(Reuters) - Top shareholders of Chesapeake Energy Corp will take control of the board of directors after the natural gas producer came under intense pressure to reform following a governance crisis and poor financial performance.
Chesapeake said on Monday it would replace four members of the board, just days ahead of the company's annual meeting.
Two of Chesapeake's largest investors, Mason Hawkins's Southeastern Asset Management and billionaire Carl Icahn, will select the replacements. Hawkins and Icahn demanded changes after Reuters reports shed light on the board's lax oversight of Chief Executive Officer Aubrey McClendon, an executive known for risky business decisions.
Southeastern Asset Management will nominate three of the new directors, while Icahn and his affiliates will pick the fourth, Chesapeake said.
The board previously stripped McClendon of his title of chairman; an independent replacement will be named. McClendon will remain on the board.
The four new directors will approve the independent chairman, so after all the changes, oversight of McClendon will have been greatly strengthened.
The natural gas producer's nine-member board has been under intense scrutiny since Reuters reported in April that McClendon had taken out more than $1 billion in loans, using his personal stakes in thousands of company wells as collateral.
McClendon's personal lender, EIG Global Energy Partners, is also a big source of funding for Chesapeake, a situation that academics and analysts have said may cause a conflict.
The CEO also ran a $200 million hedge fund from his office, borrowed from a former board member, and is allowed to profit when his oil and gas interests are sold alongside the company's, Reuters has reported. Since the first report on April 18, Chesapeake's shares have fallen 14 percent as governance worries and a liquidity crunch weigh.
Both Hawkins and Icahn have said in regulatory filings that an outright sale of the company should be considered.
IS IT ENOUGH?
Four current Chesapeake directors will resign after the new directors are appointed. The company did not specify which board members would step down.
It is likely that Lou Simpson will remain on the board because he was named to it by Hawkins.
Charles Maxwell, an oil analyst at Weeden & Co, had planned to retire this year.
Of the remaining directors, former U.S. Senator Don Nickles, former Union Pacific Corp CEO Richard Davidson, Oklahoma State University President V. Burns Hargis, and former Oklahoma Governor Frank Keating are among the longest serving board members and therefore are likely to bear the brunt of any resignations, said Mark Hanson, an analyst with Morningstar.
Analysts and Chesapeake investors mostly characterized the changes as positive, but said more was needed.
"I think these changes are positive because you'll have four board members representing shareholders plus one who shareholders think is favorable to them, Louis Simpson," said Joseph D. Allman, oil and gas industry analyst at JPMorgan in New York. "The board will push changes. That is, less spending and additional asset sales."
"However, these changes are not necessarily accretive to value," said Allman. "Chesapeake is in a situation where it has to sell assets. Everybody knows it has to sell assets. So, it's not in a strong negotiating position."
Decade-low natural gas prices have contributed to a large funding gap at Chesapeake. To close it, the company has said it will sell up to $11.5 billion in assets this year.
Icahn said in a filing with the U.S. Securities and Exchange Commission that he would continue to consult on the selection of a new chairman and assets sales, and did not want the company's current low valuation to discourage potential buyers of the whole company.
McClendon has not raised the possibility of selling Chesapeake, focusing instead on selling assets, such as its holdings in the West Texas Permian Basin, to close a funding gap estimated at more than $10 billion this year.
Asset sales are crucial for the company, which has accumulated one of the nation's largest portfolios of oil and gas leases.
Last week, debt rating agency Moody's Investors Service warned Chesapeake that it must sell at least $7 billion in assets to avoid breaching a loan covenant.
"Even $7 billion in asset sales could place Chesapeake's covenant compliance for its revolving credit facility in some doubt, and the company would still face a significant funding gap in 2013," Moody's said in a note.
The Chesapeake annual meeting is scheduled for Friday.
Chesapeake shares rose 3 percent to $16.05 in midday New York Stock Exchange trading.
(Reporting By Michael Erman and Matt Daily in New York, Anna Driver in Houston and Brian Grow in Atlanta; Editing by Gerald E. McCormick, Jeffrey Benkoe and John Wallace)
