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Under pressure


Allegations mount against Chesapeake Energy CEO Aubrey McClendon as investors watch the stock price plummet.

Clifton Adcock May 9th, 2012

It’s fair to say that the past few weeks have not been kind to Chesapeake Energy co-founder, board chairman and CEO Aubrey McClendon.

Aubrey McClendon
Mark Hancock

A steady drip — perhaps more of a constant flow — of negative news stories has rocked the Oklahoma City-based company, starting with revelations published by Reuters on April 18 that McClendon took out $1.1 billion in personal loans over three years. The loans, which were through McClendon-controlled companies, were used to secure funding for a CEO perk known as the Founder Well Participation Program (FWPP).

The situation seemed to suggest a conflict of interest. The FWPP allowed McClendon to have a 2.5 percent stake in each well drilled, provided that he paid 2.5 percent of the drilling cost, Reuters reported. McClendon used the loans to pay for expenses on his end, raising questions

as to whether the CEO would act in the best interest of the publicly traded company or his own best interest because of his substantial debt.

Chesapeake’s stock dropped 10 percent the day the initial story came out.

The Reuters piece and subsequent stories also stated that while the deal was unusual, it wasn’t illegal. Moreover, news accounts noted that stockholders were not fully informed of the situation.

An April 26 follow-up story stated the Securities and Exchange Commission had begun an informal inquiry into FWPP.


Stripped title

After two weeks of blistering headlines and lawsuits filed by some shareholders, Chesapeake announced that it would be ending the FWPP 18 months early — in June 2014 — and that an independent, non-executive would replace McClendon as board chairman. McClendon will retain his position as CEO.

The reorganization comes amid Chesapeake’s increase in oil production because of falling natural gas prices and a decision to sell off some of its assets because of debt.

“I am completely supportive of the board’s plans to separate the positions of chairman and CEO and to bring an independent chairman to the board,” McClendon said in a written statement. “This action reflects our determination to uphold strong corporate governance standards and will also enable me to focus my full time and attention on execution of the company’s strategy, the implementation of our transformation into a major oil producer and the completion of our asset monetization and joint venture objectives.”

That same day, Chesapeake also released its first-quarter earnings. The report garnered mixed reviews from analysts; some pointed out that the energy giant missed its earnings per share and revenue projections, but had increased revenue from the first quarter of 2011.

“This has been a very challenging two weeks for all of our shareholders, bondholders and other stakeholders, and also for our friends and employees,” McClendon said in a conference call after the earnings report was released. “Your mother told you not to believe everything you read or hear for good reason, and that’s certainly been the case for the past two weeks.”

McClendon with Rob Lowe at an OKC Thunder game
Shannon Cornman

McClendon went on to say that he was “deeply sorry for all the distractions.”


'Poor governance’

While McClendon assured stockholders, another Reuters story had hit the wires. This one detailed a $200 million hedge fund McClendon ran with Chesapeake co-founder Tom Ward (now SandRidge Energy CEO) that traded in oil and gas, the same commodities produced by Chesapeake.

Critics said the hedge fund posed another possible conflict of interest, as Chesapeake holds large sway over the oil and gas markets and McClendon would have inside information about his company’s strategy. As Reuters reported, McClendon conceivably could have allowed the hedge fund to buy up a commodity prior to the company making major trades, thereby manipulating the commodity’s price before Chesapeake had a chance to make a move.

One analyst told Reuters that the allegations, if true, would be “even more alarming than the personal loans.”

Chesapeake stocks plummeted more than 14 percent that day, amid growing calls for McClendon to step down.

The second Reuters story hit just as U.S. Sen. Bill Nelson, D-Fla., asked the U.S. Department of Justice to investigate Chesapeake for potential fraud and price manipulation.

A Chesapeake spokesperson referred questions regarding the hedge fund to McClendon’s personal spokesman, Ron Hutcheson, who did not respond to Oklahoma Gazette’s requests for comment.

Philip Weiss, an oil and gas securities analyst for Argus Research Group, said the latest revelations only add to the company’s woes and reinforce the decision to instate an independent chairman.

“It’s further examples of poor governance at the company, further examples of a CEO who may have abused his position or taken unfair advantage of his position,” he said.

Weiss said it was a good idea to end FWPP, but questioned why it would take so long to come to an end.

“The interesting thing about it is, if you think about it, you can make the argument he didn’t want to [end the program immediately] because they’re ramping up their activity in all these liquid-rich plays where the wells will be more lucrative,” he said. “There’s probably more value in what they haven’t drilled than what they did.


Cult of personality

While most agree FWPP should be ended, installing the right person as chairman could help give investors confidence, said Arthur Smith of Triple Double Advisors, a Houstonbased investment firm specializing in oil and gas securities.

“It’s been warmly received by investors,” he said. “There’s a lot more to be figured out about what other moves the board will make, but it’s certainly a positive, particularly if they get the right non-executive chairman. I think that’s probably the No.

1 item discussed at the Petroleum Club, is who would be the right person to step in that role.

“That will be the next big issue:

Who is it and what sort of plan they will announce, in terms of reordering the board oversight of Mr.

McClendon. The right person I think will give the investment community a lot of comfort.”

Smith, who described the embattled CEO as a friend, also expressed confidence that investors want McClendon to remain at the helm of Chesapeake.

“You can say a lot of things about [McClendon], but he is a bigger-than-life individual,” he said. “What he has accomplished and the bold steps he’s taken and the money he’s moved around, I think that is one of the issues. The investment community doesn’t want Aubrey to go away because he is Chesapeake Energy, but what they do want is more order and discipline and [to address] conflicts of interest and governance.”


Nonprofits lend a hand

Debby Hampton speaks at a pro-Chesapeake news conference
Mark Hancock
Around 20 Oklahoma City nonprofits that have benefited from monetary and in-kind contributions from Chesapeake Energy held a news conference May 4 expressing their support for the company and CEO Aubrey McClendon.

The speakers, who included representatives from United Way, Regional Food Bank of Oklahoma, Horace Mann Elementary School, Allied Arts and the Oklahoma Center for Nonprofits, said much of what they do wouldn’t be possible without the financial, material and volunteer assistance of Chesapeake.

McClendon’s role and work in the nonprofit community was praised, with one speaker comparing him to George Bailey, the character played by Jimmy Stewart in the classic movie, It’s a Wonderful Life.

Debby Hampton, president and CEO of United Way of Central Oklahoma, conceded that Chesapeake had a role in organizing the news conference, but that many in the nonprofit sector had asked the company how they could help.

“It really started from the nonprofit sector, but, yes, we did contact Chesapeake before we scheduled this and had this press conference,” Hampton said. “When you have this amount of strong nonprofit CEOs, there’s never one person. It was kind of immediate; it was kind of a ripple effect of every nonprofit getting together and saying what could we do.”

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