Natural gas producer Chesapeake Energy Corp will split the jobs of chairman and chief executive, and bring an early end to a program that granted CEO Aubrey McClendon stakes in company wells, an arrangement that sparked investor anger and potentially created serious conflicts of interest.
McClendon, a co-founder of the company, will be replaced as chairman by an independent, non-executive chairman, and the arrangement that allowed McClendon to buy a 2.5 stake in each of Chesapeake's wells -- the Founder Well Participation Program (FWPP) -- will end 18 months early, in June 2014. McClendon will receive no compensation whatsoever from the program, according to a statement by the company.
Chesapeake was under pressure from one of the company's largest shareholders to agree to an early end to the FWPP, which had been scheduled to run through 2015. Chesapeake's board said last week that it planned to negotiate an early termination of the plan.
"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," O. Mason Hawkins, head of Southeastern Asset Management, said in Chesapeake's statement.
The comment was the first from Hawkins, a reclusive investor based in Memphis, Tennessee, whose firm owns 13 percent of Chesapeake.
The oil and gas company, the second-largest producer of natural gas, also reported a smaller quarterly net loss. McClendon will speak to investors on the company's earnings call on Wednesday.
In response to the changes at the company, Chesapeake shares rose substantially, closing 6 percent higher at $19.60 on the New York Stock Exchange. After the close of regular trading, the stock fell 2.5 percent, however.
Chesapeake's moves came less than two weeks after Reuters reported that McClendon had taken out as much as $1.1 billion in personal loans with his well stakes as collateral, an arrangement that analysts and academics said posed potentially serious conflicts of interest.
The well program has also come under the scrutiny of the U.S. Securities and Exchange Commission and the Internal Revenue Service.
The IRS probe, included in an SEC filing on Monday, had previously not been disclosed to shareholders.
"We believe separation of the chairman and CEO roles will improve Chesapeake's corporate governance and the early termination of the FWPP will eliminate a source of controversy, both of which should send a positive signal to the market and improve shareholder value," Merrill "Pete" Miller Jr., Chesapeake's lead independent director, said in a statement.
Chesapeake board members are considering candidates for the chairmanship "with no previous substantive relationship with Chesapeake and will be soliciting input from major shareholders," the company said.
Board members contacted by Reuters referred queries to Chesapeake and George Sard, CEO of public relations firm Sard Verbinnen & Co.
"I think the board members decided they'd had enough," said industry analyst Mike Breard of Hodges Capital in Dallas, which owns Chesapeake shares. "They needed to look at Chesapeake as a big company -- and not as a small company run by one man."
Other investors argued more action is needed.
"The New York State Common Retirement Fund has long been concerned about Aubrey McClendon's dual role as chairman and CEO of Chesapeake," said Thomas DiNapoli, New York's comptroller. "Much remains to be done to restore investor confidence in this company, and we hope this is one of several steps Chesapeake's board will take to achieve that goal."
David Dreman, who has been critical of the company and owns 1 million shares of Chesapeake, said the board could have ended the program immediately.
"They're (the board) bending to the winds of the IRS and the SEC, but they're certainly not taking the lead internally in making significant changes," said Dreman, who is chairman of Dreman Value Management LLP.
Chesapeake reported a first-quarter net loss as it took a non-cash charge based on a lower market value for its hedges. Excluding items, the company earned 18 cents a share, well short of the 29 cents expected on average by analysts.
The company, which has broad exposure to natural gas prices, said it would significantly reduce spending on drilling and acreage purchases during the rest of this year.
Oklahoma City-based Chesapeake reported a net loss of $71 million, or 11 cents per share, compared with a net loss of $205 million, or 32 cents per share, in the same quarter a year earlier.
Chesapeake's average daily oil and gas output rose 18 percent in the first quarter.
To close an expected funding gap of as much as $6 billion, Chesapeake plans to raise up to $14 billion through asset sales and other transactions in 2012, it said.
So far, the company has raised $2.6 billion by issuing preferred shares and doing other types of transactions.