Aubrey McClendon: Chesapeake Energy’s Little Problem

Connecting the Dots: The Marcellus Natural Gas Play Players–Part 6

Shareholders of Chesapeake Energy received an unwelcome wake-up call on Wednesday, April 17, 2012.

Reuter’s headline screamed “Exclusive: Chesapeake CEO took out $1.1 billion in unreported loans”By Anna Driver and Brian Grow

Aubrey McClendon, the CEO of Chesapeake Energy Corp, has borrowed as much as $1.1 billion over the last three years against his stake in thousands of company wells – a move that analysts, academics and attorneys who reviewed loan documents say raises the potential for conflicts of interest.

The loans, which haven’t been previously detailed to shareholders, are used to fund McClendon’s operating costs for an unusual corporate perk that offers him a chance to invest in a 2.5 percent interest in every well the company drills. McClendon in turn is using the 2.5 percent stakes as collateral on those same loans, documents filed in five states show.

The size and nature of the loans raise questions about whether McClendon’s personal financial deals could compromise his fiduciary duty to Chesapeake investors, experts who reviewed the documents told Reuters.

Over the next few days as more information emerged and Chesapeake Energy attempted damage control, the market saw Chesapeake (CHK) shares hit a new 52-week low of $16.78

The damage control from Chesapeake has been, well, a bit peculiar and weak.  While the actual loan transactions and failure to disclose to the shareholders may be “legal”, it does bring up the issue of conflict of interest and makes one wonder what else is going on with McClendon.

Chesapeake Energy tried to ease concerns by citing a similar situation concerning Martha Stewart:

“Chesapeake says it didn’t have to say more and cites as legal justification a court ruling involving Martha Stewart.”

Ummmm… Martha Stewart ended up in jail.    OOOOOPSIE……

Comparisons of Enron’s deals and eventual collapse under the weight of its own arrogance were frequently mentioned in articles.

Recent History of Chesapeake Energy

The day before the Reuters story made shareholders’ spines shudder, Chesapeake Energy announced a public offering of its Oil Field Services.

The Wall Street Journal reports:

Chesapeake Oilfield Services Inc. hopes to raise up to $862.5 million in an initial public offering of stock, according to a filing Monday with the Securities and Exchange Commission. The oilfield services company—which owns more than 100 drilling rigs, a hydraulic fracturing subsidiary, an oil field tool rental business and a fleet of trucks that ferry drilling rigs and other heavy equipment—will continue to primarily serve Chesapeake Energy, the filing said. Both companies are based in Oklahoma City, Oklahoma.

Chesapeake Energy is the second largest natural gas producer in the U.S. and spent about $13.3 billion last year to drill and complete 1,662 wells, according to the filing. At year’s end, Chesapeake Energy employed more than 130 drilling rigs, more than twice as many as its nearest competitor, Exxon Mobil Corp.

The filing didn’t say how many shares Chesapeake Oilfield planned to sell in its IPO or in what range the company hoped to price them. It did say that underwriters Goldman Sachs Group Inc. G and Bank of America Merrill Lynch would have the option of selling up to $112.5 million worth of additional shares if demand warranted.

Chesapeake Energy has been attempting to raise cash and make its balance sheet more appealing by selling or spinning off assets.

The previous week, Chesapeake Energy announced three oil and gas asset monetization transactions for proceeds of $2.6 Billion.

Marketwatch reports:

Chesapeake has completed the sale of preferred shares of a newly formed unrestricted, non-guarantor consolidated subsidiary, CHK Cleveland Tonkawa, L.L.C. (CHK C-T), and a 3.75% overriding royalty interest in the first 1,000 new net wells to be drilled on CHK C-T leasehold and certain wells contributed at closing for proceeds of $1.25 billion. The purchasing investment group was led by GSO Capital Partners LP, an affiliate of the Blackstone Group , and included TPG Capital, Magnetar Capital and EIG Global Energy Partners. CHK C-T owns approximately 245,000 net leasehold acres in the Cleveland and Tonkawa unconventional liquids-rich tight sand plays in Roger Mills and Ellis counties, Oklahoma. Chesapeake has retained all the common equity interests in CHK C-T.

