By Anna Driver and Brian Grow
June 21 Chesapeake Energy Corp named
former Conoco head Archie Dunham its new chairman, replacing
Aubrey McClendon as it seeks to quell a shareholder revolt over
a governance crisis.
McClendon, who co-founded the company 23 years ago and built
it into the second-largest natural gas producer in the country
behind Exxon Mobil Corp, will continue as chief
executive, but will report to a more independent board and an
influential chairman who will likely rein in his free-spending
Chesapeake, struggling with weak cash flows amid the lowest
natural gas prices in a decade and a massive $10 billion funding
gap, is racing to sell assets as its focuses spending on its
most profitable fields.
In May, Chesapeake said it would split the job of CEO and
chairman. That decision came in the wake of a Reuters report
saying McClendon, both chairman and CEO at the time, had
arranged more than $1 billion in personal loans using his
interest in company wells as collateral.
McClendon's largest personal lender, EIG Global Energy
Partners, is also a big source of funding for Chesapeake, a
situation that could put the executive's interests at odds with
shareholders, academics and analysts have said.
The arrival of Dunham, a former U.S. Marine who earned two
degrees from the University of Oklahoma, heightened speculation
the company could seek a buyer. For a Breakingviews column:
"This guy's got a lot of contacts around the world. He seems
to me like he would be a good choice to run Chesapeake or sell
it out," said Mike Breard, an analyst with Hodges Capital
On Wednesday, the Financial Times reported that China's
Sinopec Corp was considering a multibillion dollar bid
for Chesapeake assets.
In addition to Dunham, Chesapeake's board appointed four
other new independent members proposed by the company's top two
Southeastern Asset Management, the largest shareholder with
a 13.9 percent stake, brought in Bob Alexander, Brad Martin and
Frederic Poses, while activist investor Carl Icahn, who owns 7.6
percent, proposed Vincent Intrieri.
At a rare public appearance, Southeastern CEO O. Mason
Hawkins said Chesapeake's shares were worth more than $50 apiece
and would eventually top $100 if gas prices rebound.
"Chesapeake is at the full position to have the best assets,
so shame on us if we don't produce a lot of earnings and a lot
of cash flow," Hawkins said at the Morningstar Investment
Conference in Chicago. "Chesapeake has a chance to deliver more
units at higher prices."
Tim Rezvan, an analyst at Sterne Agee, said the board
changes "should give investors confidence that a more palatable
spending plan will be in place next year."
Dunham, 73, spent more than three decades at Conoco and
served as its president and chief executive when it sealed the
deal that created ConocoPhillips in 2002. He was
chairman of ConocoPhillips from the merger until his retirement
Dunham has been credited with turning around a struggling
Conoco in the 1990s when, as head of its oil and gas production
business, he sold $2 billion of assets and focused spending on
its best-performing fields.
Some analysts wondered whether Dunham was selected to
prepare Chesapeake for a possible sale, something that both
Hawkins and Icahn have urged the Oklahoma City, Oklahoma company
"Given (Dunham's) age, I'm left wondering if his appointment
doesn't signal something bigger is afoot," said Morningstar
analyst Mark Hanson. "At 73, he obviously is a very accomplished
guy. If this is his last hurrah, it's not going to be waiting
for gas prices to recover, it's going to be a sale."
Another shareholder said Dunham's membership on the boards
of Union Pacific Corp and Louisiana-Pacific Corp
could weaken his focus on Chesapeake.
"I would have thought the chairman would have been a little
more hands on," said David Dreman, chairman of Dreman Value
Management LLP, which owns about 1 million shares. "We're not
getting an active chairman."
A call to Dunham's Houston home was not immediately
Despite being rejected by about three quarters of the
company's shareholders in a vote earlier this month, Chesapeake
said it would keep V. Burns Hargis on the board to help complete
a review of McClendon's financing arrangements.
"The news (of the appointments), which is welcome and
positive, is tempered by the decision to keep Hargis," said
Michael Garland, head of governance for New York City
Comptroller John Liu.
"It's a bad decision justified by flawed logic," he said.
"They are keeping the director who chaired the audit committee
that failed in its oversight and is now investigating what went
The five new directors will replace Richard Davidson,
Kathleen Eisbrenner, Frank Keating and Don Nickles - who
resigned - and Charles Maxwell, who retired.
McClendon retains some power despite the changes. The board
amended company bylaws to give the CEO the authority to call
board meetings and special shareholder meetings.
The company's shares ended 4.8 percent lower at $18.12 on
the New York Stock Exchange. That compares with a 5 percent
decline in the SIG Oil Exploration and Production Index