Big Changes Coming at Chesapeake
Jay.
CARL C. ICAHN
767 Fifth Avenue, 47th Floor
New York, New York 10153
May 25, 2012
Via Federal Express and Email
Board of Directors
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Ladies and Gentlemen:
The past several weeks have proved a difficult time for shareholders of Chesapeake Energy. The basic function of a board is to oversee management and to hold it accountable. We believe the board has failed this duty in a dramatic fashion. Rather than act as a source of stability and provide assurance to shareholders, this board has led the company through a highly publicized spate of corporate governance breakdowns while amassing an astounding $16 billion funding gap, which we believe has contributed to the share price decline of over 55% from the 52-week high.
We are not alone in criticizing this board. Shareholders have filed lawsuits, withhold campaigns and have otherwise voiced disapproval and all three major proxy advisory firms (i.e., ISS, Glass, Lewis and Egan-Jones) have advised shareholders to withhold votes from directors at the 2012 annual meeting. Chesapeake shareholders will benefit neither from a constant stream of negative news reflecting upon the companies troubled past, nor from a half hearted attempt by the board to make the minimum possible number of changes to skate by for one more year. The board must not only find a way to eliminate the enormous funding gap, but also the more substantial creditability gap.
We recently had dinner with Aubrey McClendon to suggest a manner by which that credibility gap might be filled. The company has publicly identified several actions including reduced spending and asset sales which will relieve some of the funding gap, yet the board still seems to miss the point. We believe that a management team and a business plan without strong oversight and accountability is doomed to fail. Accordingly, at that dinner we asked Aubrey to consider direct shareholder representation on the board. The next day we were informed that the board refused to even consider this request prior to the selection of a chairman of their choosing. We believe that this response was completely disingenuous and illogical. Why is appointing a new chairman, sometime out in the future, an excuse for putting off considering whether to have shareholders, the true owners of the company, have immediate representation on this very flawed board in this very fluid situation?
The board has recently announced that it is going to select a new Chairman and separate the Chairmanship and CEO roles. While this is certainly a step in the right direction, appointing a new Chairman in the manner that Chesapeake is doing, does not exactly elevate corporate governance to the “gold standard” as the board would have shareholders believe, instead it is woefully inadequate in both process and substance. Having the current board select a new chairman without shareholder approval and without allowing for shareholder representation is akin to asking the fox, who has plundered the hen house, to choose another fox to assist it in standing guard over the remaining hens.
To engender any meaningful credibility among shareholders, corporate governance reforms cannot, in our view, be led by directors whose irresponsible actions have brought this company to the edge of the proverbial cliff. Accordingly, we propose that at least 4 of the current directors (other than Louis Simpson) should be immediately replaced by two persons designated by us and two persons designated by another large shareholder such as Southeastern Asset Management, the company’s largest shareholder. In our opinion, only when these changes are effectuated will the board be truly independent and more importantly will investors come to believe that promises made will be promises kept; when a capital plan is agreed upon it will be maintained, not diverged from as it has in the past.
We believe that shareholder representation on boards, even in a minority capacity, is an extremely powerful tool to instill accountability in a company. This has proven to be the case in numerous companies on which we had minority board representation, including Motorola, Biogen, Genzyme, and Hain Celestial to name a few. Moreover, as my past record has demonstrated, I work assiduously to increase the value of stocks in which my companies have invested, which has led to gains of billions of dollars for ALL shareholders, not just my firm. Over the last few years, our actions have led to an increase in aggregate market value of approximately $55 billion for shareholders at well over a dozen companies where we have played an activist role. These companies had a market value of under $20 billion when we first invested. We would like the opportunity to do the same at Chesapeake.