In a risky play, Chesapeake Energy has gone “naked”:

“….removed most of its 2012 derivatives positions, leaving the company naked to big dips in natural-gas futures prices just as they were headed for a ten-year low.
Late last year, the company removed most of its gas and oil hedges for 2012 and 2013, according to documents and people familiar with the matter, believing that prices were at or near a bottom. ” ~ CNBC, April 9, 2012

Definition of ‘Naked Option’:  A trading position where the seller of an option contract does not own any, or enough, of the underlying security to act as protection against adverse price movements. If the price of the underlying security moves against the trader, who does not already own the underlying security, he or she would be required to purchase the shares regardless of how high the price is. The potential for losses, then, can be unlimited, and as a result, brokers typically have specific rules regarding naked trading. Inexperienced traders, for example, would not be allowed to place this type of order.

In December 2011, Chesapeake Energy sold its Marcellus Shale gas gathering assets to Chesapeake Midstream Partners, LP, for $865 million.

Thick Skin?

The Two Sides of Aubrey, by Christopher Helman, a Forbes article in October 2011 describes McClendon as:

He’s a hero: Chesapeake Energy may earn $2 billion this year and could solve our energy problems. He’s a risk junkie: His aggressiveness could (and almost did kill) the company.

At a steak dinner with McClendon, Helman remarked further:

“He co-owns the restaurant and had already picked the wine, which was decanted two hours ahead of time. Only the royal stuff: a 1989 Petrus, a 1989 Haut Brion and, conspicuously, a 1982 Lafite Rothschild. Easily ten grand worth of tipple.”

Helman confesses to being critical of McClendon, “…called him everything from dangerous to overpaid and suggested that the company he built would fare better without him.”

McClendon maintains “a key to success in any walk of life is having a short memory and a thick skin…”

His response to a March 2012 Rolling Stones article left me with the feeling his skin isn’t all that thick.  The day after the Rolling Stone article appeared on the internet, Chesapeake Energy released a 2,872 word rebuttal.

Rolling Stone rebutted the rebuttal.   Chesapeake did not rebut the rebutted rebuttal.

Shell Games

Another story which should have sent red flares through the Chesapeake Energy shareholders’ morning newspaper was a December 2011 Reuters story By Joshua Schneyer and Brian Grow entitled Special Report: Energy giant hid behind shells in “land grab”.

The company issuing the rejections wasn’t much of a business at all. It was a shell company – a paper-only firm with no real operations – called Northern Michigan Exploration LLC.

One jilted land owner, Eric Boyer-Lashuay, called to complain to the broker who had handled his lease. Northern, he recalls saying, is “a shell company … a blank door with no one behind it.”

Today, he puts it this way: “It was all a fake, all a scam.”

Northern has voided hundreds of land deals, and was indeed a facade – a shell company created so that one of America’s largest energy companies could conceal its role in the leasing spree, a Reuters investigation has found. Oklahoma-based Chesapeake Energy Corp., the nation’s second-largest gas driller, was behind the entire operation.

Chesapeake had created one shell company that set up another, Northern Michigan Exploration. Next, Northern hired brokers who signed leases with residents such as Boyer-Lashuay. And those brokers were under strict orders not to divulge Chesapeake’s role, records reviewed by Reuters show.

In fact, the effort in Michigan was directed from the very top – by Chesapeake’s CEO, Aubrey McClendon. In corporate filings that Chesapeake made public earlier this year – nine months after McClendon’s agents began signing Michigan land leases – McClendon is named as the chief executive officer of Northern, the shell company that voided hundreds of those leases.

How many other shell companies does Chesapeake have?

On the last pages of Chesapeake Energy – POSASR-20110208, Exhibit-4 document, Jennifer M. Grigsby is listed as “Senior Vice President, Treasurer and Corporate Secretary of the Company and of the Subsidiaries listed below”.

Northern Michigan Exploration LLC is on the list, as well as companies with exotic names such as Winter Moon Energy Company, L.L.C., Gothic Production, L.L.C. and Empress, L.L.C. 

An internet search turned up no websites for these 4 companies.

Overseeing audits of Chesapeake is PriceWaterhouseCoopers (PWC).  They received a little less than $3million to look at the books.  PWC were also auditors for Enron and American International Group, Inc. (AIG).  We know how well that worked out.

PWC’s splash graphic on their website boasts “..Rethinking risk management for new market realities…”.    Seems right up Chesapeake’s alley.

The Aubrey Problem

From 2006 through the first half of 2008, Chesapeake’s board granted McClendon shares of restricted stock. McClendon had borrowed heavily to bet even more of his stock holdings. When Wall Street crashed in October of 2008, McClendon was caught in a margin call. He was forced to sell 31.5 million shares of Chesapeake over a 3-day period.  According to a company statement this was “substantially all” of his holdings.

2008 Crash

“My confidence in Chesapeake remains undiminished, and I look forward to rebuilding my ownership position in the company in the months and years ahead,” McClendon stated in response to his losses.

