Chesapeake Energy Corp.’s annual meeting Friday has taken on special meaning for the company, its shareholders and the business community following corporate governance questions raised in the past two months that are hanging over the heads of CEO Aubrey McClendon and members of the board of directors. Two board members face reelection, but if big shareholder groups have their way, including the third largest, Carl Icahn, the company will see some new faces.

The annual meeting is scheduled to begin at 10 a.m. CT in Oklahoma City and is to be webcast.

On Thursday analysts with Moody’s Investors Service warned that at least $7 billion of Chesapeake’s assets have to be sold this year to avoid a breach of debt covenants and a credit downgrade. Even with a big sell-off Chesapeake still may exceed debt restrictions in the second half of the year because its revolving credit facility covenants limit debt to four times earnings before interest, taxes, depreciation and amortization, according to Moody’s senior analyst Peter Speer.

Chesapeake obtained a $4 billion unsecured loan last month from Goldman Sachs Bank USA and affiliates of Jefferies Group Inc. to cover an expected 2012 cash flow shortfall (see NGI, May 21). McClendon has said the company plans to pay off the bank loan by selling up to $9-11 billion in assets this year, including the Permian Basin portfolio, which is expected to sell for up to $8 billion.

“Even $7 billion in asset sales could place Chesapeake’s covenant compliance for its revolving credit facility in some doubt, and the company would still face a significant funding gap in 2013,” Speer wrote. “Asset sales much below $7 billion, meanwhile, would likely lead to a downgrade.”

In early May Moody’s downgraded Chesapeake to “negative” (see NGI, May 14). Speer at that time pointed to the large capital funding gap for this year because of low natural gas prices and the company’s planned increase in spending.

Ahead of the board meeting State of New York Comptroller Thomas P. DiNapoli, who manages the New York State Common Retirement Fund, joined other large investor groups last week and urged shareholders to not support the reelection of board members Richard Davidson and V. Burns Hargis, the only two up for reelection. DiNapoli said in his letter he had for several years engaged the company’s management “on a number of issues, including board independence and executive compensation, but to no avail.”

The “solution for Chesapeake,” he said, is “a board overhaul.”In the past couple of weeks Chesapeake has put two assets on the market, including a portion of its Denver-Julesburg Basin portfolio, which may fetch up to $1 billion (see NGI, May 28). Last week a “for sale” sign went up on the Woodbine assets in Texas, which at only 57,000 net acres are considered a bit player in the U.S. portfolio.

The leasehold extends across portions of the Central/East Texas counties of Madison, Leon, Houston, Grimes and Robertson. Net production volumes in the Woodbine from October through March were 348 b/d and 870 Mcf/d. Average net cash flow from January through March was $825,000/month.

The Woodbine formation, a long-time oil target, historically had been vertically drilled, and vertical wells had recovered more than 46 million bbl of oil. Today the tight sand formation is being reworked using horizontal drilling and hydraulic fracturing. Producers are targeting depths of 8,000-9,000 feet, mostly for crude oil, “with liquids-rich casinghead gas and low water ratios,” according to Chesapeake.

Initial production rates of 600-1,200 boe/d are being reported by producers, Chesapeake said. In addition to Chesapeake, producers now testing wells in the play include Apache Corp. and Encana Corp. McMoRan Exploration Co. CEO Jim Bob Moffett, a respected geologist, calls the Woodbine a “synonym” in Texas for the prospective Tuscaloosa Marine Shale. The Woodbine “directly underlies the Eagle Ford Shale and overlies the Buda formation,” Chesapeake said. Porosity is 8-16%, with gross thickness of 75-120 feet. Chesapeake’s horizontal well completions to date have addressed “the wide variation in permeability and porosity.”

A prospectus is available from Meagher Energy Advisors. The bid date is June 28 with an effective date of June 1. Closing is tentatively scheduled for July 26.

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