Last fall, after a multiple-year process of watching and researching Chesapeake Energy (NYSE:CHK), I became a shareholder at a price just over $25 per share.
This past weekend, I spent some time reading the 2011 letter to shareholders from Chairman Aubrey McClendon. I thought that the following paragraph was timely:
Chesapeake's total estimated unrisked unproved resource base of 350 tcfe is by far the largest such resource base in the U.S. Chesapeake's market valuation today very clearly does not give this unrivaled resource upside any value. We presume this is because of investors' overwhelmingly negative view about the near-term future of U.S. natural gas prices. We believe this is a shortsighted approach to determining the value of our company and our unproved resource base. We are determined to unlock this value for our shareholders.
I agree with McClendon in that the value of Chesapeake's assets is far in excess of the current value implied by the stock market. I think over time it could be multiples of the current share price. I disagree, however, with the presumption McClendon makes that an overwhelmingly bearish view on natural gas is the only reason for the disconnect between intrinsic value and the current share price.
Remember how there used to be a "Buffett premium" in the share price of Berkshire Hathaway that could be attributed to the company being run by investing genius, risk-averse and shareholder-friendly Warren Buffett? I believe the opposite is happening at Chesapeake Energy, where there is a "Chesapeake discount" being applied because investors don't feel comfortable entrusting their capital to a board of directors that puts (in my opinion) the financial interests of the CEO ahead of the financial interests of shareholders.
As a Chesapeake Energy shareholder, this discount to intrinsic value frustrates me. To cause myself further aggravation, I thought I'd have a look at what this board of directors (who I feel has let shareholders down) gets paid.
This information is all laid out in the recently filed Chesapeake Energy Proxy statement. Here is what director compensation in 2011 looked like at Chesapeake:
Fees Earned or
Paid in Cash
Richard K. Davidson
Kathleen M. Eisbrenner
V. Burns Hargis
Charles T. Maxwell
Merrill A. ("Pete") Miller, Jr.
Louis A. Simpson
Frederick B. Whittemore
Over $500,000 for almost all of them. That appears to be quite a bit of money. But I bet they work hard for it. The proxy lays out what is required from each Director:
The Board held four meetings in person and eight meetings by telephone conference during 2011. Non-employee directors meet regularly in executive session, including after each scheduled quarterly Board meeting. Additionally, management frequently discusses matters with the directors on an informal basis. Each director attended, either in person or by telephone conference, at least 90% of the Board and committee meetings held while serving as a director or committee member in 2011. The Company expects the directors to attend annual meetings of shareholders. All of the Company's directors attended the 2011 Annual Meeting of Shareholders.
For more than half a million dollars, each board member is required to attend at least 90% of 12 meetings (only four of which have to be in person). I'll give them the benefit of the doubt and assume they all attend the full 12-meeting schedule. I would guess each meeting takes about two hours, so that would be 12 x 2 = 24 hours of work for the year.
On an hourly basis, that would suggest each board member is getting paid $500,000 / 24 hours = $20,833 per hour. And I thought I was overpaid.
As a shareholder, I'm paying $20,833 per hour to board members who, in my opinion, have helped create the current massive undervaluation in Chesapeake's stock price today by not putting shareholder interests before the interests of the CEO of the company.
I believe I am far from being the only shareholder who feels this way. I'm not only unhappy, I'm willing to do something about it.
Throwing My Hat Into the Director's Ring (Facetiously, Of Course)
Since it is election season in the U.S., I'm going to get into the spirit of things and throw my hat into the ring for election to the Chesapeake Energy board of directors.
I bought my Chesapeake shares with my own hard earned money because I think those shares are undervalued. I think shareholders need representation on the board of directors by someone who is interested in only one thing, and that is maximizing the Chesapeake share price. I'm willing to be that representation.
I own shares in Chesapeake Energy. If the company does well and those shares increase in value, I am rewarded. Therefore, as your representative on the board of directors I will not accept any fees, stock awards, or other perks from Chesapeake Energy. My only expectation would be to be reimbursed for the telephone expense involved in calling in for board meetings, and reimbursement for economy class travel and hotel accommodation for attending in-person meetings. I'll even pay for my own meals.
I'm not a CEO of another large corporation, and I'm not connected in the political world. But what I am is a shareholder with some common sense and a conscience. I know that oil and gas companies shouldn't buy $12 million map collections from the CEO. I know that $75 million is too much money to pay as a bonus. And I know that shareholders are fed up with corporate greed, especially in an economy where a lot of Americans are out of work.
And since I'm not going to accept any compensation from Chesapeake other than reimbursement for my economy travel and accommodation, you'll know that I have no reason to fear standing up and opposing the chairman of the board. I will have no half-million-dollar annual compensation package to lose.
So vote for me in 2012 as your independent candidate for Chesapeake energy director. If elected, I will cost shareholders only a couple of thousand dollars per year, and I will not tolerate any funny business. While I'm not qualified for the job, I think I'm still an upgrade. Because even I can figure out that oil and gas companies don't need antique maps to run their business.