McClendon’s losses lasted for about 82 days.  His handpicked Board of Directors bailed him out. His 2007 5-year employment agreement was thrown out.  On December 31, 2008, the Chesapeake board presented McClendon with $75million bonus and a new pay package.

The board also agreed to purchase McClendon’s antique maps for $12.1 million.  Shareholders were upset and sued Chesapeake. It took until this year for a settlement to be reached, whereby McClendon will return the $12.1 million + interest. He will get his maps back.

Oklahoma judge approves Chesapeake settlement in shareholders’ lawsuit

An Oklahoma County judge has signed off on a settlement in a lawsuit filed by Chesapeake Energy Corp. investors upset over CEO Aubrey McClendon’s compensation in 2008.

BY JAY F. MARKS – January 31, 2012

Excerpt:

Five groups, led by the Louisiana Municipal Police Employees’ Retirement System, filed lawsuits against Chesapeake and its board.

The parties reached a settlement in the case last fall, calling for McClendon to buy back his map collection while the company adopted “significant” governance reforms.

“This is a rare concession by Mr. McClendon,” said attorney Marc Gross, who represented the plaintiffs in the case. “We’re very proud to have gotten this settlement.”

Oklahoma County District Judge Dan Owens accepted the settlement Monday morning, despite objections from two shareholders.  Owens said Chesapeake has about 660 million outstanding shares, but only two shareholders voiced any complaint with the settlement, leading him to conclude it is fair and reasonable.

The judge is ready to sign off on the agreement, although the Chesapeake shareholders who objected to the deal still can appeal his ruling.  Attorneys on both sides of the case were pleased the judge agreed to accept their settlement agreement.  Gross said it is unusual for companies or executives in such securities cases to make significant payments like McClendon has agreed to do. He will pay $12.1 million, plus interest, for his map collection.  Gross also said Chesapeake has taken steps to establish a review process to avoid such compensation issues in the future.  “We’re very pleased with the outcome,” he said.  Chesapeake did not admit any wrongdoing in the settlement.

“Chesapeake stands behind its board’s approval of Chief Executive Officer Aubrey McClendon’s 2008 incentive award, but feels this settlement is in the company’s and its shareholders’ best interest,” said Henry Hood, the company’s general counsel. “We are pleased to put this matter behind us and hope shareholders and the public will focus on our efforts to promote natural gas as the clean fuel of choice for power generation and transportation, creating American jobs and reducing dependence on foreign oil.”

Did you notice the attempt to distract attention from the settlement?  “We are pleased to put this matter behind us and hope shareholders and the public will focus on our efforts to promote natural gas as the clean fuel of choice for power generation and transportation, creating American jobs and reducing dependence on foreign oil.”

 

The Unreported Loans

Chesapeake has a little program called Founder Well Participation Plan (FWPP).  It grants McClendon a 2.5% direct stake in the drilled wells.   The FWPP does not allow McClendon to “cherry pick” the most profitable wells. It’s all or nothing.

From Reuters Special Report: Chesapeake CEO took $1.1 billion in shrouded personal loans

But because McClendon is using the loans to finance his participation in the well plan, he defrays his risks. Two of McClendon’s lenders, both private equity firms, in turn spread the loan risks to other investors by raising money from state pension funds and other investors to fund them. Those insights emerge from a February 2011 document detailing a meeting between McClendon’s largest personal lender and a prospective investor.

“If he hasn’t had to put up any of his own money, how is that alignment” of McClendon and Chesapeake’s interests, asked Mark Hanson, an analyst with Morningstar in Chicago.

In Louisiana, Texas, Arkansas, Pennsylvania and Oklahoma, Chesapeake files conveyance forms and is a regular practice.  A conveyance allows the transfer of ownership or interest in real property from one person to another by a document, such as a deed, lease, or mortgage

Pennsylvanians are slowly becoming aware of the problem with leasing property and conveyances.

New surprise in gas boom  Notify owners of mortgage

Times-Tribune August 3, 2011

Excerpt:

Bradford County landowners, who have negotiated mineral rights leases, have received a surprise on the financial side.  Like most companies, gas companies use lines of credit secured by company assets to finance ongoing operations. Gas company assets include the leases by which they access natural gas.

As revealed during a recent Bradford County commissioners meeting, Chesapeake Energy Corp. has mortgaged the mineral rights to about 1,000 properties in Bradford County, in order to access a $5 billion line of credit.

