Shareholders take over Chesapeake Energy board
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OKLAHOMA CITY -- Chesapeake Energy CEO Aubrey McClendon, who turned a $10,000 investment in 1989 into the nation's second-largest natural gas producer, presided over his last annual meeting as chairman Friday and watched as shareholders successfully took over a board they think let him get away with too much for too long.
The shareholder revolt against the Oklahoma City driller and the top executive who helped fuel Pennsylvania's drilling boom was months in the making. Angry over arrangements that allowed Mr. McClendon to closely tie personal finances with company business, several called for his complete ouster.
After Friday's meeting, that looks like more of a possibility than ever before.
The two directors up for re-election each received support from about 26 percent of the votes cast. And because shareholders also overwhelmingly endorsed a proposal requiring majority voting in director elections, the two directors -- Oklahoma State University President V. Burns Hargis and Richard K. Davidson, the former CEO of the Union Pacific Corp. -- were forced to resign. Another director, Charles Maxwell, reached the mandatory retirement age of 80.
That opens the possibility for seven vacancies on a nine-person board.
"It's likely you might not be with us next year," said shareholder Gerald Armstrong to Mr. McClendon.
Over the past three months, Mr. McClendon has barely kept control of his company as plummeting share prices sliced more than $2 billion in market capitalization, federal agencies started inquiries into his loan arrangements and shareholder activists bought stock in an effort to sway the company from the inside.
Record-low natural gas prices -- brought on in part by rapid-fire development led by Chesapeake -- has strained the firm even further and forced it to curtail some of the drilling that once funded operations.
The turmoil at Chesapeake stems from reports that Mr. McClendon was borrowing against personal stakes in company wells and presiding over a culture of constant leveraging that raised questions about how the gas firm was raising capital.
Mr. McClendon's position as the face of Chesapeake was on full display at the meeting.
The Founders Well Participation Program, which afforded Mr. McClendon a 2.5 percent stake in company wells that he later mortgaged, will end early. He was demoted as chairman of the company he co-founded and defended with red-faced passion. He said he's sorry.
Shareholders were having none of it Friday.
Vincent J. Intrieri, a representative from shareholder activist Carl Icahn's firm Icahn Capital, called Mr. McClendon a "great oil and gas man," but said, "even great executives need vigilant oversight."
Mr. Icahn or one of his representatives is expected to fill one of the board vacancies, as are three candidates proposed by Chesapeake's largest shareholder, Southeastern Asset Management.
The company has said it will announce Mr. McClendon's replacement as chairman by the end of June.
Mr. McClendon tried to assuage shareholders that the solution to his company's debt-ridden balance lies in part underneath Pennsylvania and Ohio, where Chesapeake has aggressively flipped, traded and purchased land to become the top leaseholder in the states. The company has drilled thousands of wells in Pennsylvania and leased about 1.5 million acres in Ohio.
The company, he said, is entering an "asset harvest" phase that will most likely lead to more rigs popping up across Appalachia. The "asset harvest" phase will temper land acquisitions and focus on current holdings in 10 shale plays across America that include the Marcellus and Utica shales.
The announcement of this fourth phase seemed designed to calm shareholders. Chesapeake is now "a completely different company to invest in," he said. "Everything becomes simpler. We have what we own; we're happy with what we own."
This was a far cry from Mr. McClendon's trademark bombast. The same executive who once boasted "we're the biggest frackers in the world" was reserved on Friday.
The Utica Shale, which is deeper than the Marcellus and underlies much of eastern Ohio, signals the start of Chesapeake's focus on liquids-rich regions with extractable commodities that are priced higher than natural gas, Mr. McClendon said.
The Utica is "one of the most important discoveries in the history of our business," he said. Mr. McClendon's company has leased about 1.5 million acres in the Utica, but recently put about one-fourth of its Utica holdings up for sale as it tries to lower the company's estimated $13 billion debt.
The company's hunt for capital was evident just hours before the meeting began, when the firm announced it was selling its midstream assets for $4 billion. The company has said it plans to sell a total of about $14 billion in assets this year.
Shares rallied on news of the sale, and Chesapeake closed for the day at $18.36, up 51 cents. Share prices overall are down almost 40 percent from one year ago.
Biju Perincheril, an analyst at Jeffries & Company present at the meeting, questioned Chesapeake's asset sales, asking if they were temporary fixes to a permanent balance sheet problem.
"We don't intend to kick the can down the road," said Mr. McClendon in response. "We intend to crush the can."
About 230 shareholders pre-registered to attend Friday's meeting; only 85 attended at all last year, according to a Chesapeake spokesman, Jim Gipson. The unrest was seen from institutional investors and everyday shareholders.
Representatives from the New York City Pension Funds, which owns 1.9 million shares, praised the board's decision last month to welcome four new directors, saying it "sets the stage for the extensive board overhaul that is long overdue."
Shareholders soundly rejected the board's compensation plan, with only 20 percent of votes cast in support for a plan that would pay Mr. McClendon $17.8 million this year in cash and stock.
While the company continues to sell assets, Mr. McClendon said he has no intention to sell his company even if larger firms do "lust after our assets." About 20 firms have expressed interest in the oil fields of West Texas that the company has put up for sale, he said.
The company has no interest in overseas or off-shore drilling, and that he hoped domestic energy independence would gain bipartisan support in the 2012 presidential election.
"I'm an optimist by nature," he said.
First Published June 9, 2012 12:23 am