The heat on Chesapeake Energy Corp.'s board continues to rise.
New York State Comptroller Thomas P. DiNapoli on Tuesday became at least the fourth institutional Chesapeake investor to call for a leadership change at the Oklahoma City-based oil and natural gas producer.
DiNapoli, who is trustee of the New York State Common Retirement Fund, said replacing Oklahoma State University President Burns Hargis and former Union Pacific Corp. executive Richard K. Davidson on Chesapeake's board is “a necessary first step” in crafting a panel that is accountable to shareholders.
“For too long, CEO (Aubrey) McClendon has been allowed to dominate the board and the board has failed to perform its critical role in overseeing the company on behalf of its shareholders,” DiNapoli wrote Tuesday in a letter to Chesapeake shareholders. “As members of the audit committee, directors Hargis and Davidson should be held accountable for the board's significant failings in its oversight responsibilities.”
Activist investor Carl Icahn, California Public Employees' Retirement System and New York City Comptroller John C. Liu also have called on shareholders to withhold votes for Hargis and Davidson at Chesapeake's June 8 annual meeting. Three investor advisory firms have done the same.
Chesapeake's largest shareholder, Southeastern Asset Management Inc., also expressed its displeasure with the board and the company's strategy earlier this month.
The Chesapeake board responded to Liu's complaints last week by defending its accomplishments in addressing shareholder concerns.
“We believe that Chesapeake has built the nation's best collection of E&P (exploration and production) assets,” the board wrote in a letter to shareholders, “and the company has a clear strategy to harvest those assets by focusing on developing the 10 core plays in which Chesapeake has built a No. 1 or No. 2 position while also continuing our transition from natural gas to liquids, reducing capital expenditures and paying down long-term debt.”
DiNapoli, who oversees a retirement fund that owns about 3.5 million shares of Chesapeake stock, contends the company needs new leadership because its stock performance over the past month has been “dismal.”
He noted the company has lost nearly $1.5 billion in market capitalization since April 18, when Reuters reported McClendon had secured more than $1 billion in loans against his personal stake in Chesapeake wells.
Some of those loans came from a private equity firm that has done business with Chesapeake, spurring a board review.
DiNapoli said Chesapeake's directors have not done enough, especially in light of the company's precarious financial position.
“A fundamental restructuring of the company's board of directors is essential if the board is to regain the trust of stakeholders and regulators,” he wrote.
Chesapeake's stock gained 54 cents on Tuesday, closing at $16.35 a share.
Increasing analyst concern
Chesapeake is looking to sell some assets to cover a funding shortfall.
Analysts at Jefferies and Co. estimate Chesapeake must sell at least $7 billion in assets before the end of the year to satisfy its credit facility covenants, while needing to bring in an additional $2 billion next year, according to a research note issued Tuesday.
Chesapeake may not have enough sale options to reach that figure because of the weak market for natural gas assets, analyst Biju Z. Perincheril wrote, so the company “could find itself in need of selling more of its prized assets.”
Company officials have talked about selling Chesapeake's acreage in west Texas' Permian Basin and finding a joint venture partner to help develop its assets in the Mississippian oil play in northern Oklahoma and southern Kansas.
Perincheril estimated those deals would bring in about $5.5 billion, so Chesapeake could be forced to sell some of its lucrative undeveloped acreage in south Texas' Eagle Ford Shale or Ohio's Utica Shale.
“Longer term, we think the company needs to exhibit stricter financial discipline in order to regain investor confidence,” which could come with stronger board oversight, Perincheril wrote.