The problem is that landowners who have leased those mineral rights typically are not aware of the mineral rights mortgage until they attempt to use their land as collateral for financing of their own. Then the title search reveals the mineral rights mortgage.

Since the mineral rights are distinct, the company’s use of the lease to secure its financing should not adversely affect a landowner’s attempt to secure financing.

But that’s up to individual lending institutions. According to Diane Ward, a former supervisor of Standing Stone Twp., some banks have rejected loan applications from landowners because of the company’s mineral rights mortgage.

With McClendon’s loans and use of these wells and leased properties as collateral – where does it leave the property owners in the event of a default?

According to News-OK:

Chesapeake Energy Corp. CEO says he began borrowing in 1993

BY JAY F. MARKS – April 27, 2012

Chesapeake Energy Corp. CEO Aubrey McClendon has been borrowing money to cover his share of the company’s drilling costs since the well participation program began in 1993, he revealed Thursday.

McClendon and his companies — Arcadia Resources LP, Larchmont Resources LLC and Jamestown Resources LLC — own oil and natural gas reserves worth $6 million more than they owed on them at the end of 2011, according to his disclosure statement.

McClendon also sold a share of his holdings last year for $108.6 million, netting about $61 million before taxes.

Despite that profit, McClendon’s cumulative expenditures under the program have “significantly” exceeded production revenues because of increasing capital costs, according to Chesapeake’s proxy statement.

McClendon and his affiliates owed $846 million on loans secured by his interest in wells granted to him by the shareholder-approved Founder Well Participation Plan as of Dec. 31.

The program is expected to be shut down before its scheduled expiration in 2015, the company announced Thursday, citing an agreement between McClendon and its board.

NOTE: We see yet another personal corporation added to the list: Arcadia Resources LP.  How many other personal corporations are there?  Were the Board of Directors aware of them?

I think I’m having a Nixon-Watergate flashback….. What DID they know and WHEN DID they

know it?

Summary Table

Source: Supplemental Disclosure Regarding Aubrey K. McClendon’s Interests in Chesapeake Energy Corporation’s Founder Well Participation Program

(1) Includes amounts borrowed to pay well costs incurred on wells or leasehold for which no proved reserves have been booked.

(2) This does not include unproved reserves (i.e., probable and possible).

(3) This does not include any value for unproved reserves (i.e., probable and possible) or leasehold.

(4) Based on reporting rules of the Securities and Exchange Commission, calculated using an annual discount rate of 10% and the unweighted arithmetic average of prices on the first day of each month in 2011. At PV9, the value would be $447 mm. This does not include any value for (a) unproved reserves (i.e., probable and possible); (b) proved undeveloped reserves or (c) leasehold.

Per Reuters – McClendon borrowed through three companies he controls.  These are Chesapeake Investments LP, Jamestown Resources LLC, and Larchmont Resources, LLC.   It affords him the opportunity to buy the very same well stake which he uses as collateral against the loans.

 Source: From Reuters Special Report

EIG Global Energy Partners spun off from Trust Company of the West (TWC) in January 2011 to form its own independent investment company.

Union Bank is a subsidiary of UnionBanCal Corporation.

UnionBanCal Corporation is a wholly owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd., which is a subsidiary of Mitsubishi UFJ Financial Group, Inc.

At a February 2011 meeting between EIG and the New Mexico State Investment Council, the state’s public investment fund, EIG chief operating officer Randall Wade sought a $50 million investment from New Mexico.

When asked about a prior EIG investment in McClendon’s well interests, Wade boasted EIG had known Chesapeake for more than 25 years and “provided pre-IPO financing for them in the late 1980s.”

Those tight bonds, Wade said, have created other unique opportunities for EIG.

“In fall 2008, Mr. McClendon didn’t have liquidity to participate in the (well) program in 2009, at which point EIG entered into discussions with him” and ultimately formed a special purpose vehicle called Larchmont Resources, Wade said.

Through Larchmont, EIG acquired the rights to all of McClendon’s well stakes for 2009 and 2010. EIG then set up a new special purpose vehicle – Jamestown Resources – to control McClendon’s well shares in 2011, with rights to 2012, Wade said.

EIG’s investments have been extremely profitable. “EIG sweeps 100 percent of the cash flow generated by those projects until EIG has gotten all of its money back plus a 13 percent realized return,” Wade told New Mexico investors. EIG also gets a 42 percent cut of McClendon’s share of the well profits “in perpetuity.”

Chesapeake Energy Corporation was founded in 1989 by McClendon and Thomas “Tom” Ward. Ward was President and Chief Operating officer until 2006.

