© Copyright 2012, The Oklahoman
Just days on the job, Chesapeake Energy Corp.'s new chairman said he sees no reason why Chesapeake would leave Oklahoma City and praised CEO Aubrey McClendon as a “brilliant explorer, entrepreneur and risk-taker.”
“Chesapeake is a U.S.-based midsized energy company. Its focus is in the Lower 48 states, and its employees travel domestically primarily. Therefore, I see no reason why the company's headquarters should be anywhere other than in Oklahoma City,” Archie Dunham said.
Three days after the former ConocoPhillips chairman was named Chesapeake's chairman, he praised the new board for its independence and makeup, saying current and former CEOs make the strongest directors.
“CEOs are willing to stand up to other CEOs and say, ‘We've heard your presentation, but we don't quite agree with that direction, so maybe you need to go back and redo it,'” Dunham said Sunday afternoon in an interview with The Oklahoman.
Dunham, 73, retired as chairman at ConocoPhillips Corp. in 2004 after a 38-year career at the Houston-based energy company and its predecessors, including then-Ponca City-based Conoco Inc. Under Dunham's watch, Conoco Inc. completed what was then the world's largest initial public offering and grew into the third-largest company in the United States, with operations in 55 countries.
Besides his general corporate experience, Dunham brings with him 27 years of experience on some of the largest and most influential boards in the country.
“The primary job of a board of directors is to keep the company from strategically and financially taking a hit below the water line,” he said.
Houston-based Enron Corp. was led by a strong CEO, but it fell into trouble because of a weak board, Dunham said.
“The Enron board had a lot of attorneys and university presidents and people who were beholden to the philanthropy of the board. In that situation, I think you have a weak board,” Dunham said. “If you have a weak board, you're going to make major strategic blunders, and sooner or later, you're going to make a blunder that's a hit below the water line and the company sinks.”
Dunham is a Houston resident and also is building a home in California. He will not be moving to Oklahoma, but he does expect his new role to keep him involved with Oklahoma City.
“I'm sure initially, the next 90 days, I'll be spending more time here than I would want,” Dunham said. “But I would hope that after three or four months that it will settle down to a day or two a month, which is the time requirement of most non-executive chairmen in major companies today.”
Chesapeake's directors took little time before settling on Dunham as the new chairman.
Then-nominating committee chairman and former Gov. Frank Keating contacted Dunham on May 27, about a month after the company announced that McClendon would give up the title. Keating asked if Dunham would be willing to meet lead independent director Pete Miller. He agreed to talk, and Miller called five minutes later to arrange a meeting.
Dunham met McClendon for the first time on June 6, the day of the Game 6 matchup between the Thunder and Spurs. He attended the game with his friend and former colleague Mike Stice, Chesapeake's senior vice president of natural gas projects and CEO of subsidiary Chesapeake Midstream Partners.
“A lot of people saw us on television because I sat on the first row,” Dunham said. “So I started getting all these emails from people asking me if I was going to be the next chairman? I said, ‘I'm just here with Mike Stice.'”
Despite nearly four decades in the energy industry, Dunham has had little contact with McClendon and the new directors he will serve with at Chesapeake.
Before agreeing to become Chesapeake's chairman, Dunham reached two conclusions about the company, based on his own research.
“Aubrey is an exceptional, brilliant explorer, entrepreneur and risk-taker. He's done a great job of building a company and creating and capturing high-quality assets,” Dunham said. “No. 2, the company is in trouble, reputationally, with a lot of investigations and apparent ethics problems.”
Chesapeake is under investigation by the Securities and Exchange Commission and faces at least 17 shareholder lawsuits after it was revealed in April that McClendon used his personal stake in Chesapeake wells as collateral for up to $1.5 billion in personal loans.
Further revelations showed that McClendon personally was involved in a hedge fund that traded in commodities, including natural gas. On Monday, Reuters reported on possible collusion with Canada's Encana Corp. on land auctions in Michigan.
A man of many titles
Through his experience as a director, a chairman and a CEO, Dunham said he has gained insight into the proper responsibilities of each position and that it is essential for the role of each to be clearly defined and followed.
In his latest role, Dunham heads up the newly constructed Chesapeake board, which now has five independent representatives appointed by the company's two largest shareholders: Southeastern Asset Management and activist Carl Icahn.
Dunham will work closely with McClendon, who until last week also carried the title of chairman.
“I think the hardest role that I ever had was being executive chairman after having been chairman, president and CEO,” he said. “In many respects, that has to be the same kind of discomfort that Aubrey will have. He's on the other side of that. Instead of being chairman, president and CEO, now he's president and CEO. It takes a while to get used to those new responsibilities because you have to let go.”
