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On January 7, Chesapeake Energy (CHK) announced that it withheld Chief Executive Officer Aubrey McClendon's annual bonus in the wake of investor criticism of the management and performance of the second-largest natural gas producer in the United States. The company's board stated that it also substantially cut 2012 incentive compensation for executives and reduced perks.

Chesapeake will instead develop annual and long-term incentive compensation plans that will correlate executive pay to the company's performance. The board's Compensation Committee determined that 2012 executive bonuses should be reduced by more than 50 percent compared to 2011, and eliminated McClendon's bonus entirely. Chesapeake noted that the wholesale removal of McClendon's bonus was in accordance with his own recommendation to such effect.

In 2012, shares of CHK declined by about one quarter and the company lost $1.07 billion through the first three quarters of the year, with CHK scheduled to report its Q4 results on February 18 of this year. Chesapeake's net debt increased to more than $16 billion in 2012, forcing the company to put assets up for sale including oilfields and pipelines. See a recent performance chart for CHK:


(Click to enlarge)

According to the company, it will introduce proposals at this year's annual meeting to change voting standards and strengthen shareholder control, and that it shall continue to seek changes in Oklahoma law that would allow investors to vote on the entire board of directors in 2013. Changing internal voting standards appears considerably more likely within 2013 than effectuating changes in legislation, but the direction towards improved shareholder rights is clear.

In April of 2012, CHK directors started investigating whether some of Aubrey McClendon's personal financial transactions conflicted with his duties to the company. The investigation followed media reports claiming that McClendon used personally held minority stakes in wells that were majority owned by Chesapeake as collateral for his personal loans. The subsequent media and investor investigation came at a time when natural gas prices were in a state of rapid decline, and these occurrences helped push CHK shares down. Chesapeake has also indicated that it will end McClendon's well-investment program within 2014, which is sooner than an originally indicated termination date of the end of 2015.

In reaction, Chesapeake's board of directors removed McClendon from his former position chairman of the board, replaced more than half the directors and cut board compensation by 20 percent. McClendon was replaced as chairman with Archie Dunham, former ConocoPhillips (COP) Chairman. Chesapeake's largest investors, Carl Icahn and Southeastern Asset Management, heavily influenced most board changes. The board has not yet released the results of its investigation into McClendon's finances. The results will likely be released in conjunction with or shortly after the company reports Q4 2012 results next month.

Beyond direct compensation and bonuses, Chesapeake is also working to minimize executive perks. In May, the board reduced McClendon's personal use of corporate airplanes. Nonetheless, Chesapeake recently added that McClendon agreed to reimburse the company for personal use of its aircraft at a sum of more than $250,000 a year, which is below the prior expected and anticipated standard of more than $500,000 a year. Chesapeake also indicated that it would reduce its

All in all, as Chesapeake continues to self-correct and reduce the perplexing strings tying Aubrey McClendon's personal wealth and credit to the company's corporate assets. As the company continues to make such strides, Wall Street should again become more comfortable with Chesapeake's future prospects. In the interim, it appears likely that activist investors such as Carl Icahn shall continue to press the business to institute policies and initiatives that will benefit shareholder value.

One significant problem that Chesapeake still suffers from is that the company is still in the midst of its asset sale plan, while natural gas prices remain historically depressed. See a 5-year chart of natural gas prices, below:


(Click to enlarge)

Selling natural gas property while the commodity is depressed is not ideal. Moreover, the known need by CHK to shed itself of assets must result in a buyer's market and potential fire sale pricing of the assets it intends to sell. Recent major energy asset sales such as China's state-owned oil company CNOOC's bid for Nexen Energy (NXY) indicate that there is strong global appetite for energy assets, but Chesapeake would have tremendous difficulty in clearing the sale of its domestic natural gas to a foreign state-owned entity. Additionally, continued discourse over the shale fracking may make many would-be buyers wary of increasing their exposure to shale assets before more information is available. As a result, the most probable purchasers of CHK assets would appear to be domestic exploration and production MLPs.

It appears that CHK is poised to appreciate in 2013. Chesapeake's continued efforts to change the company from within should yield cost savings and an increased rate of comfort with CHK by the investor community. New asset sales, corporate changes, increased positions by Chesapeake's major investors and/or new allocations by other known investors are also probable catalysts within 2013, as well as the potential for natural gas prices to appreciate. At least some such news is likely to come before the end of the first quarter of this year.

Source: Chesapeake Continues To Correct Its Ways