Ward purchased a significant interest in SandRidge Energy in 2006 and became its CEO and Chairman.  He left Chesapeake Energy at that time.

McClendon started his first oil and natural gas investment company, Chesapeake Investments LP, in 1982.   A 1997 SEC filing describes Chesapeake Investments as “… an Oklahoma Limited Partnership, having a business address of  6100 North Western Avenue, Oklahoma City, Oklahoma 73118.  Mr. McClendon is the sole general partner of CI. CI is principally engaged in the ownership of working interests in oil and gas wells and leases.”

Per Rolling Stone article:  The Big Fracking Bubble: The Scam Behind the Gas Boom, By Jeff Goodell. March 1, 2012:

As McClendon put it in a conference call with Wall Street analysts a few years ago, “I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet.”

One needs to ask – more profitable for who? And is Chesapeake Energy in the business of oil & gas or real estate flipping?

Cows and Basketball
Oil and gas wells and leases aren’t the only interests of Chesapeake Investment.   It also has interests in cows, specifically beef cows, and basketball.

An internet search revealed Chesapeake Investments has 50% interest in Heritage Beef Cattle Company, LLC, which has locations in Haskell, Labette and Pawnee Counties of Kansas and Wheeler County, Texas. Kathleen McClendon is also listed as an owner of the Haskell and Wheeler county locations.

The other 50% is owned by Tlw Investments Inc, owned by Tom Ward.

Related is another company called Heritage Feeders LP with  Aubrey & Kathleen McClendon and Tom Ward listed as owners.

Source: http://farm.ewg.org
Forbes named Tom L Ward #155 of the 400 richest Americans in 2008.

Ward’s bio:

Made fortune with former rival Aubrey McClendon at Chesapeake Energy. As private as McClendon is public. Struck out on his own 2006, paid $500 million for controlling stake in Texas gas producer Riata Energy. Renamed SandRidge Energy; fifth-most-active driller of new natural gas wells in America. Production up 83% in first 6 months of 2008. Took public last November; stock down 20% since. Owns stake in basketball’s Oklahoma City Thunder, cattle ranches, feedlot operations. Founded White Fields home for troubled boys in Oklahoma.

McClendon – Ward connections

Ward also took part in the FWPP.  Fox Business reports:

Ward, now the chief executive of SandRidge Energy Inc. (SD), said during his time at Chesapeake he opted to buy stakes in Chesapeake’s wells every year between 1989 and 2006, a period he said during which the company drilled “tens of thousands” of wells. He used the stakes in the wells as collateral on personal loans, he said, but went through banks that had no business dealing with Chesapeake. Ward declined to give the amount of the loans.

“I had personal loans against a part of the investments,” Ward told Dow Jones. “It was just traditional bank debt.”

Ward said he sold his stakes in Chesapeake wells to third-parties in 2008 as natural-gas prices fell by more than half after reaching a peak of $13 a million British thermal units. Ward declined to say how much money he received from the sale or name the buyers.

“I sold the wells for more than what was owed,” Ward said.

Wonder if Ward is doing the same type of deals with SandRidge interests?

Gas, Oil or Real Estate?

Monday (4/23/12) – Reuters published another article:  Exclusive: CEO’s sales of well stakes raise questions at Chesapeake

Excerpt:

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.

Excerpt:

In the two asset sale deals, one in 2011 in Arkansas worth $4.75 billion and one in 2008 in Oklahoma worth $1.75 billion, McClendon sold his interests in Chesapeake-controlled wells and acreage when the company divested its interests in the same properties.

The financial advisers for these transactions, as well as many others on behalf of Chesapeake Energy, is the firm of Jefferies & Company, specifically the Jefferies Energy Investment Banking Group  Chairman of the Energy Investment Banking Group is Ralph Eads III.

From the New York Times, Eads is described as a Small Player on Wall Street Carves Out a NicheBy THOMAS KAPLAN – NY Times, Nov. 22, 2010

Excerpt:
“A particular bright spot has been in energy. In addition to bankers like Mr. Eads, Randall & Dewey also brought with it a large technical team of geologists and other experts. Mr. Eads credits them with reaching the conclusion that exploring shale formations could be the next big thing. That was three and a half years ago, before even many energy companies were interested in shale.

That got Mr. Eads thinking: if there is all this gas available to be extracted, who is going to pay for it?

“It was very clear to me that the holders of acreage did not have enough capital to be able to develop the assets themselves,” he said. “This was going to have to be financed in large part by the industry.”

