Chesapeake Energy Corp. (CHK:US)’s efforts to defuse a shareholder revolt over Chief Executive Officer Aubrey McClendon’s personal finances and management missteps have intensified calls for his dismissal.
In the past six weeks, the second-largest U.S. natural-gas explorer shrank pay packages, eliminated perks, agreed to remake its board, and obtained a $4 billion loan to cope with tumbling gas prices and a looming cash shortfall. Still, McClendon is $7.4 billion shy of the asset sales he said are needed during the next six months to cover drilling costs and begin to repay ballooning debt.
“He should resign or the reconstituted board should let him go,” said David Dreman, chairman of Dreman Value Management Inc., which holds about 1 million Chesapeake shares. “This company’s got to get its credibility back. As long as you have a guy like Aubrey there, I don’t think we’re going to get the credibility back.”
Shareholders are criticizing McClendon and the board after the CEO was allowed to pile up more than $800 million in personal loans to buy stakes in company-operated wells for his private portfolio, deals that sparked Internal Revenue Service and U.S. Securities & Exchange Commission reviews. His wrong bet on gas demand in late 2011 left the company with no protection against falling prices and he has lagged behind rivals such as Devon Energy Corp. (DVN:US) in shifting to more-lucrative oil production.
Chesapeake was the worst performing stock in the Standard and Poor’s 500 Oil & Gas Exploration & Production (4O1) Index this year until May 25, when investor Carl Icahn announced he’d taken a 7.6 percent stake and began pushing for reforms. Since then, Chesapeake has gained 11 percent. The shares fell 4.1 percent to $17.61 at the close in New York.
Jim Gipson, a Chesapeake spokesman, declined to comment on the calls for McClendon’s removal. Ron Hutcheson, a spokesman handling inquiries about McClendon’s personal finances, said he couldn’t immediately comment.
McClendon already has paid a high price as the board sought to mollify outraged shareholders: Within the next two weeks, he’ll be forced out of the chairman’s post he held since co- founding the Oklahoma City-based company 23 years ago. Chesapeake’s largest investors, Southeastern Asset Management and Icahn, will take control of the board later this month when half the non-executive directors will be replaced with their designees.
Investors also have been punished as McClendon’s personal entanglements compounded the effect of cratering gas prices, wiping out $2.6 billion in market value so far this year. Chesapeake’s borrowing costs have soared, its credit ratings (CHK:US) have been cut and its ability to raise cash by auctioning assets has been limited by loan covenants. Alembic Global Advisors estimated the company’s cash flow shortfall may exceed $22 billion by the end of 2013.
“It is completely unacceptable that Aubrey McClendon retains the CEO’s post,” said Pedro Noronha, a managing director at London-based hedge-fund Noster Capital LLC, which holds an undisclosed number of Chesapeake shares. “How can he honestly think he will have the time and emotional ability to remain at the helm of a multibillion dollar company while undergoing all these obstacles and while enjoying his expensive hobbies?”
Shareholders expressed the depth of their disappointment at the June 8 meeting by opposing the re-elections of directors V. Burns Hargis, president of Oklahoma State University, and Richard K. Davidson, former chairman of Union Pacific Corp. (UNP:US)
Both men, who are leading a probe of McClendon’s loans that overlap with company financiers, offered to resign after the vote. The board isn’t required to let them go and said in a June 8 statement that it would decide later.
Shareholders also overcame company opposition to three measures intended to dilute the power concentrated in the nine- person board of directors.
A requirement that directors receive a majority of votes to be elected received support from 97 percent of voters at the June 8 meeting. Although that total fell short of the 66.6 percent of outstanding shares required under the company’s bylaws, directors decided to implement the majority-voting standard immediately.
The holders also voted 86 percent in favor of doing away with a requirement that changes to corporate bylaws must be supported by two-thirds of outstanding shares. A measure that would give large, long-term investors the right to nominate candidates for board seats received support from 60 percent of the votes cast.
Southeastern, which holds 13.6 percent of Chesapeake’s shares outstanding, said in a filing (CHK:US) after the meeting that Chesapeake should keep Hargis on the board until the review of McClendon’s finances is completed. Southeastern, based in Memphis, Tennessee, said it voted against both Hargis and Davidson, and that it hopes the review can be completed within “weeks, not months.”
Under a pact announced last week, Southeastern will appoint three of the new independent directors and Icahn the fourth. Neither Southeastern nor Icahn have said publicly which four of the eight sitting directors should be dismissed, though the agreement exempts Louis Simpson, who was appointed to the board last year at Southeastern’s request.
Jeffrey Bronchick, chief investment officer for Cove Street Capital in Los Angeles, said he is happy with the board reforms so far initiated. He supports a “properly harnessed” Aubrey overseen by directors who can say “no” to him.
“What matters is change is afoot,” Bronchick said. “The company is speeding down a reversal of direction to sell assets.”
Chesapeake outspent cashflow in 19 of the past 21 years as it amassed drilling leases from Appalachia to the Rocky Mountains and made some of the biggest onshore discoveries of the past 20 years, including the Haynesville Shale formation in Louisiana and the Utica Shale in Ohio.
Chesapeake was rocked by an unexpected $71 million first- quarter loss after McClendon exited hedging contracts in late 2011 the protected the company’s gas output from falling prices.
McClendon said during a May 2 conference call that he misjudged the commodity markets by assuming gas was poised to rebound; instead, the price of the fuel continued to plunge, reaching a 10-year low in April. Without the hedging contracts, Chesapeake had to sell its gas at lower prices.
“Right now, Chesapeake is so tainted that they need a new infusion throughout the whole organization,” Gerald R. Armstrong, a Denver-based shareholder, said in a telephone interview.
Armstrong, 71, traveled to Oklahoma City to attend the June 8 annual meeting, where he told McClendon that the CEO “might not be here next year.”
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