co-founder, Aubrey McClendon, who used to make nearly every decision at the company, down to the kind of cheese served in the company cafeterias.

Mr. Lawler, a buttoned-down petroleum engineer, had big boots to fill--though he says he didn't see it that way.

"There's kind of an inference that in filling someone's shoes that you are going to pursue the same path they did," Mr. Lawler, 49, said during his first in-depth interview about taking the reins at Chesapeake. "I knew we were going to change everything."

His challenge comes as the entire U.S. energy industry is struggling to survive low oil and gas prices. But the hurdles are extreme in Chesapeake's case. Perhaps as a result, Mr. Lawler has attracted almost no public criticism, even from former executives.

Mr. Lawler started his career at Kerr-McGee Corp., an Oklahoma-based oil-and-gas company, which was acquired in 2006 by Anadarko Petroleum Corp. He swiftly climbed the ranks there; by the time Chesapeake's recruiters came calling in 2013, Mr. Lawler was on Anadarko's executive committee, and in the running to head the company someday.

Given that Chesapeake's woes had been the talk of the energy industry and chronicled in the national press, Mr. Lawler thought he knew how troubled the company was. He declined to meet with the company's board--twice--before deciding to take on "the biggest challenge in the entire industry," he said.

Those who know Mr. Lawler well say not to bet against him. "Doug came into Chesapeake with a lot of backbone," said Jim Hackett, who led Anadarko for most of Mr. Lawler's time there.

Before Mr. Lawler arrived, Chesapeake's stock had been on a roller coaster. In addition to the company's chronic overspending, investors had been spooked by controversy over Mr. McClendon, who had borrowed large sums--for his personal use--from private-equity firms that had invested in the company.

Mr. McClendon, who led Chesapeake after founding it with a partner in 1989, declined to comment. The company accused him earlier this year of stealing proprietary maps and data and using them to start a rival company, American Energy Partners LP. Mr. McClendon has said the information was rightfully his. The case is before an arbitrator.

The problems went even deeper than Mr. Lawler expected, he said. For example, there was no real budgeting process. The focus was almost exclusively on acquiring and drilling land.

One eye-opening discovery: 54% of Chesapeake's projects in 2012 hadn't turned a profit, according to a presentation Chesapeake made to analysts last year.

To make matters worse, there was little appreciation among employees for the many challenges facing the company, Mr. Lawler said. A mainstay of Oklahoma City, Chesapeake had its name on the local sports arena, it gave millions of dollars to charity, and it offered great perks, including a community garden (with company beekeeper) and, at times, access to tanning beds and Botox injections.

The more Mr. Lawler dug in, he said, the more problems he found. Mr. McClendon had signed contracts with outside investors that committed it to drilling hundreds of wells, whether or not they were economic. He also inked deals requiring the company to transport specific amounts of natural gas on certain pipelines or face big financial penalties.

In part because of such obligations, Chesapeake spent nearly $30 billion more on drilling and leasing than it brought in from its operations from 2010 through 2012, financial filings show.

Under Mr. Lawler's direction, Chesapeake has slashed spending by more than half compared with 2012, and pared its staff by 67%. Its drilling footprint is nearly 5.5 million acres smaller. Antitrust allegations against the company in Michigan have been resolved, as have about two-thirds of the lawsuits filed against Chesapeake over past business practices.

He also made symbolic changes. This year, Chesapeake is forgoing its traditional holiday lights display--putting the thousands of dollars it would have spent on those decorations toward providing gifts to poor children and matching community donations made to a regional food bank.

Employees have responded well to Mr. Lawler, who displays his own commitment even on his black crocodile boots, embroidered with Chesapeake's name. Asked to cut the average cost of drilling a well by $1 million within a year, workers instead hit the goal in three months--shaving more than $1 billion from Chesapeake's budget, Mr. Lawler said. A well in the Eagle Ford Shale of South Texas that in 2013 cost Chesapeake $6.9 million, on average, now costs $5.3 million--or 23% less.

Despite all this, Chesapeake's future remains shaky.

Shares have fallen by more than 70% since the start of the year. Chesapeake has written off $15.6 billion in holdings, and its cash flow continues to shrink. In the past several months, the company has suspended its dividend and laid off 740 employees.

At this point, Mr. Lawler said, the biggest challenge is external. Chesapeake has been hampered by the low price of natural gas, which accounts for more than 70% of the company's output. Oil accounts for the rest, and the bust of the past 15 months hasn't helped.

Mr. Icahn has praised Mr. Lawler for his aggressive leadership. "Doug so far has done a great job," he said in February, when Chesapeake's stock was trading over $20 a share, versus just over $5 today. He didn't respond to recent requests for comment.

Mr. Lawler said he knows his future depends on Chesapeake's turnaround and the support of investors like Mr. Icahn.

"If I am not adding value for the shareholders, I fully expect Carl to fire me," Mr. Lawler said. "That's the reason I came here."

Write to Erin Ailworth at Erin.Ailworth@wsj.com

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  (END) Dow Jones Newswires   11-26-151230ET   Copyright (c) 2015 Dow Jones & Company, Inc.

Read more: http://www.nasdaq.com/article/chesapeakes-boss-faces-tall-order-201...