Chesapeake Energy Corp. (CHK) will name an independent chairman to replace Aubrey McClendon and halt an incentive program that allowed the chief executive officer to amass personal stakes in thousands of company-operated wells.
McClendon agreed to a board request to terminate the so- called Founder Well Participation Program in June 2014, 18 months early, without additional compensation, according to a release today. McClendon will retain the CEO position and won’t relinquish any of the well stakes he acquired during the past 23 years, Michael Kehs, a Chesapeake spokesman, said today in an e- mailed statement.
McClendon, the only chairman the company has had since he co-founded it in 1989, was criticized by investors and analysts after news reports last month detailed his use of interests in company wells to obtain hundreds of millions of dollars in personal loans. Oklahoma-city based Chesapeake rose 6.3 percent to $19.60 at the close in New York, after earlier jumping 12 percent for the biggest intraday gain since December 2008.
“This board has been slow to address shareholder concerns and it is unfortunate that it took a crisis of this magnitude and substantial loss of shareholder value to spur them to action,” New York State Comptroller Thomas DiNapoli, who oversees 3.1 million Chesapeake shares held by the $140 billion New York State Common Retirement Fund, said in an e-mailed statement today. “Much remains to be done to restore investor confidence in this company and we hope this is one of several steps Chesapeake’s board will take to achieve that goal.”
Southeastern Asset Management Inc., Chesapeake’s biggest shareholder with a 17 percent stake as of Dec. 31, pushed for the separation of the chairman and CEO roles.
“We are pleased that the board listened to our input and believe it has made the right decision by ending the FWPP early and seeking an independent chairman,” O. Mason Hawkins, chairman and CEO of Memphis, Tennessee-based Southeastern, said in Chesapeake’s statement.
Allowing the well-investment program to continue through the middle of 2014 will enable McClendon to buy stakes in the Utica Shale in Ohio, an oil-soaked geologic formation, and other regions that Chesapeake recently began exploring, said Mark Hanson, an analyst at Morningstar Inc. (MORN) in Chicago.
McClendon, 52, had $846 million in loans outstanding as of Dec. 31 to participate in the program which allowed him to purchase up to 2.5 percent of almost every well the company drilled. Under the terms of that program, he had to fund drilling and leasing costs proportionate to his stake in each well.
As Chesapeake has grown over the past two decades, McClendon’s need for cash to cover his well costs expanded. McClendon’s personal cash crunch was exacerbated by the plunge in natural-gas prices that delayed the point when wells drilled in recent years began to turn a profit, Hanson said.
McClendon had $573 million in losses on his well stakes during the past three calendar years as lease and drilling expenses overwhelmed gas and oil revenue, the company said in a regulatory filing yesterday. During the first quarter, he piled on another $88 million in losses.
“If they terminated the program right now, he probably wouldn’t be able to cover his outstanding loans,” Hanson said today in a telephone interview. “This is one last hurrah so he can be made whole before they end the program.”
The Internal Revenue Service has been reviewing the well- investment program since March 2010 as part of ongoing audits of the company’s 2008 and 2009 tax returns, Kehs said today in an e-mailed statement. The company is scheduled to announce first- quarter results today.
“It’s positive that the board is creating some independence between the CEO and the chairmanship,” Scott Hanold, an analyst at RBC Capital Markets LLC in Minneapolis, said today in a telephone interview. “Aubrey McClendon has been the face of Chesapeake and is definitely the one who built the asset base they have, so having him continue to be part of the company is strategically the right decision.”
The nominating and corporate governance committee on Chesapeake’s board is considering chairman candidates with “no previous substantive relationship” with the company, according to the statement. McClendon will remain chairman until a replacement is named.
“I’d be looking for somebody who understands the industry with no business ties, no personal ties, no professional ties whatsoever to Aubrey or Chesapeake,” Philip Weiss, a New York- based analyst for Argus Research, who has called for McClendon and the entire board to be fired, said today in an interview.
“It would also be somebody with a schedule that would allow him or her to make this an important part of their everyday life,” said Weiss, who owns no shares and is one of the four analysts who rate Chesapeake a sell out of 36 that follow the company.
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