Chesapeake Energy Corp.'s departing CEO will leave his successor a shrunken, cash-starved version of what was once the preeminent natural gas producer.
Meanwhile, Aubrey McClendon himself will walk away with compensation including $34 million in accelerated vesting of restricted stock that he was awarded previously, and about $12 million in cash severance and benefits to be paid out over four years, a person close to the matter told Bloomberg News.
McClendon's surprise announcement Tuesday that he would retire April 1 culminated a shareholder revolt by Carl Icahn and Southeastern Asset Management's O. Mason Hawkins that earlier cost the CEO the chairmanship he'd held for more than two decades. McClendon also relinquished his annual bonus and saw executive perks curtailed amid federal investigations of a portfolio of personal loans that topped $840 million.
Icahn and Hawkins, who together control 22 percent of Chesapeake's stock, pushed for McClendon's resignation after concluding his presence and the controversy surrounding his personal business deals was hurting the company's share price, an unnamed source told Bloomberg.
Shares of Oklahoma City-based Chesapeake climbed 6 percent to $20.11 at Wednesday's close in New York after earlier reaching $21.20 for the biggest intraday gain in almost nine months.
Chesapeake lost as much as 43 percent of its market value in 2012 as scrutiny of McClendon's financial transactions destroyed investor confidence in management and cratering gas prices drained the company of cash.
Unfinished tasks facing the next CEO include raising $8 billion from asset sales this year to plug a funding shortfall, and converting a company that pumps enough gas to supply 20 percent of American household demand into an oil producer.
"Companies have life cycles, and during various stages it can make sense for some people to leave," Philip Weiss, an analyst at Argus Research Corp. in New York, said in a telephone interview with Bloomberg News. "Aubrey McClendon was very good at accumulating land but now that Chesapeake is moving into an asset-harvesting mode, they must have decided they needed someone with another set of skills."
An internal board investigation of McClendon's use of his stakes in thousands of company-owned wells to secure personal loans so far has found nothing improper, Chesapeake said in a statement Tuesday released after the close of regular trading.
Board member V. Burns Hargis, president of Oklahoma State University, led the probe of McClendon's loans.
Now that McClendon is on the way out, Chesapeake may go in a new direction, observers said.
"The imminent departure of CEO McClendon proves that major strategy changes are likely, and we envision a reduced spending environment that is less reliant on asset sales," Tim Rezvan, an analyst at Sterne Agee & Leach Inc. in New York, who has a neutral rating on Chesapeake shares, wrote in a note to clients Wednesday.
Archie Dunham, the former ConocoPhillips chief executive who replaced McClendon as chairman in June, thanked the outgoing CEO for his "enormous achievements," in an e-mail to employees. The company isn't for sale and employee perks such as on-site childcare and a fitness center at the company's Oklahoma City headquarters won't be discontinued, Dunham wrote.
In a separate e-mail to Chesapeake employees, McClendon attributed his imminent departure to "certain philosophical differences" between him and the board without elaborating.
McClendon led Chesapeake from its 1989 inception in Oklahoma City, amassing U.S. gas and oil fields that cover an area equivalent to half the size of New York state. As one of the first explorers to embrace horizontal drilling and hydraulic fracturing, McClendon helped usher in a revival of U.S. gas and oil production with discoveries such as the Haynesville Shale in Louisiana and Utica Shale in Ohio.
The success of the drilling methods led to a glut of North American gas that drove prices to a 10-year low in early 2012, causing Chesapeake to cut jobs, curtail capital spending and sell about $11 billion in oilfields and pipelines to help close a gap between cash flow and drilling expenses. The company lost $1.07 billion during the first three quarters of last year and net debt ballooned by 56 percent during that period to $16.1 billion.
The board will release final results of its review of McClendon's financial transactions on Feb. 21, when announcing fourth-quarter results.
"While I have certain philosophical differences with the new board, I look forward to working collaboratively with the company and the board to provide a smooth transition to new leadership," McClendon said in the statement.
McClendon's departure under a mutual agreement with the board will be treated as a "termination without cause" rather than a retirement, said a person with knowledge of his departure terms, who spoke on the condition that he not be identified.
A retirement before Dec. 31 of this year, according to a May filing detailing severance terms, would have required McClendon to repay part of a special $75 million cash payment the company awarded him in 2008. The "clawback" would be worth about $11 million based on an April departure, according to a formula disclosed in the filing.
Based on the terms of a termination without cause, Chesapeake won't collect any clawbacks from McClendon in connection with his resignation, the person with knowledge of the matter said.
Sterne Agee's Tim Rezvan said Chesapeake faces major challenges.
The company, which needs to sell at least $4 billion in assets, has a limited inventory of top-shelf oil assets and unhedged exposure to continued low natural gas prices, he said.
Rezvan said one last bad bet on natural gas may have sealed McClendon's fate at Chesapeake.
"The elephant in the room for Chesapeake has been the company's unhedged gas production in '13 and '14," Rezvan wrote in a research report issued Wednesday.
He said Chesapeake hedged its gas at $3.03 a thousand cubic feet in the fourth quarter, when the actual price rose to $3.56, while bullishly predicting a price recovery this year that has not materialized.
"We believe that a failure to mitigate price risk was a key driver of tension between the CEO and the board," Rezvan said.
Bernstein Research analyst Bob Brackett said the change could be positive for the company since McClendon's prowess as a landman does not fit Chesapeake's evolution beyond its land grab roots.
"If Chesapeake is indeed serious about entering a 'harvest' mode and living closer within its means, the company is better served having a leader who embodies that strategy," Brackett wrote in his report on McClendon's looming departure.
Aubrey McClendon
Age: 53
Home: Oklahoma City
Education: Graduated from Duke University in 1981.
Early career: Worked as an independent producer of oil and natural gas from 1982 to 1989.
Founded Chesapeake Energy: 1989
Net worth: $1.2 billion, according to Forbes (2011)
Original Print Headline: Moving on
This story was compiled from reporting by the Tulsa World Business staff, Jay F. Marks of The Oklahoman and Bloomberg News.
