It is a good day for Chesapeake Energy (CHK) shareholders. The company's Board of Directors did the right thing and listened to what large shareholders Southeastern Asset Management and Carl Icahn had to say.
What they had to say of course was "thank you for your service, but it is time for some new shareholder representatives to take control of this Board".
Chesapeake announced Monday that the company had reached an agreement with shareholders and that the following actions would be taken:
Chesapeake has agreed to a plan to reconstitute its Board of Directors by adding four new independent directors to replace four existing independent directors who will resign from the Board upon the appointment of the new directors. Three of the new independent directors will be proposed by Southeastern and the fourth independent director will be Mr. Icahn or a person designated by Mr. Icahn, with Mr. Icahn making that determination prior to the reconstitution of the Board.
In addition, as previously announced, a fifth existing independent director is retiring at the 2012 Annual Meeting of Shareholders and will be replaced subsequently by a new independent Non-Executive Chairman through a selection process that is nearing completion. The new independent Non-Executive Chairman, who will have no previous substantive relationship with Chesapeake, will be confirmed by the reconstituted Board and will be acceptable to Southeastern and Mr. Icahn. Aubrey K. McClendon will relinquish the position of Chairman when the new Chairman is appointed and will continue as Chief Executive Officer and a director. Chesapeake will announce the new Board composition, including the independent Non-Executive Chairman, on or prior to June 22, 2012. The size of the Board will remain at nine directors.
By my math (which is actually pretty good) that means that Southeastern and Icahn are going to have significant influence over the choice of 5 of 9 members of the Board (the four new independent directors plus the new Chairman). And that should mean that we (shareholders) now have a Board that is controlled by us, and not a Board that is controlled by the CEO.
This is a fresh start for shareholders and for this company. It is also a fresh start for the controversial CEO Aubrey McClendon, who as a shareholder I am glad is still involved with this company (McClendon remains a director and CEO). Say what you will about McClendon's risky management style, but you can't dispute the fact that he has assembled an incredible set of assets. With a new Board of Directors watching and controlling, McClendon is a valuable asset for Chesapeake.
The big challenge immediately in front of Chesapeake is managing its large debt load in an environment of depressed natural gas prices (which Chesapeake faces unhedged). I've been encouraged with the information that I have been seeing that suggests Chesapeake doesn't intend to fool around, and is going to make some big moves to shore up the balance sheet, rather than do the bare minimum.
Chesapeake's stated plan (see page 20) for several weeks has been to sell pieces of its Permian Basin and Mississippi Lime assets in an effort to raise between $9.5 billion and $11 billion which would fund capital spending and reduce debt.
It now appears that Chesapeake is prepared to do more than that thought, as I've also noticed that Chesapeake is looking for bids on some other assets.
Monday, I came across a request for bids on 337,000 net acres that Chesapeake holds in the Utica Shale where acreage values (according to the Chesapeake Presentation linked earlier) exceed $13,000 per acre. That could mean this Utica acreage put up for sale is worth over $4 billion.
Additionally, last week I noticed another request for bids, this time on Chesapeake's 500,000 plus net acres in the DJ basin primarily targeting the Niobrara. With 500,000 acres in play this is clearly another very large acreage position that could net something in the billions for Chesapeake.
I like this approach, and I think Chesapeake should put virtually all of its assets up for bids. That way the company can accept the offers that are attractive and reject those that aren't. This seems much smarter than trying to sell only one property, which bidders know Chesapeake absolutely has to sell to meet funding and debt covenant obligations.
If Chesapeake lists a whole bunch of properties for sale and every property receives an attractive bid then I'd say "sell them all" and put this debt issue to bed forever. I don't mind giving away some upside to secure a more certain eventual realization of the value in the assets that aren't sold.
I still haven't seen anything that leads me to believe that the value of Chesapeake's assets (less debt) isn't multiples of the current share price. With new leadership steadying the ship, I feel more confident than ever that eventually all of that asset value will be recognized in Chesapeake's share price.
Disclosure: I am long CHK.