Chesapeake Should Consider Selling, Shareholder Says

Chesapeake Energy Corp.’s biggest investor said the natural-gas supplier, battered by collapsing gas prices and investor distrust, should consider selling itself and spend less time meeting with analysts.

“We urge the board to be open to any offers to acquire the whole company,” Southeastern Asset Management Inc. Chairman and Chief Executive Officer O. Mason Hawkins wrote in a letter to Chesapeake today. While the shares have declined, “we don’t want to use this large price-to-market gap as an excuse to refuse discussions with potential acquirers who would be willing to pay a price today that recognizes the longer term value of the company.”

Chesapeake shares have fallen 11 percent in the past three weeks amid concern that Chairman and CEO Aubrey McClendon’s personal financial transactions conflict with his professional duties. Directors said May 1 they will strip McClendon of the chairman’s post, and are conducting an internal review of his private deals. The Securities and Exchange Commission opened an informal inquiry last week, the company has said.

“We want to be certain that any offer would be evaluated by an independent board, and that is not the case today,” Michael Garland, director of corporate governance for New York City Comptroller John C. Liu, said today in an e-mailed statement.

Board Independence

Liu, whose office holds 1.57 million Chesapeake shares in pension funds it oversees, has urged the company to allow large, long-term shareholders to nominate directors. A vote is scheduled at Chesapeake’s June 8 annual meeting in Oklahoma City.

McClendon’s management team should “put their heads down” and avoid “unproductive communications” including conferences, media interviews and other meetings, Hawkins wrote in his letter. The company’s stock “has far too many renters and not enough owners, so we would suggest the current system of shareholder communications is not working.”

Chesapeake executives are scheduled to make presentations to four conferences hosted by Wall Street firms during the next four weeks. Those events include the May 15 Barclays Capital Americas Select Franchise Conference in London and the Citi Global Energy Conference in Miami on June 6.

Midstream, Oilfield Services

Chesapeake also should get rid of midstream and oilfield-services assets not core to its exploration and production business, according to the letter the Memphis, Tennessee-based investment company sent to Chesapeake.

“We appreciated receiving the letter and look forward to further discussions with our largest shareholder in the days and weeks to come,” Michael Kehs, a spokesman for Chesapeake, said in an e-mail.

Southeastern, which holds 13.6 percent of the company’s shares, said McClendon should focus on the highest possible operational cash flow, rather than “arbitrary” targets like its plan to lower debt by 25 percent while increasing production 25 percent by the end of this year.

McClendon didn’t immediately respond to an e-mailed request for an interview. Kehs said in a separate e-mailed statement that the company would have no other comment than the one-sentence remark above.

Chesapeake’s board plans to eliminate in 2014 an executive perk McClendon used to buy stakes in almost every well the company has drilled during the past 23 years.

Activist Investor

Directors have said they weren’t aware of the details of loans the CEO obtained using the well stakes as collateral, some of which involved financiers that also did business with the company. Investors and some analysts have said the board failed to properly look out for shareholders’ interests.

The Southeastern letter comes five days after the firm filed with federal securities regulators to change its status to an activist investor so it could pursue talks with management of third parties to boost the company’s value.

‘The letter wasn’t all that surprising,’’ Biju Perincheril, a New York-based analyst for Jefferies & Co., said today in a telephone interview. He has a buy rating on the stock and doesn’t own it. “Given their ownership in the company, I’d expected them to be more vocal.”

Chesapeake fell 1.5 percent to $17.13 at the close in New York.

Southeastern was an outspoken supporter of McClendon’s growth strategy as recently as three months ago.

Accumulating Shares

Even when adjusting for the recent effects of gas prices below $3 per thousand cubic feet, “Chesapeake’s value remains over twice the stock price today,” Ross Glotzbach, a senior analyst at Southeastern, said during a Feb. 1 conference call with investors. “While Chesapeake has been a disappointing investment over the last few years, we think that the next few will be much better.”

Glotzbach, a Princeton University-trained economist, was one of the signatories to Hawkins’ letter today.

Southeastern has been increasing its stake in Chesapeake as the share price dropped, according to data compiled by Bloomberg. Since the end of 2009, Southeastern added 8.01 million Chesapeake shares to its holdings, a 1 percent increase, while the stock lost 34 percent of its value, falling to $17.13 from $25.88.

Chesapeake, based in Oklahoma City, outspent its cash flow in 19 of the past 21 years while amassing a portfolio of gas and oil fields that cover an area half the size of New York state.

Jeffrey L. Mobley, Chesapeake’s senior vice president of investor relations and research, on May 3 reiterated the company’s commitment to reducing net debt to $9.5 billion by the end of this year from $12.6 billion at the end of March.

The company, co-founded by McClendon 23 years ago, cut its 2012 and 2013 operating cash-flow estimates as much as 48 percent on May 1 and increased the amount of assets it plans to sell to $20.5 billion by the end of 2013. Even so, it said it may run short of cash next year.

Download: Suntrust's Dingmann Discusses Chesapeake Energy


Before it's here, it's on the Bloomberg Terminal. LEARN MORE