We believe that Chesapeake has collected some of the best oil and gas assets in the world. However, we believe that the low stock price today does not reflect the value of those assets; rather the stock price suffers because of the enormous risk associated with an ever changing business strategy, enormous capital funding gap, poor governance, and unchecked risk taking. While the company has recently recognized that their strategy of exponential capital expenditure growth is not sustainable, they still seem unable to distinguish between having cash in the bank as opposed to the projected proceeds of a series of ever more complicated and risky on and off balance sheet financial transactions and the hope of higher commodity prices. Now is the time for Chesapeake to focus only on what is important. What is important is that this pernicious funding gap, which we believe this board has created, must be filled. The board must bite the bullet, come up with a realistic plan and stick to it. In our opinion, shareholder representation, especially on this board, is needed to make this happen. A new chairman alone, appointed by this board, will not accomplish this objective.
As I am sure you are aware, this is not our first investment in Chesapeake stock. In late 2010, we acquired a substantial position in the company and met with management at that time to discuss the maximization of shareholder value. In part, we believe, due to our presence, the company sold non-core assets, closed their funding gap and announced that they were through spending money on land. Shareholders rewarded the company for this newfound responsibility, and the stock rallied. However, without shareholder representatives on the board (a major concern for us at the time) the promises made in 2010 proved hollow, and the company quickly abandoned their new strategy and not only accelerated land acquisitions but also capital spending on non-core assets. Recognizing this fundamental problem with the board, we sold our position. That decision turned out to be particularly prescient. The company’s stock price has plummeted by nearly 60% since that time and the board has watched the current events unfold without, in our opinion, any attempts to demand accountability. Now more than ever, the company needs the stewardship of a strong board – a board that can instill confidence in the shareholder base and restore accountability and credibility. If our suggested changes are not made at the board level immediately, we fear the company will be severely hamstrung in its attempt to regain its footing. It seems to us that the board has been quick to insulate themselves from accountability to shareholders and has expressed no interest in demanding accountability from management. A new plan and good intentions are insufficient to close the gap between asset value and stock price. We must have a board whose primary concern is enhancing the value of shareholders, a board that has the strength to hold management accountable, and the willingness to be held accountable themselves. In our view, only a board that has these attributes can enhance the value of this company.
We, as one of your largest shareholders, wish only the best for this great company and do not wish to bring about any additional distractions, however, we believe that without a strong board to demand accountability there is a significant chance that the value destruction shareholders have seen in the past few weeks may become irreparable. We cannot stand idly by and allow this to happen. Therefore, if you continue to arbitrarily refuse the request we have made for shareholder representation, we, as activists, will immediately take whatever “actions” we feel are necessary to protect the value of this company. As you are well aware, this is an extremely time sensitive issue, especially in light of the fact that you have refused to postpone the meeting that is coming up shortly. Therefore, we hope and expect to hear from you in the next few days.
Very truly yours,
/s/
Carl C. Icahn
Views: 4299
Replies are closed for this discussion.
Replies to This Discussion
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Permalink Reply by Krkyoldhag on -
This month the company put out this slick very expensive magazine touted as an investor's report. The cost of these things is out of sight so I take it as indication they are just not able to cut back on excess even in little things. I would have preferred to have these costs tacked onto checks. Figure royalty owners paid for the slick edition.
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Permalink Reply by Greedy Landowner on
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That is an impressive letter. If natural gas is going to have a chance at replacing some of the gasoline used in our cars it is going to have to have a champion who is transparent.
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Permalink Reply by Steve P on
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The letter is excellent, timely, and necessary. Chesapeake's Board was hand-selected by the President of the company. This is business as usual for a small or even a mid-sized company. Typically, companies lose that friendly Board as it grows, borrows money or attracts investment from VCs, because the VCs won't put up with that stuff. I am not sure why that natural evolution didn't happen with CHK. Chesapeake has been wreckless in its growth strategy. I know it could not have grown the way it has without McClendon, but that assertion cuts both ways. I bought CHK stock 2 years ago - it is down more that 50%. I've chosen not to dump it at a huge loss, but I certainly am not going to double down either.
