Chesapeake Bends to Icahn’s Demand for Board Overhaul
Chesapeake Energy Corp. (CHK), the U.S. energy explorer battered by collapsing natural-gas prices and growing investor mistrust, will replace almost half its board under pressure from billionaire investor Carl Icahn.
Four of the company’s eight non-executive directors will be replaced with nominees of the largest shareholders, Southeastern Asset Management Inc. and Icahn, Chesapeake said in a statement today. Icahn triggered the overhaul by acquiring a 7.6 percent stake last month to rein in what he saw as Chairman and Chief Executive Officer Aubrey McClendon’s risk-taking and overspending that led to a $22 billion cash crunch and has eroded the share price by 26 percent this year.
McClendon has been under a cloud since a series of media reports in March and April about personal loans he obtained using minority stakes in company-owned wells that he’d been allowed to gather for his private portfolio. The company announced May 1 that he will step down as chairman when a replacement is chosen.
“Carl Icahn and Southeastern got what they wanted,” Fadel Gheit, a New York-based analyst for Oppenheimer & Co. who rates the stock “outperform” and owns none, said today in a telephone interview. “They will have four seats, so the non-executive chairman will become a very important player in this company’s future.”
Southeastern’s 13.6 percent stake in Chesapeake makes it the largest holder, followed by Icahn. Southeastern will propose three of the new directors and Icahn will name the fourth, the company said today. Memphis-based Southeastern on May 7 chastised the management team for failing to focus on operations and spending too much time meeting with Wall Street analysts.
Icahn now plans to urge “cost savings initiatives” and a more conservative approach to spending, according to a filing with the Securities & Exchange Commission today. His efforts may include pushing for a sale of pipelines and gas-processing plants, as well as scaling back drilling budgets.
Icahn also said in the filing that he is not averse to an outright sale of the company should someone offer “a meaningful premium,” according to the filing.
The new directors and chairman will be announced no later than June 22, the company said today. McClendon will remain a director and CEO after a new chairman is named.
Chesapeake rose 6 percent to $16.52 at the close in New York, the biggest gain in the Standard & Poor’s 500 Index.
The company didn’t name the four directors that will resign. A fifth independent director, Charles Maxwell, is scheduled to retire after reaching the board’s mandatory retirement age of 80. Louis Simpson, a former Warren Buffett protege who joined the board a year ago, will remain a director, the company said.
“We greatly appreciate the substantial contributions of all our directors but recognize our shareholders’ desire for change,” Merrill “Pete” Miller, the lead independent director, said in the statement. “Following implementation of these initiatives, the Chesapeake board will have been substantially reconstituted with five new independent directors, including a new independent chairman, in addition to Lou Simpson.”
Simpson was appointed to the board last year after he was suggested by Southeastern, McClendon said in a statement at the time.
If shareholders at the company’s June 8 annual meeting adopt a majority-voting standard for directors, the rule will be immediately applied to that day’s results, the company said. The company also will seek an exemption from a 2010 Oklahoma law, for which Chesapeake lobbied, that requires staggered terms for some corporate boards. The company said it will seek permission for holders to vote on the entire board in 2013.
McClendon’s role as CEO may be in peril given concerns about potential conflicts of interest and the company’s vulnerability to falling commodity prices, Tim Rezvan, a New York-based analyst for Sterne Agee & Leach Inc. who rates the shares “neutral” and owns none, said today in a telephone interview.
“You could make the case that the chance of him losing his job had increased substantially even before this announcement," Rezvan said. ‘‘I don’t think at this point anybody’s going to be too loyal to Aubrey. The spotlight is pretty intense.”
Chesapeake, which McClendon has led since its 1989 inception in an Oklahoma City strip mall, saw share value decline this year as scrutiny of McClendon’s personal transactions was compounded by a glut-driven collapse in gas prices at a company whose output is more than 80 percent gas.
Under an executive perk designed to align McClendon’s personal interests with those of the company, the CEO acquired stakes as large as 2.5 percent in almost every well Chesapeake drilled during the past 23 years. McClendon took out loans backed by his well stakes to fund his portion of costs. As of Dec. 31, he owed $846 million on those loans, the company reported on April 26.
Some of the loans came from companies that were involved in separate financial transactions with Chesapeake. The Internal Revenue Service and SEC have begun probes.
McClendon, 52, built Chesapeake into the second-largest U.S. gas producer by amassing fields that cover an area half the size of New York state. As one of the first explorers to embrace horizontal drilling and hydraulic fracturing, McClendon helped usher in a renaissance in U.S. gas and oil production with discoveries such as the Haynesville Shale in Louisiana and Utica Shale in Ohio.
As a glut of North American gas drove prices to a 10-year low in April, Chesapeake warned on May 1 that it may run out of cash to fund drilling projects as early as next year. Alembic Global Advisors estimates the company’s cash-flow shortfall may reach $22 billion by the end of 2013.
McClendon lagged rival U.S. energy producers such as Devon Energy Corp. (DVN) in shifting rigs from gas fields to higher-profit oil prospects, leaving it more vulnerable to slumping gas prices. Even after the recent decline in crude prices, oil sells for almost six times more than gas, on an energy-equivalent basis.
Exxon Mobil Corp., based in Irving, Texas, is the largest U.S. gas producer.
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