Chesapeake Energy Corp. shareholders on Friday soundly rejected two board members up for reelection and approved three shareholder-initiated resolutions at the company’s annual meeting in Oklahoma City, signaling a turning point for the operator’s corporate governance and likely for the future of CEO Aubrey McClendon.

Besides corporate governance changes, the landscape of the company also is changing, with big leaseholds now on the market and the profitable midstream businesses to be sold for $4 billion-plus to Global Infrastructure Partners.

However, corporate governance appears to be at the top of shareholders’ to-do lists after they ousted V. Burns Hargis, president of Oklahoma State University, and former Union Pacific CEO Richard K. Davidson, who recently were reelected by Chesapeake’s board. However, Hargis received only 26% of the preliminary shareholder votes cast, while Davidson captured just 27%, which led both men to tender their resignations under a new majority voting bylaw, also enacted on Friday.

In addition, board member Charles Maxwell retired as expected, leaving the board in disarray. Following “extensive discussions” with representatives of Southeastern Asset Management, its largest shareholder (13.6%), and Carl Icahn (7.8%), Chesapeake last Tuesday already had agreed to replace four existing independent directors, with three proposed by Southeastern and one by Icahn. With the departure of Maxwell, Hargis and Davidson, there remains one other open seat, which is to be filled by the incoming chairman, expected to be announced later this month.

The historic shareholder revolt proved to be a positive for the stock, which rose 2.86% (51 cents) to end the week at $18.36, versus a close on Thursday of $17.85. More than 30.93 million shares traded hands on Friday, less than the average volume of 31.78 million. The previous Friday, ahead of Memorial Day weekend, Chesapeake ended at $16.90.

“Chesapeake appreciates shareholder feedback and will act appropriately with regard to the matters voted on,” executives said following the annual meeting. “Chesapeake has recently taken important actions to enhance corporate governance and increase management oversight by, among other things, reconstituting the board of directors. As previously announced, Chesapeake will add a new independent nonexecutive chairman and four new independent directors proposed by shareholders to its nine-member board within the next two weeks.

“Chesapeake will also take the necessary actions so that shareholders will have the opportunity to elect the entire board of directors at the 2013 annual meeting of shareholders.”

McClendon presided over the one-hour meeting, and he heard only a smattering of discouraging remarks from the shareholders who attended. Most of the biggest shareholders already had voiced their opinions in the past two months via proxy statements about what needed to change within the company. More than 200 had pre-registered to attend this year’s meeting; last year only 85 were registered to attend.

During his presentation shareholder Gerald Armstrong told the CEO, “It’s likely you might not be with us next year.” And Icahn representative Vincent J. Intrieri called McClendon a “great oil and gas man,” but said, “even great executives need vigilant oversight.”

According to preliminary statistics, 549 million shares were represented by proxy at the meeting, which is about 85% of the company’s shares. Unlike previous annual meetings, Chesapeake did not webcast or teleconference Friday’s meeting, and no recordings or videotaping were allowed. Media in attendance also were not allowed into the meeting hall and watched the proceedings in another room. Journalists who did not attend relied on twitter feeds and third-party accounts to interpret what happened.

McClendon stayed focused on the positive, and he never discussed any of the financial dealings that have been written about him since March. Instead, he told the audience that the corporate governance changes would help the company succeed as it moves into “asset harvesting” after spending years acquiring big leaseholds and developing a premier set of assets that have made it the second largest natural gas producer in the country.

The CEO, however, appears to have lost his shareholders’ confidence. In a year that some have called the “shareholder spring” as some have forced change by gaining majority votes at annual meetings, Chesapeake basically has been taken over by its shareholders.

The shareholder-initiated proposed resolutions receiving majority votes cast were:

The proxy access resolution basically gives Chesapeake shareholders the right to oust members of the board every year. It follows one approved by Nabors Industries Ltd. last Tuesday, which was considered an industry first. However, a Chesapeake shareholder proposal relating to disclosing political lobbying expenditures was defeated; it only received the support of 36% of those casting votes. Another to approve named executive officer compensation was defeated after receiving the support of only 20% of the votes cast.

Shareholders approved a board proposal to amend the bylaws to implement majority voting in director elections. The proposal received the support of 97% of the votes cast but only 64% of the shares outstanding, which was less than the two-thirds required for an amendment to the bylaws. However, the board voted to adopt the bylaws based on shareholder support. A Chesapeake board proposal to amend the company’s long-term incentive plan passed with the support of 86% of the votes cast. However, another board proposal to approve the annual incentive plan for Chesapeake’s management team was defeated; only 31% were in support.

Asset Sales Mounting

In addition to new faces running the company, the asset base quickly is being transformed. Chesapeake on Friday capped a week of asset sales announcements by announcing it would sell its midstream businesses to Global Infrastructure Partners (GIP), which backed Chesapeake as it launched the business three years ago. GIP agreed to buy all of the assets for more than $4 billion cash in a sale that would net Chesapeake about $2.4 billion and cut previously budgeted midstream capital spending over the next three years by $3 billion.

In the first transaction Chesapeake agreed to sell its limited partner and general partner units in Chesapeake Midstream Partners LP (CHKM) to GIP for $2 billion in cash. GIP helped finance and then took a stake in CHKM when it was publicly launched in 2010 (see NGI, July 12, 2010; Sept. 28, 2009). The first half of the proceeds are expected on June 15, with a final closing and payment by June 29. Chesapeake said its net book value for the properties at the end of March was about $1 billion and it expects to report the same amount as a pretax gain on the sale.

Chesapeake also entered into a letter agreement to sell CHKM some Midcontinent gathering and processing assets through subsidiary Chesapeake Midstream Development LP (CMD), which in turn would be sold to GIP for more than $2 billion. Chesapeake’s net book value for these assets at the end of March was about $1.4 billion. The GIP letter agreement includes a 45-day exclusive negotiation period and a 45-day extension period if a purchase price has been agreed to and progress is being made toward closing.

Last week Chesapeake also agreed to sell 337,481 net acres in its prized Utica/Point Pleasant Shale, which would give it less than one million acres in the play. The Utica/Point Pleasant acreage encompasses 510,847 gross acres, is mostly in the wet gas/oil window of the play, land that Chesapeake had planned to target in its move to a more liquids position. Eighty percent already is held by production (HBP). As of May, Chesapeake had 1.3 million net acres in the Utica Shale (Pennsylvania and Ohio combined), according to figures compiled by NGI. The latest sale would leave the company with an estimated 963,000 net acres in the prospective play.

On Thursday Chesapeake also put up for sale 450,000 net acres in Northern Michigan, a leasehold that overlies two emerging resource plays, the Silurian A-1 Carbonate and the Ordovician Collingwood Shale. Both of the formations “offer the potential for wet gas production, with the strong possibility of oil and condensate production,” Chesapeake said. The leasehold crosses 20 counties.

The bid date for the Michigan acreage is June 29, with closing set for July 27. The bid date for the Ohio sale is July 11 with a closing date tentatively set for Aug. 17.

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