The change could be especially challenging because McClendon is such a public figure for the company.
“I think that happens anytime a founder successfully creates a major company,” Dunham said. “When the company is highly successful, that's what always happens. I don't see that as an issue or a problem as long as the CEO recognizes that as the company becomes a publicly owned company, they have to remember that they're working for the shareholders.”
While McClendon will have to adjust to being only CEO, Dunham said it also is important that as chairman, he does not overstep his role.
“You have to be very careful, especially when you're the chairman, to not be the CEO,” he said. “I've told Aubrey I have absolutely no interest in being CEO of Chesapeake. I've been a CEO. I love the job. But that's not what I wish to do going forward.”
The new board — and Dunham in particular — will be faced with the responsibility of overseeing McClendon's work.
“It's going to be a hard job,” Dunham said. “Aubrey is a brilliant and very successful CEO. It's going to be hard for him to no longer be chairman, president and CEO. But I feel confident that the two of us can work together and that Aubrey recognizes that a strong board is really a tremendous asset for the CEO not only in the long term, but also in the short term.”
The relationship between the CEO and a strong board is essential to the success of any company, Dunham said, pointing out that the CEO reports to the directors, who are accountable to the shareholders.
“A CEO is a fool, in my opinion, if he doesn't rely on the judgment and experience of a board,” he said. “We'll learn how to work together. I feel absolutely confident that Aubrey and I can work together and make this a success.”
While the board is responsible for oversight, the CEO's primary role is to establish the rules and expectations for the company, Dunham said.
“The job of the CEO and the senior management principally is to set the tone at the top and to create a culture of absolute perfect ethics and perfect integrity, focus on safety and focus on environmental excellence,” Dunham said.
That culture must continually be communicated throughout the company, Dunham said.
“Everybody must understand what the value system is, what the culture is and what the consequences are if you violate that culture,” he said.
Dunham, who had not met McClendon before he was approached to become chairman, reflected on his impressions of the CEO since meeting him.
“I was impressed with his enthusiasm, his vigor, his desire to work effectively with me, and his love of Chesapeake, his love for Oklahoma and Oklahoma City,” Dunham said. “I think he wants this to be a success. That's why I'm so confident that we can make this work.”
Dunham acknowledges he still has a lot to learn about Chesapeake. His unfamiliarity with the company was an important consideration in his selection, as Chesapeake's previous board set out to find an independent chairman with no previous ties to the embattled oil and natural gas company.
While Dunham had no business ties to Chesapeake, he revealed Monday in a regulatory filing that he owned 200,000 shares of Chesapeake stock. Dunham received an additional 41,391 shares on Monday as compensation for becoming chairman.
Dunham is working quickly to catch up on the company's operations and finances. He is in Oklahoma City this week to meet with Chesapeake's senior executives.
“I've done some research on some individual members of the management team, and I'll withhold judgment on them until I meet with them and see them function in their respective positions,” he said.
Dunham expects Chesapeake's new board to meet for the first time in the next couple of weeks. It also has a meeting scheduled for Aug. 1.
“Our primary focus has to be the balance sheet and the cost structure. I think that's what the board will be grappling with short-term,” he said. “I would imagine the board would have all of its due diligence done in the first 90 days.”
Chesapeake has taken a number of hits to its reputation over the past couple of months as media reports have raised questions about potential conflicts of interest and lax oversight.
Dunham was reticent to discuss much of the media coverage that has been blanketing Chesapeake.
“I don't want to comment too much because I haven't been here long enough, but I think in the investment community there are always some who would like to drive the price of a stock down for all kinds of financial reasons,” he said.
Dunham said Chesapeake's board should be focusing on increasing the company's share price “because that is in the long-term best interest of shareholders.”
He said now is the time for Chesapeake to be in “create-value-for-shareholder” mode after it has amassed an impressive portfolio of oil and gas assets.
“That probably means more focus. That certainly means rationalization of assets,” Dunham said. “Hopefully we'll be selling the assets that are not core to the future of Chesapeake.
“I think that's Aubrey's plan, and clearly that's what the board will want to do.”
Some industry analysts have criticized Chesapeake for having too broad of a focus and have said 10 core areas are too much for a company its size.
Dunham said that is not necessarily true.
“I don't think it's too big,” he said. “The fact that we're going to be a North American company, that's just not an out-of-bounds focus. We were in 55 countries (at ConocoPhillips). A focus on North America, to me, whether it's 10 fields or 15 fields, really doesn't make any difference.
