In 2008, I was on a commodities panel with three other fellow panelists at an all-day investment conference. I’ve never been one to refrain from sharing my opinion and I was running my own Commodity Trading Advisor (CTA) at the time so there was no wider corporate censure or opprobrium if I spoke freely. Sure enough, when the topic came to a Wall Street darling at the time – Aubrey McClendon and Chesapeake Energy – I let it rip. I still remember the surprise and disdainful looks I received from calling the individual and institution a bunch of cowboys trying to disguise themselves as value focused business people. Recall that in 2008, when Chesapeake’s stock plummeted, Aubrey McClendon forfeited most of his stock to a margin call because he had borrowed hundreds of millions to purchase yet more Chesapeake stock. Luckily for him, the board voted to give him a $75 million bonus to continue participating in his “Founders Well Participation Program” and also purchased his rare map collections for $12.1 million. What? Corporate governance? Hello? Does this really happen?

Back then the hype was overblown but fast forward to today and perhaps the market’s despair is overdone? Yes, commodity prices are down materially and Chesapeake has more than enough exposure to oil & gas prices but let’s review the facts.

In 2013, the founder and erstwhile CEO, Aubrey McClendon, stepped down after years of boom time growth amidst a maelstrom of media reports of conflicts of interest between himself & Chesapeake. He left Chesapeake as a highly levered firm.  Around this time, the stock collapsed and a well-known activist (Carl Icahn) and a well know value investor (Mason Hawkins) stepped in to buy large stakes of common equity.  The two investors own about 25% of the market cap in Q2 2015. Since 2013, the firm has moved to divest assets and de-leverage its balance sheet. Unfortunately, the starting point isn’t great but they have two very large advantages versus their peer group – (1) they started the fire drill exercise two years before everyone else (2) they knew they were in crisis mode from 2013 so there was no head in sand syndrome of denial. They knew they had to act and do it while the borrowing window was open.

• Year to date, Chesapeake has taken $15 billion (yes, billion) of impairments to their balance sheet.
• Chesapeake’s total assets hit a peak in 2012 at $47 billion but as of Q3 2015, their total assets stand at $21 billion.
• Chesapeake’s total liabilities hit a peak in 2012 at $30 billion but as of Q3 2015, their total liabilities stand at $17 billion.
• Free cash flow has been negative since 2006. So now they have asset sales to raise cash and impairments that cost money. Case in point — they raise cash in 2014 and announce a $5 billion impairment charge in 2015.

Will they get out of the mess? Not sure. It’s far from a no brainer and maybe it’s more of an even odds bet…but they’ve done a few interesting things lately around their debt to extend their weighted maturities so it could be interesting. I’ve gone ahead and purchased a bit of the 4.5% Cumulative Convertible Preferred on Chesapeake (unfortunately at a higher price than current levels). The current price is at distress levels with a current yield around 26%. It’s pricing in disaster so who knows, maybe it goes lower or maybe it just works out ok.  Either way, it’ll pretty interesting to follow and see how the various interested parties play the game – existing management, common equity holders, and debt holders.