Among the first people to whom Mr. Eads reached out was Aubrey K. McClendon, the chief executive of Chesapeake Energy, who decades earlier had been his fraternity brother at Duke University. Jefferies has advised Chesapeake on more than 15 deals over the last five years — most recently last month, when the Chinese state-run oil company Cnooc struck a $2.2 billion partnership with the company to develop a South Texas shale deposit.

“Certainly with regard to J.V.’s, Ralph is considered by me — and is also generally considered by others — to be the most accomplished energy investment banker in the business, bar none,” Mr. McClendon said of Mr. Eads’s role in joint venture deals.

Eads is on the board of Trustees for the American Clean Skies Foundation (ACSF), a Chesapeake Energy front group, and a trustee of Duke University.  (McClendon is also a trustee of ACSF.)

Xiqing Gao is President and Investment Manager for China Investment Corporation (CIC) which has a minority stake in the CHK-Utica deal between Korea Investment Corporation and Chesapeake.  Gao is a Duke University Trustee.

Dominic Dell’Osso is another Jefferies – Chesapeake connection. In 2008, Dell’Osso left Jefferies as an investment banker to take a position as Vice President of Finance and Chief Financial Officer of Chesapeake’s wholly-owned midstream subsidiary Chesapeake Midstream Development, L.P., Dell’Osso Chesapeake’s new Senior Vice President and Chief Financial Officer in 2010.

Dell’Osso replaced  “Marcus C. Rowland, 58, its Chief Financial Officer for the past 18 years, will resign as of October 29, 2010 to join Cisco, Texas-based Frac Tech Services, LLC as its President. Frac Tech is one of the largest providers of hydraulic fracturing services in the U.S. Chesapeake has invested approximately $375 million in Frac Tech and owns an approximate 26% interest in the company.”

Exactly what part Eads and/or Dell’Osso played in the 2008 and 2011 transactions is unknown at this time, but we do know Jefferies & Company acted as Financial Advisers, and “someone” knew of McClendon’s sale of his shares and “reinvestment” as a purchaser through his 3 personal corporations.
There were two transactions in 2008 between Chesapeake and BP mentioned in this 2008 BP announcement:

Chesapeake Energy Corporation and BP America Announce Fayetteville Shale Joint Venture

OKLAHOMA CITY, OK AND HOUSTON, TX, SEPTEMBER 2, 2008 – Chesapeake Energy Corporation (NYSE:CHK) and BP America (NYSE:BP) today announced the execution of a Letter of Intent for a joint venture whereby BP will acquire a 25% interest in Chesapeake’s Fayetteville Shale assets in Arkansas for $1.9 billion.

Excerpt:

BP will pay $1.1 billion in cash at closing and will pay a further $800 million during the remainder of 2008 and in 2009 by funding 100% of Chesapeake’s 75% share of drilling and completion expenditures until the $800 million  obligation has been funded. Chesapeake plans to continue acquiring leasehold in the Fayetteville Shale play and BP will have the right to a 25% participation in any such additional leasehold. The transaction is subject to the execution of mutually acceptable definitive documentation that the companies anticipate executing within the next week and closing is anticipated to occur later this month.

Excerpt:

Just a month after closing the sale of all our Arkoma Basin Woodford Shale assets in Oklahoma to BP for $1.7 billion, we are pleased to now announce a second major transaction with BP for a 25% interest in our Fayetteville Shale assets in Arkansas for $1.9 billion.

Excerpt:

“The PXP Haynesville Shale joint venture and the BP Fayetteville Shale joint venture together will pay for approximately $2.5 billion of Chesapeake’s drilling and completion expenditures currently planned for the second half of 2008 through 2010. As previously announced, we are also pursuing a similar transaction involving our Marcellus Shale assets with others in the industry that we hope to complete by year-end 2008.”

Per Reuters: Special Report: Chesapeake CEO took $1.1 billion in shrouded personal loans

McClendon’s biggest personal lender, EIG, has been a big financier for Chesapeake, too.

In November, Chesapeake raised $1.25 billion from a group of investors including EIG through the sale of “perpetual preferred shares” in a newly formed entity, Chesapeake Utica LLC, which controls about 800,000 acres of oil and gas-rich land in Ohio. The sale offers lucrative terms to EIG investors, paying an annual dividend of 7 percent and royalty interests from oil and gas wells, according to analysts.

On April 9, the company announced a nearly identical deal to raise another $1.25 billion from EIG and other investors, in another new subsidiary called CHK Cleveland Tonkawa.