“What we want to do is focus on our best assets. I don't know if that's 10 fields or 12 fields, eight or 15. Aubrey does know. The board will get to understand that over the next several weeks.”
While the company has announced plans to sell up to $21 billion in assets over the next two years, Dunham said it will not be a fire sale.
“The assets the company is going to sell are outstanding assets,” he said. “They're going to command an excellent price, a fair price.”
He said the board's most important responsibility is to review Chesapeake's planned asset sales and solve its financial woes.
Chesapeake is trying to offset a capital issue of up to $21 billion as the company shifts its operations to focus on more profitable oil and liquids production amid low natural gas prices. The company has said it plans to sell up to $14 billion in assets this year and half that amount next year to help fund its drilling operations until increased oil and natural gas liquids production can increase cash flow.
“We need to understand why those assets and not other assets. We need to understand the value of the assets,” Dunham said. “We need to have an absolute firm commitment that we're going to get the balance sheet where it needs to be as quickly as possible.
“We need to be running far down the street toward that objective by the end of the year.”
Dunham said the board's review also will include comparing Chesapeake's spending and staffing levels to competitors like Anadarko Petroleum Corp., Devon Energy Corp. and other industry peers.
“To me the best way to look at your cost structure is to benchmark your organization with your competition,” Dunham said. “That's what I did when I was running Conoco. We benchmarked our best competition. We looked at layers of management. When you're benchmarking against your very best competition and your cost structure is out of line, you have to ask yourself why. There's usually not an excuse. So then you have a tough job of cutting costs.”
The market capitalization for each of those companies is more than twice that of Chesapeake's, which employs more than Anadarko and Devon combined. Chesapeake has a market capitalization of $10.9 billion and about 12,600 employees, while Devon has a market cap of $22 billion and 5,200 employees and Anadarko is worth $30 billion with 4,800 employees.
“Unlike the federal government, which never reduces staff, public companies have to reduce staff, have to cut costs, have to sell assets during different times in the history of the company in order to remain viable,” he said.
“I think the experience of all the board members in doing that at various times in their careers will help us make the right decisions on the assets that need to be sold and the right decisions around the cost structure of the company.”
Good corporate citizen
Dunham said he hopes Chesapeake can continue to be a supporter of civic organizations and causes.
“I think that's one of the responsibilities of a corporation,” he said. “It is not the primary responsibility, but they do have a social responsibility to the community and the state, as well as a responsibility to their employees to be the kind of company they can be proud of.”
He said he understands the company is important to Oklahoma City and Oklahoma, but he believes it is vital to the United States, as well.
“I think we need a strong, vibrant natural gas industry. I think the leadership that companies like Chesapeake — especially Chesapeake — have provided in the gas and oil shale plays over the last five years has been significant,” he said. “They focused on that while the majors were focusing on other things.
“That's a real plus and a real tribute to Aubrey and people like Aubrey who continue to focus on opportunities in the United States.”
The unprecedented exploration and production success Chesapeake and other independent producers have experienced surprised everyone in the industry, including the producers themselves, Dunham said.
Improved technology and drilling techniques allowed the companies to flood the market with natural gas, driving down the price to below profitable levels.
“If you had gone into the board room of every major oil company in the world three years ago and they were getting ready to do their long-term plan and set their capital budget, I would guess with you that there probably was less than 1 percent of those presentations that would have had natural gas at less than $2.50 per million BTU (British Thermal Unit),” Dunham said.
“I would guess that 80 percent of them would have said three years ago or five years ago that natural gas in 2012 would be $7.50 per million BTU.”
A BTU represents the heat energy generated from burning roughly 1,000 cubic feet of natural gas.
The price of natural gas has tumbled from more than $5 one year ago to less than $2 this spring. The price has since recovered in recent months but still remains below comfortable levels for the industry. The price gained 7 cents Tuesday to close at $2.77.
While the flood of newly available natural gas has hurt the industry in the short-term, the discovery promises to be beneficial to the country for many decades to come, Dunham said. Increased domestic oil and natural gas have made it possible for North America to approach energy independence by 2020, he said.
“We need to have regulation, we need to have incentives, we need to have tax laws that encourage domestic production and domestic exploration,” Dunham said.
“If we do, I think we can continue to dramatically increase the production of oil and gas in the United States. That has to be good for our country and our economic well-being.”
In the short term, however, prices appear tied to the strength of the American and global economies, he said.
“I think we're in a $2.50 to $3 range for the short term, and I don't know whether that's 12 months or three years,” he said. “What we need is a dramatic improvement in the global economic activity so that can raise the demand for natural gas globally.”