Chesapeake Energy Corp. should be open to any takeover offers as it deals with the fallout of questions about CEO Aubrey McClendon's personal business dealings, the company's largest shareholder said Monday.
Southeastern Asset Management Inc. sent a letter to McClendon and the Chesapeake board Monday detailing its concerns about the company.
“We urge the company to take action in three areas: debt targets, management focus and strategic options,” Southeastern CEO O. Mason Hawkins and two other officials wrote.
Southeastern said Chesapeake's current share price is far below its net asset value, so it would not support a “lowball” bid for the company.
“We also don't want to use this large price-to-value gas as an excuse to refuse discussions with any potential acquirers who would be willing to pay a price today that recognizes the longer term value of the company,” officials wrote Monday in a letter to McClendon and Chesapeake's board.
The Memphis-based money manager, which holds more than 13 percent of Chesapeake's outstanding stock, last week indicated it would take an active role in Chesapeake's affairs.
The letter was the first public sign of that.
“They own 90 million shares or 13.6 percent and have lost more than $750 million in the last five weeks,” said Fadel Gheit, an energy analyst with Oppenheimer in New York. “They will likely force the company to sell most, if not all, of its assets. They will get their money back and more.”
Chesapeake's stock has dropped more than 10 percent since April 18, when Reuters reported McClendon has secured up to $1.1 billion in personal loans by using his stake in the company's wells as collateral. A subsequent report indicated McClendon and co-founder Tom Ward operated a hedge fund from inside Chesapeake from 2004 to 2008 that traded in oil and natural gas futures.
Ward has said he doesn't see anything wrong with the arrangement, but Chesapeake and McClendon have not commented on the report about Heritage Management Co. LLC.
McClendon has agreed to cede his position as Chesapeake's chairman and allow the board to end his well participation program next summer, 18 months before it was due to expire.
McClendon sent an email Monday to Chesapeake's 13,400 employees offering “some perspective from my vantage point” on the scrutiny facing the company over the past few weeks.
He did not address the reports specifically, but assured employees “the board and I have taken actions to put the recent distractions behind us so that we can move forward together with our plan to continue building value for the company's shareholders and other stakeholders.
“I also want to assure you that we are operating our business on the strong foundation formed by our industry-leading asset quality and by our exceptionally talented and motivated employees,” McClendon wrote.
“Although we will be slowing some of our drilling and leasehold acquisition activities because of the current 10-year lows in natural gas prices, we will still remain by far the most active driller in the U.S.” McClendon wrote
“We will also continue growing our liquids production and we will be well prepared to resume our gas production growth when gas prices recover.”
McClendon said Chesapeake has overcome many challenges over the past 23 years, but today it is better equipped to deal with such obstacles.
“I firmly believe our best days are ahead of us, he wrote.”
Chesapeake's stock dropped 26 cents Monday after the company disclosed Southeastern's letter in a regulatory filing. It closed at $17.13 a share.
Southeastern wants the company to focus on maximizing its cash flow after capital expenditures, rather than pursuing arbitrary production growth and debt production goals.
“We do not think that managing to an arbitrary target like the ‘25/25 Plan' makes sense,” Southeastern officials wrote.
Announced in January 2011, Chesapeake's 25/25 Plan calls for the company to pay down its long-term debt and increase production — each by 25 percent by the end of 2012.
The letter also offered support for Chesapeake's plan to sell some of its holdings and secure joint ventures in oil-rich plays to raise up to $14 billion this year, while divesting some noncore assets.
“We applaud recent statements by management that the era of large spending on new plays is over,” the letter said.
Southeastern also suggested Chesapeake officials should focus on the company's business over “unproductive communications.”
“Sell-side conferences, media interviews with no hope of a fair hearing and meetings all over the U.S. with groups who may have only a casual interest but don't mind hearing the ‘story' use valuable amounts of top management's time with no apparent benefit and plenty of misinterpretation detriment,” the letter said. “Trading volumes highlight that CHK stock has far too many renters and not enough owners.”
A Chesapeake spokesman said the company values Southeastern's insight.
“We appreciated receiving the letter and look forward to further discussions with our largest shareholder in the days and weeks to come,” said Michael Kehs, Chesapeake's vice president of strategic affairs and public relations.