Chesapeake shareholders rebuke board, seek changes
(Reuters) - Chesapeake Energy Corp (CHK.N)
shareholders delivered a sweeping rebuke of the company's Chief Executive Aubrey
McClendon and its board on Friday, by rejecting two directors up for reelection
in a reaction to a governance crisis that has engulfed the
company.
The shareholders' vote came just hours after Chesapeake said it plans to sell
its pipeline and related assets to Global Infrastructure Partners for more than
$4 billion, as part of efforts to close a colossal $10 billion cash shortfall
this year.
Chesapeake, the nation's second-largest natural gas producer, has been under
fire from investors since Reuters reported that McClendon had arranged for more
than $1 billion in personal financing - from a lender who is also a big source
of funding for the company - in a situation that may put his interests at odds
with those of shareholders.
The company said the two directors - V. Burns Hargis, president of Oklahoma
State University, and Richard Davidson, a former chief executive officer of
Union Pacific Corp (UNP.N)
- had tendered their resignations from the board after winning the backing of
fewer than a quarter of the shareholder votes cast.
"It's an overwhelming opposition vote that represents the total collapse of
investor confidence in the entire board," Michael Garland, head of corporate
governance for the New York City comptroller, said after the annual meeting of
investors.
Garland described the mood in the meeting as "subdued."
Shareholders also soundly rejected the company's executive officer
compensation program, with only 20 percent backing the measure. However, that
vote is only an advisory measure and is not binding.
"Obviously, we'll be studying the result of the vote today and see what needs
to be done," McClendon told the investor meeting at the company's sprawling
campus in Oklahoma City.
Security was tight at the meeting, with uniformed officers guarding entrances
to the campus, and media banned from attending. Chesapeake said thrice as many
investors as last year had registered to attend the meeting, which lasted just
over an hour.
One shareholder, Gerald Armstrong, suggested to McClendon that his tenure at
the helm may be coming to an end, and criticized the board for failing to heed
shareholder votes in the past.
"Accountability is what it's all about, and it's time for a change," activist
investor Armstrong said. "It's likely you (McClendon) might not be with us next
year."
His comments were echoed by David Dreman, chairman of Dreman Value Management
LLP which owns about 1 million Chesapeake shares, who reiterated on CNBC that
McClendon should resign or be fired.
A representative of billionaire investor Carl Icahn praised the embattled CEO
as being a "great oil and gas man," but said even McClendon needed tight
supervision by a strong board.
McClendon said last month he will step down as chairman, and Chesapeake
announced on Monday it will replace four of its current board members with
directors chosen by its top shareholders - activist Carl Icahn and Mason
Hawkins' Southeastern Asset Management. This would give shareholder-backed
directors a majority on the board.
The new board members' names will be announced by June 22.
'DIFFERENT' COMPANY?
Shares of Chesapeake have lost about half their value over the last year as
it seeks to convince shareholders that it is still a good investment, despite
steep drops in profits and a spate of corporate governance scandals surrounding
McClendon.
The company has been the fastest-growing gas producer in the United States in
recent years, but a slump in natural gas prices earlier this year to their
lowest in a decade shrank revenue that Chesapeake had planned to use to trim
debt and to fund operations.
Chesapeake is planning to sell between $9.0 billion and $11.5 billion in
assets this year to cover a $10 billion cash shortfall, including lucrative
property in West Texas' Permian Basin.
At the meeting on Friday, McClendon sought to reassure shareholders, saying
the company was entering a new phase where it will focus on producing oil and
gas from about 10 basins, a departure from its "land grab" strategy.
"It will be a completely different company to invest in," McClendon
said.
The company has said it expects to trim more than $3 billion of debt by the
end of the year. Debt investors welcomed the announcement about the planned
pipeline sale, pressuring the price of its credit default swaps, which are used
to insure the company's debt against potential default.
Five-year credit default swaps tightened by 15 basis points to 687 basis
points earlier on Friday. That means it costs $687,000 a year for five years to
insure $10 million of debt.
Shares of Chesapeake were up about 2.6 percent at $18.32 on the New York
Stock Exchange in afternoon trading.