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Page 22n Thursday, June 14, 2012


BAKKEN BREAKOUT WEEKLY Chesapeake shareholders rebuke board

By TIM TALLEY Associated Press

OKLAHOMA CITY — Chesapeake

Energy Corp. shareholders rebuked the company’s board by withholding sup- port for two directors up for re-election at the June 8 annual meeting. Both direc- tors have tendered their resignation. Shareholders also withheld their sup-

port for Chesapeake’s executive compen- sation plan and peppered CEO Aubrey McClendon with questions about the corporate governance and accountabili- ty of the nation’s second largest producer of natural gas. Shares of the Oklahoma City-based

company are worth nearly 40 percent less than a year ago. And Chesapeake still has big spending plans even though it’s taking in less cash because of a plunge in natural gas prices. It also needs to sell off billions of dollars in assets to service a huge debt load. “Something is out-of-balance here

at Chesapeake,” said shareholder Gerald Armstrong of Denver, whose proposal to reincorporate the company in Delaware passed with the support of 53 percent of

the votes cast. Armstrong said the move would bring greater accountability to the company but that Chesapeake had re- sisted it. The proposal is nonbinding.

“The absence of good government practices has become more apparent. Accountability is what it’s all about and it’s time for

a change.” – Shareholder Gerald Armstrong of Denver

Armstrong said he filed his proposal

in January before media reports raised questions about whether McClendon’s personal business interests were in con- flict with those of the company he runs. The reports helped sink an already de- pressed stock price. They also painted a picture of a board that accepted better- than-average pay and perks in return for keeping a loose rein on the CEO.

The reports disclosed that McClen-

don was allowed to borrow money from a company that Chesapeake was doing business with. Shareholders began call- ing for a shake-up of the board after Chesapeake acknowledged that direc- tors hadn’t fully scrutinized the loans’ details. “The absence of good government

practices has become more apparent,” Armstrong said. “Accountability is what it’s all about and it’s time for a change.” Change, at least in the make-up of

the board, is coming. Chesapeake has agreed with activist investor Carl Icahn and Southeastern Asset Management, its largest shareholder, to replace four of nine board members with directors they choose. The company also stripped Mc- Clendon of the chairman title and plans to name a new independent board chair- man by June 22. The two directors who resigned June

8 are V. Burns Hargis and Richard K. Da- vidson. A representative of Icahn Capital,

Vincent J. Intrieri, said the organization is demanding better corporate gover- nance. Intrieri said McClendon is a great oil

and gas executive but that even the best of executives need a strong board of di- rectors to oversee their decisions. McClendon and his company have

been at the forefront of a boom in U.S. natural gas production. Just a few years ago, it appeared the U.S. was running out of natural gas. Now the supply is so abundant that prices have dropped to levels last seen 10 years ago. That plunge has left Chesapeake

short on cash to service the large amount of debt it accumulated while buying up land for drilling. To fill the gap, Chesa- peake plans to sell as much as $14 billion of assets in 2012. On June 8, Chesapeake said it would sell its pipeline assets in three deals total-

ing $4 billion. That will bring asset sales so far this year to $6.6 billion. Biju Perin- cheril, an analyst at Jeffries & Company, said Chesapeake is now close to the $7 billion worth of asset sales he estimates it needs to avoid violating the terms of some of its loans. In spite of low gas prices, the embat-

tled CEO painted a bright future for the company he co-founded in 1989. Mc- Clendon said Chesapeake is responsible for 25 percent of the growth in natural gas production in the U.S. in the past five years and that the company has invested in commercial natural gas refueling sta- tions it believes will enhance demand for the fuel. Shares rose 2.8 percent June 8 to

$18.35 and gained 18 percent last week as analysts and investors welcomed the shake-up of the board. The shares are still down more than 17 percent for the year. “I’m very proud of the efforts that

our company has made to provide lead- ership in this area,” he said. “It’s all about delivering value to shareholders.” McClendon predicted that natural gas

prices will eventually rebound from the current price of about $2.30 per 1,000 cubic feet but that the company will shift its focus to the production of natural gas liquids this year to boost its bottom line. “The company trades at a great dis-

count to the value of its assets,” he said. Investors may not be that patient. Michael Garland, executive director of

corporate governance for New York City Comptroller John C. Liu, said members of Chesapeake’s board have been unre- sponsive to shareholder concerns and that plans to replace four board mem- bers sets the stage for an overhaul “that is long overdue.” “The board is under intense scrutiny,”

Garland said. “The new directors must act swiftly and purposefully.”

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