Dividends on preferred shares are controversial because they are paid before regular dividends owed to common shareholders. “Basically it’s a form of more expensive debt,” Morningstar’s Hanson said. “It makes it appear that it’s not debt, but it sits on top of obligations to the common shareholder.”

The fact that McClendon’s largest personal lender received favorable terms on its Chesapeake investments caused some Wall Street analysts to call for more information about McClendon’s loans.

Damage Control
Press Release from Chesapeake Energy, 4/26/2012: Chesapeake Energy Corporation’s Board and CEO Aubrey K. McClendon Agree to Negotiate Early Termination of Founder Well Participation Program – CEO Agrees to Separately Provide Enhanced FWPP Disclosure

Chesapeake Energy Corporation today announced that its Board of Directors has determined that it does not intend to extend the company’s Founder Well Participation Program (FWPP) with its chief executive officer, Aubrey K. McClendon, beyond its present 10-year term ending December 31, 2015.

Following consultation with the company’s Board of Directors, Mr. McClendon will separately disclose supplemental information regarding the interests he has acquired through the company’s Founder Well Participation Program as of December 31, 2011. The company also announced the Board of Directors is reviewing the financing arrangements between Mr. McClendon (and the entities through which he participates in the FWPP) and any third party that has had or may have a relationship with the company in any capacity.

Chesapeake also wishes to clarify a statement appearing in its April 18, 2012 press release captioned “Chesapeake Energy Corporation General Counsel Henry J. Hood Issues Statement.” The statement that “the Board of Directors is fully aware of the existence of Mr. McClendon’s financing transactions” was intended to convey the fact that the Board of Directors is generally aware that Mr. McClendon used interests acquired through his participation in the FWPP as security in personal financing transactions. The Board of Directors did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions.

Is your head spinning over that one?  FULLY AWARE actually means GENERALLY AWARE?  Since when?

To repeat: ” The Board of Directors did not review, approve or have knowledge of the specific transactions engaged in by McClendon or the terms of those transactions.”

So they were Fully Aware, but now only Generally Aware but had no knowledge of specific transactions?  So they kind of knew but not really knew McClendon was up to something, but didn’t know what???

 

I think I’m having a Nixon-Watergate flashback….. What DID they know and WHEN DID they know it?

Damage Control Too Little Too Late?
Within a couple hours of the 4/26 Chesapeake Energy press release made its way into the news, Reuters dropped another shoe.
SEC starts probe of Chesapeake CEO’s well stakes – Reuters, April 26, 2012

(Reuters) – The Securities and Exchange Commission has opened an informal inquiry into Chesapeake Energy Corp.’s controversial program that granted Chief Executive Aubrey McClendon a share in each of the natural gas producer’s wells, a source familiar with the matter said on Thursday.

That investigation, being led by the SEC’s office in Fort Worth, Texas, comes after Reuters reported about loans McClendon had obtained on those wells that raised concerns about a potential conflict of interest by the company’s CEO.

Note: This is an INFORMAL INQUIRY, the first of many steps the U.S. Securities and Exchange Commission may take.

Per SEC Page:  All SEC investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. With a formal order of investigation, the Division’s staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can authorize the staff to file a case in federal court or bring an administrative action. In many cases, the Commission and the party charged decide to settle a matter without trial.

Common violations that may lead to SEC investigations include: misrepresentation or omission of important information about securities; manipulating the market prices of securities; stealing customers’ funds or securities; violating broker-dealers’ responsibility to treat customers fairly; insider trading (violating a trust relationship by trading on material, non-public information about a security); and selling unregistered securities.

The news of the SEC informal inquiry was followed by: S&P cuts Chesapeake Energy rating to ‘BB’ ~ Thu Apr 26, 2012 6:43pm GMT

Overview     

U.S. natural gas producer Chesapeake Energy Corp. has announced that it is negotiating an early termination of the Founder Well Participation Program (FWPP) after revelations about the CEO’s personal transactions revealed shortcomings in the company’s existing corporate governance practices. The board is currently reviewing financing agreements between the CEO and third parties.

Turmoil resulting from these developments could hamper Chesapeake’s ability to meet the massive external funding requirements stemming from its currently weak operating cash flow and continuing aggressive capital spending.

We are lowering our corporate credit and senior unsecured debt issue ratings on Chesapeake to ‘BB’ from ‘BB+’, and lowering the ratings on two affiliates–Chesapeake Oilfield Operating LLC and Chesapeake Midstream Partners L.P.          

    — We are placing all these ratings on CreditWatch with negative implications.        

