Chesapeake Appoints Dunham Chairman, Replaces Four Directors

June 21 (Bloomberg) — Chesapeake Energy Corp. named former Conoco Phillips Chairman Archie Dunham to lead its board as the second largest U.S. natural gas producer struggles with falling energy prices and mistrust of its management.

Dunham, 73, fits Oklahoma City-based Chesapeake’s tradition of choosing leaders in sync with its culture. The Oklahoma native attended theUniversity of Oklahoma and spent almost five decades in the Oklahoma oil patch where Chief Executive Officer Aubrey McClendon got his start. McClendon will remain on the board as CEO after losing the chairman’s post amid scrutiny of his personal finances and potential conflicts of interest.

Chesapeake is racing to sell $7.4 billion in assets by the end of December to avoid a cash crunch that could cripple its drilling program. The company appointed four other directors today picked by major investors including Carl Icahn, with a mandate to rein in spending and risk-taking by the CEO.

“Now strong governance is essential to restoring trust,” Bill George, a director at Exxon Mobil Corp. and Goldman Sachs Group Inc., and a Harvard Business School professor, said in an interview before Dunham’s appointment was announced.

“McClendon is such an entrepreneur, and he seems to have gotten confused and acted like he still owned the company after he took it public.”

New Board

Chesapeake named Bob Alexander, R. Brad Martin, Frederic Poses and Vincent Intrieri to its board, according to a statement today from the Oklahoma City-based company McClendon co-founded 23 years ago.

Chesapeake declined 4.8 percent to $18.12 at the close in New York. The shares have fallen 19 percent this year as the impact of falling gas prices and soaring debt compounded the controversy over McClendon’s use of personal stakes in company- owned wells to obtain loans.

Dunham takes charge of a board reconstituted at the insistence of its two largest shareholders, Icahn and Southeastern Asset Management Inc. The company agreed on June 4 to let Icahn and Southeastern pick four new directors after Icahn likened the board to a fox that had “plundered the hen house.”

McClendon, who co-founded Chesapeake in 1989, was forced to surrender the role of chairman after revelations that he took personal loans from entities that also were involved in financial transactions with the company.

Ongoing Investigations

The board’s audit committee, the Internal Revenue Service and U.S. Securities & Exchange Commission are conducting reviews, Chesapeake has said.

Dunham retired two years after leading Conoco Inc. into a $25 billion merger with Phillips Petroleum Co. that created the third-largest U.S. oil company at the time. The 2002 deal capped a four-year consolidation in the U.S. oil industry that included the formation of Exxon Mobil and what is now BP Plc.

During his tenure at Conoco, the shares rose an average of 12 percent annually, outperforming Exxon Mobil and the Standard & Poor’s 500 Index.

Dunham dispatched Conoco’s engineers and geologists to explore far-flung prospects in Vietnam and the former Soviet Union at a time when the largest U.S. energy companies had dismissed domestic oilfields as largely played out. During that period, McClendon and Chesapeake co-founder Tom Ward were among the pioneers of new drilling techniques that in the next decade brought a renaissance in U.S. oil and gas production.

Eating Reindeer

Dunham joined Conoco in 1966 as an associate engineer and then rose through the ranks to CEO. Along the way, he honed the diplomatic skills required to win permission to drill for oil and gas internationally. During a trip to Siberia, he followed the lead of his hosts and ate raw reindeer dipped in blood.

“I just swallowed it whole,” Dunham said in a 1998 interview with Bloomberg during which he recounted the episode. “You can’t offend people.”

Under Dunham, Conoco was struggling to find new reserves of oil and gas, said John Parry, an analyst at IHS Inc. in Norwalk, Connecticut, who followed the company during Dunham’s tenure. “It had a lot of mature assets and they needed to move themselves into a growth mode,” Parry said.

The new chairman’s arrival will mark a shift in Chesapeake’s corporate strategy from a so-called wildcatter that explores high-risk oil and gas fields to a developer of previous discoveries focused on cutting production costs and shedding lower-profit assets.

First Task

Dunham’s first task will be to help McClendon find buyers for Chesapeake assets from Texas to Ohio to close a cash flow shortfall that could reach $22 billion by the end of 2013, said James Sullivan, an analyst at Alembic Global Advisors in New York.

Chesapeake outspent cash flow in 19 of the past 21 years as it acquired drilling leases from Appalachia to the Rocky Mountains and made some of the biggest onshore discoveries of the past 20 years, including the Haynesville Shale formation in Louisiana and the Utica Shale in Ohio.

Last month, Chesapeake warned that it may run out of money next year. The cash crunch could force the company to curtail some drilling projects and scale back its production targets.

The board’s new slate of independent directors will help oversee Chesapeake’s’ efforts to avoid that outcome.

Intrieri, 55, has worked for entities associated with Icahn since 1998, including as senior managing director of Icahn Capital LP. While attending Chesapeake’s annual meeting in Oklahoma City on June 8, he told McClendon he was “a great oil and gas man” in need of oversight.

New Directors

Martin, 60, formerly was chairman and CEO at Saks Inc., the department store operator. Alexander, 78, has the same alma mater as Dunham and serves on the board of CVR Energy Inc., which is mostly owned by Icahn.

Poses, 69, is a director at Raytheon Co. and is non- executive chairman at TE Connectivity Ltd. He has a business degree from New York University.

Chesapeake directors Richard Davidson, Kathleen Eisbrenner, Frank Keating and Don Nickles have resigned. The company is allowing V. Burns Hargis to remain on the board after Hargis and Davidson offered to resign following a June 8 shareholder vote opposing their re-election. Chesapeake said Hargis will remain in his position on the audit committee to help complete the review of McClendon’s finances.

“We welcome the new board chair and directors but the misguided decision to keep a director who was opposed by an overwhelming majority of investors tarnishes today’s announcement,” New York City Comptroller John C. Liu said today in an e-mailed statement.

Chesapeake was the worst performing stock in the Standard and Poor’s 500 Oil & Gas Exploration & Production Index this year until Icahn’s May 25 announcement that he’d taken a 7.6 percent stake and began pushing for reforms.

Exxon Mobil is the largest U.S. gas producer.

–With assistance from Carol Hymowitz and Jim Polson in New York, Mike Lee in Dallas and Edward Klump, David Wethe and Bradley Olson in Houston. Editors: Susan Warren, Jessica Resnick-Ault