Exclusive: CEO's sales of well stakes raise questions at Chesapeake

Mon Apr 23, 2012 3:34pm EDT
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By Brian Grow and Anna Driver

(Reuters) - Chesapeake Energy Corp's chief executive came under fire last week after Reuters reported that he used his stakes in company wells to take out as much as $1.1 billion in personal loans.

Now, Reuters has found, CEO Aubrey K. McClendon has employed another way to cash in on a perk unique to the company he runs: He sold his share of two large energy plays at the same time the company divested its interest.

Analysts say the deals, which generated $6.5 billion in proceeds, pose a potential conflict because of the possibility that they could have been timed and structured to suit McClendon's personal interests, rather than those of the company he runs.

"I can imagine a scenario where Aubrey is suffering some financial distress and might want to get a deal done - and it's not the best price for the company," said Joseph D. Allman, oil and gas industry analyst at JPMorgan in New York. Because of the potential conflict, Allman said, Chesapeake should scrap the CEO perk that makes them possible.

McClendon's deals stem from his involvement in an incentive, unique to Chesapeake among large energy companies, called the Founder Well Participation Program. The well plan gives McClendon the right to purchase an interest of up to 2.5 percent in all the wells the company drills in a given year. In exchange, he pays an equal percentage of the costs.

Reuters reported last week that McClendon had used his stakes in thousands of Chesapeake wells as collateral for up to $1.1 billion in personal loans - the majority of which were extended to him by an investment management company, EIG Global Energy Partners, that is also a major investor in Chesapeake itself. The money was used to finance his participation in the well plan, Chesapeake said.

Chesapeake's shares fell sharply after the report. Some investors called for a management shake-up and full disclosure of McClendon's loans and other financial interests that may clash with those of the company. They say the loans are troubling because McClendon's big lender is simultaneously a major investor in Chesapeake, raising the possibility it received favorable terms. The size and terms of the loans also create the risk that McClendon could seek to influence corporate decisions on behalf of his lenders, instead of shareholders, analysts said.

On Friday, Chesapeake responded by disclosing the existence of McClendon's loans in a preliminary proxy statement, but it didn't report any amounts or terms.   Continued...

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. From a single 6,000-square-foot building in 1989, the multi-building complex today contains almost one million square feet of office space and includes employee perks like on-site Botox treatments at the headquarters. Chesapeake Energy Corp. CEO Aubrey McClendon is one of the most successful energy entrepreneurs of recent decades. But he hasn't always proved popular with shareholders of the company he co-founded, the second-largest natural gas producer in the United States. Now, a series of previously undisclosed loans to McClendon could once again put Chesapeake's CEO and shareholders at odds. Picture taken April 17, 2012. To match Special Report CHESAPEAKE-MCCLENDON/LOANS REUTERS/Steve Sisney