Rating Action         

On April 26, 2012, Standard & Poor’s Ratings Services lowered its ratings on Oklahoma City-based Chesapeake Energy Corp., including the corporate credit       rating to ‘BB’ from ‘BB+’, and lowered ratings on two related entities–Chesapeake Oilfield Operating LLC and Chesapeake Midstream Partners L.P. At the same time, we placed all these ratings on CreditWatch with negative implications.

Rationale     

The downgrade and CreditWatch placement reflect our view that recent revelations about personal transactions undertaken by Chesapeake’s CEO relating to the company’s unusual FWPP underscore shortcomings in Chesapeake Energy Corp.’s corporate governance practices.


Connecting the McClendon “dots”

Shareholder’s Battle

Chesapeake’s CEO should be replaced: Argus

Reuters – Friday  Apr 20, 2012

(Reuters) – Chesapeake Energy Corp’s chief executive officer or board, or both, should be replaced because of a growing debt pile, the opaque nature of the oil and gas company’s finances and CEO Aubrey McClendon’s “questionable” transactions with the company, Argus Research oil analyst Phil Weiss said on Friday.

“When we consider the full financial picture at Chesapeake, including its high debt levels, its use of financial engineering, the relatively low quality of its financial data, the questionable nature of some of the CEO’s transactions with the company, and the apparent unwillingness of the board to put a stop to at least some of these practices, we believe the best thing for investors would be to replace the board and/or the CEO,” Weiss wrote in a note to clients.

For a number of years, the Shareholders have unsuccessfully attempted to change Chesapeake’s Board of Directors.  As noted in more than one article, McClendon is well insulated by his handpicked board.

Two of more interesting board members are Don L Nickles, and Frank Keating.

Don Nickles is former Senator Don Nickles (R-OK).   He founded the Nickles Group in 2005.

“In his tenure as United States Senator, Nickles built a legacy of advancing free enterprise causes, from natural gas deregulation and repeal of the windfall profits tax in the 1980s, to repeal of onerous ergonomics regulation and the fight against federalized health care during the Clinton Administration. He was the author of the Congressional Review Act and the Child Citizenship Act, and the principal sponsor of President Bush’s economic growth package in 2003, which cut capital gains and corporate dividend taxes to 15 percent.

Nickles was chairman of the influential Senate Budget Committee during his last two years in the Senate, and was a senior member of both the Senate Finance Committee and the Energy and Natural Resources Committee.”

The Nickles Group is a lobbying firm providing services such as Legislative Consulting, Political Navigation, Coalition Building, and Policy Development.

During his term as Senator, Nickles was a member of the American Legislative Exchange Council (ALEC).   While he was Assistant Minority Leader in the U.S. Senate, ALEC began a new alumni forum for former members who serve in public office, called the “ALEC Alumni Forum.” It was launched in 2001 and is “charged with developing a national forum to encourage improved communications among current and former ALEC members. Nickles is now an ALEC Alumni.

Frank Keating (R) is the former Governor of Oklahoma from 1995-2003, and is now CEO for the American Bankers Association.  He was a former Assistant Secretary, Department of Treasury.

About the American Bankers Association

Founded in 1875, the American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $13 trillion banking industry and its two million employees.

While Governor, Keating was a member of ALEC, and is now ALEC  “Governors Alumni”.

Chesapeake was a “Director” level sponsor of 2011 American Legislative Exchange Council Annual Conference, which in 2010, equated to $10,000.

“Kick in the shins, for sure”
It’s now the weekend, McClendon will have some time to rest and perhaps ponder over the events of the past few days. Perhaps he will have the same reaction as he did when he almost lost his entire stake in the 2008 margin call?   In an interview at the time, he called the loss—some $2 billion on paper—a “kick in the shins, for sure.”

The weak-knee Board of Directors indicated they will “rein in” McClendon. How successful they will be remains to be seen.  Market response was at best – “tepid”.

Rumors of a take-over by Exxon-Mobil are making the rounds. For $250, the Revere will sell you a report called “Merger and Acquisition Scenario – Exxon Mobil Corp (XOM) and Chesapeake Energy Corp (CHK)”.

The SEC indicated they would be doing an informal inquiry, followed by news the S&P had downgraded Chesapeake Energy from BB+ to BB.

As if all of this wasn’t enough for the Chesapeake public relations people to juggle, a Chesapeake owned natural gas well near Douglas, Wyoming blew out, leaking natural gas and drilling mud. People living near the blow-out were notified and about 60-65 residents were evacuated.

Will McClendon consider this week a kick in the shins? Or is it a kick connecting to an area somewhat higher?

 

 

 

 

 

 


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