Chesapeake Energy Corp.’s (CHK:US) board withheld Chief Executive Officer Aubrey McClendon’s annual bonus after investors criticized the performance and management of the second-biggest U.S. natural gas producer.
The board cut 2012 incentive compensation “substantially” for executives and reduced perks, the Oklahoma City-based driller said yesterday in a filing. Directors agreed to develop annual and long-term incentive compensation plans to tie pay to performance. The stock slid 25 percent in 2012 as the S&P 500 Oil & Gas Exploration & Production index rose 2.1 percent.
Chesapeake together with explorers like EOG Resources Inc. (EOG:US) led the U.S. drilling bonanza during the last decade that wound up crashing prices for the fuel. The crunch in profit margins forced McClendon to put assets up for sale including oilfields and pipelines to raise cash and meet his drilling commitments.
The company lost $1.07 billion during the first nine months of last year while net debt ballooned by 56 percent during that period to $16.1 billion, data compiled by Bloomberg show.
Chesapeake said yesterday it will introduce proposals at this year’s annual meeting to change voting standards to strengthen shareholders’ influence. The company said it will continue to seek a change in Oklahoma law to allow investors to vote on the entire board in 2013.
Directors in April began investigating whether some of McClendon’s personal financial transactions conflicted with his duties after media reports of the CEO’s use of minority stakes in company-owned wells as collateral for private loans. The stock tumbled as scrutiny of McClendon’s personal transactions compounded the impact of free-falling natural gas prices.
Lost Chairman Position
In response, the company’s board of directors stripped McClendon of the chairman’s role, replaced more than half the directors and cut board members’ pay by 20 percent.
Chesapeake replaced McClendon as chairman with former ConocoPhillips (COP:US) Chairman Archie Dunham to lead a board reconstituted at the behest of the company’s largest investors, Carl Icahn and Southeastern Asset Management Inc. Chesapeake plans to halt the well-investment program with McClendon in 2014 rather than the original termination date at the end of 2015.
“We promised that we were going to work hard to achieve positive change, and I think these are positive changes,” Icahn said in a telephone interview yesterday. “And I hope that there will be more positive changes.”
Icahn said there also needs to be work to get to a positive cash flow. The last time Chesapeake posted positive free cash flow (CHK:US) was 2001, and the company has only had positive free cash flow twice in the past 21 years, according to data compiled by Bloomberg.
Even amid a squeeze in margins and reduced return on equity over the last year, the company has maintained its 8.75 cent-a- share quarterly dividend and is forecast by Bloomberg to leave it unchanged in the first quarter of this year.
A telephone message left for Southeastern Asset Management after normal business hours yesterday wasn’t immediately returned.
In May, the board curtailed McClendon’s personal use of corporate airplanes. Chesapeake said in its filing yesterday that McClendon agreed to reimburse the company for personal use of its aircraft amounting to more than $250,000 a year, compared with a previous standard of more than $500,000 a year.
Analysis by the board’s Compensation Committee resulted in 2012 executive bonus reductions of more than 50 percent compared to the prior year. The board cut McClendon’s bonus entirely “in accordance with Mr. McClendon’s recommendation to such effect,” according to the filing.
McClendon’s $1.951 million bonus for 2011 dwarfed those of some of his Oklahoma City-based rivals, including Continental Resources Inc. Chairman and CEO Harold Hamm, who received a $1.25 million bonus, and Tom Ward of SandRidge Energy Inc., who was paid a $1.523 million bonus.
Chesapeake’s share price tumbled 14 percent in 2011, while Continental and SandRidge gained 13 percent and 11 percent, respectively.
As part of a cost-cutting program, Chesapeake also said it would “significantly” reduce its charitable, trade association and political spending and implement an oversight program for those payments.
New York Pension Funds
The board reforms give shareholders a stronger voice, New York City Comptroller John C. Liu said in a statement yesterday. Liu helps oversee the New York City Pension Funds, which collectively held 1.6 million shares of Chesapeake as of Jan. 4.
Chesapeake’s 25 percent plunge in 2012 left its shares closing at $16.62, down from the $57.25 offering price of its last stock sale in July 2008. Chesapeake fell 4.2 percent today to $16.88 at the close of trading in New York.
The board has not yet released the results of its investigation into McClendon’s finances.
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