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Permalink Reply by Krkyoldhag on
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Good thinking on dumping. Too late now. Hope you don't end up with a lot of paper like I did with Braniff. Same thing ..the CEO kept the $$$ in his pocket and spent like it was his. I should have dumped it when he hired his girlfriend to "decorate" the planes and design the hostess outfits..There was a blurb about him buying CHK on Fox this morning (Saturday).
If this had been done 4 weeks ago might have worked. I think it might be too late to turn the ship away from the waterfalls.
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Permalink Reply by Hopeful About Natural Gas on
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Hummm ... while I am fairly favorable to this development I do wish it were not necessary.
Aubrey is a wildcatter and they can be hard to control (or keep themselves under control) Ichan is a name I have heard of for years in the investment world. This may be a game changer in more ways that one. Consider that a New York born, Princeton Grad is taking over Chesapeake Energy. It looks like two wheeler-dealers have collided and the Yankee has won. Maybe it's a sign natural gas is growing up as an important investment.
In the past natural gas companies may have been too small and regional for the big investors to get excited about. However, CHK has gotten so big and important that it can attract a major investor like Ichan to "rescue" it. Ichan is a huge name in the investment world - he's sort of a "wildcatter" too. It's a shame that he and Aubrey could not work together.
Ichan may see a chance to get his name in the history book (and make a bundle with CHK's under-valued assets) He can make a lot of money - and be the hero on the white horse. That might be very good for the image of natural gas. We need some positive PR and sadly, Aubrey is causing people to be against natural gas because they are against HIM. He's a lightning rod for all things some people hate about natgas.
"We recently had dinner with Aubrey McClendon to suggest a manner by which that credibility gap might be filled. The company has publicly identified several actions including reduced spending and asset sales which will relieve some of the funding gap, yet the board still seems to miss the point. We believe that a management team and a business plan without strong oversight and accountability is doomed to fail. Accordingly, at that dinner we asked Aubrey to consider direct shareholder representation on the board. The next day we were informed that the board refused to even consider this request prior to the selection of a chairman of their choosing. We believe that this response was completely disingenuous and illogical. Why is appointing a new chairman, sometime out in the future, an excuse for putting off considering whether to have shareholders, the true owners of the company, have immediate representation on this very flawed board in this very fluid situation?"
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Permalink Reply by Steve P on
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Hopeful: My financial and general interests are far more aligned with NG as a commodity than in the small investment I have in CHK. Aubrey has done a great deal to thrust NG into the national conversation, and most of that is a good thing. After reading a good many of the recent articles about CHK's financing, I certainly would not characterize their assets as being "under-valued" although I would like to think that the stock is undervalued. A better characterization of CHK is that it is "over-leveraged." They are sitting on a vast portfolio of leases in the many shale areas of the US, and all of those leases are valuable. At least in Louisiana, CHK paid WAY TOO MUCH lease bonus for much of that. And I say that as a land/mineral owner who got a little of that. And all of those huge lease bonuses, we now find out, came from borrowed money. I'm starting to see what Aubrey has more in common with President Obama than I am comfortable with.
Amlost none of Aubrey's or CHK's problems would be in the news if NG prices had not dropped so sharply. But, of course, CHK is one of the reasons the price has dropped so much. That pesky law of "supply and demand" just won't go away.
I have almost nothing to like about Carl Ichan, or anything in common with him. But he does tend to hold corporate leadership's feet to the fire. Much needed by the Board of CHK, who has been a rubber stamp for far too long.
I love "wildcatters" and have known and worked for some. Not sure they make good CEO's of publicly traded companies.
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Permalink Reply by Hopeful About Natural Gas on
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You mean Aubrey was wrong when he said $30K an acre for a lease was chump change??
I completely agree that CHK would not be the news story it is if prices had not fallen so far. Of course, without Aubrey and CHK do you even have the whole Haynesville shale boom or the national focus on natural gas? Aubrey was vital for that. But, he makes a terrible poster boy for natural gas these days. They should never have let him do so many interviews. He has very loose lips.
