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NEW YORK (
Chesapeake Energy's(CHK - Get Report) largest shareholder is turning into an activist. The move by Southeastern Asset Management, Chesapeake's top shareholder, signals that even after the company said it would
split the chairman and CEO roles
and agreed on early termination of a controversial oil & gas well ownership program for its co-founder and CEO Aubrey McClendon, investors may push for bigger changes to overcome a balance sheet in crisis and a 2012 low in shareh prices.
On Wednesday, Southeastern, with an over-13% stake in Chesapeake, changed its status to an activist investor so that it can work with the struggling gas giant's management to boost shares. In a filing with the
Securities and Exchange Commission, Memphis, TN-based Southeastern said that it would work with management and outside parties on "possible courses of action to assist in building corporate intrinsic value per share or to cause the company's true economic value to be recognized."
Chesapeake's biggest investor becomes an activist
The move comes amid new revelations about McClendon's potential conflicts of interest related to his stewardship of the second biggest U.S. oil and gas driller after
ExxonMobil (XOM). A
Reuters investigation on Wednesday reported that McClendon had run a $200 million commodities trading hedge fund that may conflict with his role at a leading oil and gas exploration and production company. Last week
Reuters published an investigation of McClendon's personal loans using his stake in Chesapeake wells as collateral.
Southeastern's activist filing also comes a day after its CEO was quoted in a Chesapeake Energy press release about the search for an independent chairman. Mason Hawkins, Southeastern Asset Management CEO, stated in the release, "We are pleased that the Board has listened to our input and believe it has made the right decision by ending the FWPP early and seeking an independent Chairman. Aubrey was right to recognize that these actions are in the best interests of the Company and its shareholders. We support management's continuing efforts to unlock and deliver the value embedded in Chesapeake's assets."
Meanwhile, in Chesapeake Energy's first quarter earnings, the oil and gas company reported a top and bottom line miss, but those weren't even the major issues for investors who sent the company's shares down by 14.5% on Wednesday. The company's spending guidance rose while its cash flow guidance declined, adecade-low natural gas pricing continues to heighten its liquidity risk, and the company's all-important liquids production guidance decreased while its natural gas production guidance went up.
"We believe that increased spending, coupled with a diminished discretionary cash flow outlook from less liquids revenue [Updated guidance calls for $2.7-$3B in '12, well below prior guidance of $4.5-$5.2B], increases liquidity risk if gas prices do not meaningfully recover from the current level," wrote Tim Rezvan, Sterne Agee analyst, on Wednesday.
On an analyst call Wednesday, CEO McClendon said that it needs gas prices to rise to $5 a thousand cubic feet by 2014 from present levels near $2 if it were to meet its goal of having $7 billion in cash. In a meantime, the company will look to sell $20 billion in assets to pay down debts and repair its finances.
Chesapeake shares closed at a 52-week low. The drop puts shares down nearly 25% and 50% in 2012 and the past 12 months, respectively. Since the start of 2011, the value of Southeastern Asset Management's Chesapeake Energy stake has fallen from above $2 billion to just above $1.5 billion, according to
"I'm deeply sorry for all of the distractions of the past two weeks," said McClendon, who co-founded Chesapeake in 1989, on an analyst call Wednesday.
Hawkin's fund, which counts
Dell (DELL), Chesapeake Energy,
DirecTV (DTV) and
Disney (DIS) as its five biggest holdings among 13 investments over $1 billion, according to
Bloomberg data, has been involved in recent hotly contested corporate moves like
Martin Marietta's (MLM - Get Report) $5 billion offer for
Vulcan Materials (VMC - Get Report). Vulcan has voted against the offer and is moving to slow the bid in courts so ahead of its June 1 shareholder meeting, where a hostile slate of Martin Marietta directors will seek board seats.
Activists and unsolicited takeover offers have played a big role in the recent turnaround of struggling large-cap companies. For more on recent examples of activism and share recoveries, see why a kinder, gentler activist emerged in recent
the Nook and AOL deals with Microsoft
. For more on Southeastern's involvement with Vulcan Materials, see why
2012 deals hinge on Goldman Sach's idea of fairness
See 5 ways Chesapeake Energy can be
saved from itself
for more on how it can initiate a share turnaround.
-- Written by Antoine Gara from New York.
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