Chesapeake Energy Corp.'s largest shareholder, Southeastern Asset Management Inc., on Monday urged CEO Aubrey McClendon and the board of directors "to be open to any offers to acquire the whole company."

Southeastern, which is a 13.6% shareholder, stepped in last week to become an active participant in the company after McClendon was dismissed as chairman (see Daily GPI, May 3). In the past few weeks McClendon has been accused of financial improprieties related to taking personal loans with companies that also do business with Chesapeake, as well as running a hedge fund that for a period used the same address as the corporation.

The Securities and Exchange Commission (SEC) has launched an informal inquiry, and the Department of Justice has been asked by Sen. Bill Nelson (D-FL) to investigate the company for possible price manipulation and fraud (see Daily GPI, May 4).

The letter, to McClendon and the board, was sent by Southeastern Chairman O. Mason Hawkins and disclosed in a 13D/A regulatory filing with the SEC.

"We urge the company to take action in three areas: debt targets, management focus and strategic options. We do not think that managing to an arbitrary target like the '25/25 Plan' makes sense," Hawkins wrote, referring to Chesapeake's plan to reduce its debt by 25% and increase its output by 25%.

"On the production '25,' we would prefer that management simply focus on maximizing operational cash flow after capex [capital expenditures], instead of going for a volume growth target and spending significantly above maintenance capex currently to grow production to targeted levels." Of the plan to reduce debt by 25%, Southeastern is in favor of reducing debt but "we don't think that management needs to be managing to a specific target there either. This target has been twisted by some constituencies such that it is sometimes confused with debt maturities actually coming due rather than a worthy goal."

Chesapeake also should "accelerate monetizing any assets that are not core" to the exploration and production (E&P) business, including the midstream and oil services assets "and/or any more E&P assets which are not overly reliant on depressed spot natural gas prices and where the company does not have a leading position."

A "second set of concerns" related to management's focus "and the time spent on unproductive communications. We urge management to simply put their heads down" and get things done. "Sell-side conferences, media interviews with no hope of a fair hearing and meetings all over the U.S. with groups who may have only a casual interest but don't mind hearing the 'story' use valuable amounts of top management's time with no apparent benefit and plenty of misinterpretation detriment."

The last point, said Hawkins, "may be taken out of context, but is important: we urge the board to be open to any offers to acquire the whole company. We acknowledge that today's low market price is far below the company's net asset value [NAV] per share and would not encourage any action that would generate a lowball bid versus this NAV. We recognize the dangers of opening such conversations, which can sometime put a company 'in play' at an inopportune time. We therefore want to make clear that we would not support a bid, which might be a large premium to today's stock price but is meaningfully below NAV per share.

"However, we also don't want to use this large price-to-value gap as an excuse to refuse discussions with any potential acquirers who would be willing to pay a price today that recognizes the longer term value of the company."

In response, a spokesman for Chesapeake said, "We appreciated receiving the letter and look forward to further discussions with our largest shareholder in the days and weeks to come."

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