You are right that few founders make good CEOs of traded companies. The corporate mindset is very different from a founders mindset. CHK has grown beyond Aubrey and his friends and their good old boy deals. Maybe that's a good thing for the industry over the long term.
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Permalink Reply by GoshDarn on
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HANG, there are many POV's when it comes to this stuff, and certainly your thinking is quite valid, being as a number of insiders in the O & G biz have voiced similar opinions about CHK and Aubrey's pop to the HA.
Nevertheless, I personally don't agree with that (or those) assessments, per se.
In other words, it seems to me that it really doesn't matter what entity was first to the Haynesville Shale formation, in that numerous mid-size operators and Seven Sisters now have the technology and expertise to bring in the super horizontal wells. CHK does not have a lock on such drilling, nor did it have before the HA cat was out of the bag, so to speak.
In other words, just like during the early Caddo oil boom -- the first-responders certainly did help prove the play, but the HA play would've eventually been proven anyway since the minerals are clearly in the ground and since numerous operators have a profitable way to extract them per a certain NG pricing level.
Ergo, the HA did not need Aubrey or CHK.
No, the reverse was true.
Aubrey needed the HA, per his reckless schemes and financial flips, in that it was a perfect/dovetail into his style of leveraging such in-the-ground asset grabs vis-a-vis his Enron-like derivative swaps [sic], and thus it allowed CHK to turn one dollar into twenty (to offer a bad derivative analogy).
In fact, Aubrey did quite a bit of damage to the HA, IMHO, since his unbridled complexities help drive NG options down into the basement.
And, y'know, this opinion comes from a landowner (me) -- who greatly benefited via reaping an unheard of high bonus-per-acre lease from one of Aubrey's competitors.
So, to take the easy road and characterize Aubrey as standing at the helm of the HA and somehow being responsible for what was already in the ground long before Mr. Oklahoma/trained landman had any inkling as to what was deep under the ARK-LA-TEX ground -- is a misnomer, if you ask me.
Yet, sure. Many might disagree with me, and that's their prerogative.
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Permalink Reply by Max on
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CHK thinks they can handle their own affairs.
Shareholders, go home and don't worry, you should keep your nose out of the Boards business, if the company tanks, oh well.....that's the risk you take when you invest.
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Permalink Reply by kittycatmama on
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Anyone have any idea when CHK stock will become a BUY in the markets. This co. is too big to fail. It will come back or be bought out by a bigger fish. I am thinking it will get below $10. Any ideas???????????
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KCM, some with steel guts might buy @ $8 (if and when CHK stock ever gets that low; and that's a really big if, cher) . . . in that, more than likely, the sliced up CHK assets will garner an investment bounce when NG pricing improves. Of course, timing the safety of the market firming-up (for NG) and staying up could be dicey, too.
No one truly knows if NG has bottomed per its horrific commodity cycle, or if it's a fake-out dead cat bounce. Indeed, it's kinda hard for those with dogs in NG to be 20/20 objective as to what the future will most likely bring per the energy sector's wild swings of late.
Still, considering the complexity of this dervish mess (and the possible regulatory investigations/lawsuits to come to cuff Aubrey's cronies, etc.) -- I mean, CHK is way too risky to short (now) since a serious takeover bidder could give it instant pop. As of Friday (May 25th) -- there seems to have been a base building for CHK stock at around $15 or so. In other words, the worst of it may be over.
(Maybe.)
A better hedge might be to hook a wagon to CHK's operating competitors who'll end up benefiting by CHK's demise/fire sale.
P.S. -- After the above was composed and posted, this poster read ShaleGeo's advice. And I would agree. The little guy can't compete with the Wall Street sharpies, so "following the money" really tends to be a somewhat easy way to shadow such complexities. But if it was me, I'd watch to see if Carl hedges his hedge, too.
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