Fireworks expected at Chesapeake annual meeting

Thu Jun 7, 2012 5:51pm EDT
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By Anna Driver and Matt Daily

(Reuters) - Chesapeake Energy Corp's (CHK.N: Quote) annual meeting promises to be raucous, with a vote on executive compensation in the spotlight, but the company's biggest challenge will be convincing investors it is still a good investment despite the turmoil.

At the insistence of the company's two largest shareholders, activist Carl Icahn and Mason Hawkins' Southeastern Asset Management, Chesapeake said on Monday that four directors will resign and be replaced by shareholder representatives. Paul Hodgson, senior research associate at governance firm GMI Ratings expects they will include Richard Davidson and Burns Hargis, two Chesapeake directors up for reelection at Friday's meeting.

There is a long list of investors who are demanding change after Reuters reports shed light on the board's lax oversight of Chief Executive Aubrey McClendon.

The actions of Southeastern and Icahn were sparked by financial peril at Chesapeake and an ongoing governance crisis related to transactions by McClendon that may put shareholder interests below his.

Since Monday, the shares have moved 8 percent higher, lifted by news of Icahn and Hawkins' involvement and reports the company was in talks to sell its pipeline business for $4 billion to Global Infrastructure Partners. Still, the stock is down about 40 percent over the last 12 months and many risks remain for investors.

"The company's problems with debt, liquidity, and cash flow, along with the negative impact of falling commodity prices, will not disappear simply because of changes in the composition of the board," Phil Weiss, independent oil analyst at Argus Research told his clients on Wednesday.

Chesapeake faces a funding shortfall this year estimated at around $10 billion and shareholders are forcing McClendon to curb the torrid pace of land purchases that turned the company into the largest holder of natural gas acreage in the country and to sell as much as $11.5 billion in assets to fund operations and pay down debt.

While all exploration and production companies are seeing profitability sapped by falling oil and gas prices, Chesapeake's onshore U.S. peers, including Devon Energy Corp and EOG Resources, do not have the same liquidity and governance problems.   Continued...

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. In an annex at the headquarters of Chesapeake Energy Corp, a unit informally known as AKM Operations manages a top company priority: the personal business of its namesake, Chief Executive Aubrey K. McClendon. Picture taken April 17, 2012. REUTERS/Steve Sisney