[OKC] Why Chesapeake shareholders should worry about McClendon's big borrowing

[Bob Waldrop]

Great article from the Forbes website detailed the reasons why Chesapeake shareholders should worry about McClendon’s big borrowing. (Aubrey McClendon is the CEO and co-founder of Chesapeake Energy, one of the largest oil and gas producers in the US.)

Bob Waldrop, OKC

http://www.forbes.com/sites/christopherhelman/2012/04/19/chesapeake-mcclendons-big-borrowing/ 

Here’s a snip of the article, more text is at the link.

WHY CHESAPEAKE SHAREHOLDERS SHOULD WORRY ABOUT MCCLENDON'S BIG BORROWING.

Wednesday, in a story from Reuters, came revelations that Aubrey McClendon, chief executive of Chesapeake Energy, had borrowed more than $1.1 billion against his personal stakes in oil and gas wells controlled by Chesapeake.

The size of the loans is pretty shocking (equal to more than one-tenth of Chesapeake’s total long-term debt), as is the clear and undeniable implication that McClendon is up to his eyeballs in conflicts that should lead every shareholder to question whether he has their interests or his own at heart. At one point on Wednesday investors drove down Chesapeake shares more than 10%. They closed down 5.5% on Wednesday, and have fallen by half since last August, hammered by debt loads and low natural gas prices

Here is the core of what is wrong with McClendon’s massive borrowing: Chesapeake is severely capital constrained (a result of high debt loads, reckless spending on ever more shale gas acreage and rock bottom natural gas prices) to the point that the company is trying to sell billions of dollars in assets this year to make ends meet. At the same time this is going on, McClendon has been competing directly against his own company for access to the capital markets in order to shore up his own finances — without telling shareholders the extent of his financings.

Doesn’t he owe it to shareholders to put their capital needs ahead of his own? Shouldn’t shareholders know that the ceo of their company has found someone to lend him $1.1 billion against assets that they co-own with him? That’s an amount of money that is certainly material to a company with an equity market cap of $12 billion and debt load of $10 billion. This is an obvious conflict of interest, insufficiently disclosed, that should not be allowed to continue.

(Chesapeake, in its response to the revelations, insists that there’s no conflict, that the amounts of the loans are not material, that the company knew about the size of the loans, but that the board of directors neither approved the loans nor has any business overseeing McClendon’s personal transactions covering his personal assets.)

Key to these loans is a sweetheart perk through which Chesapeake gives McClendon the opportunity to buy a 2.5% stake in every well the company drills (more than 2,000 this year). The Reuters story revealed that McClendon has borrowed heavily against these well stakes, gleaning cash from investors including EIG Global Energy Holdings, a private equity group that helped finance Chesapeake’s recent foray into Ohio’s Utica Shale. EIG’s deal with McClendon guaranteed them 100% of the revenues from McClendon’s well stakes until EIG had achieved a 13% return on investment. What’s more,according to Reuters, after the principal is paid off, EIG gets a 42% share of production from those wells, in perpetuity.

Now sharp-penciled analysts and investors have known for years that McClendon has borrowed against or sold portions of his stakes in Chesapeake wells — there’s some blanket disclosures in the company’s proxy filings and after McClendon’s infamous 2008 financial meltdown the company agreed to front the CEO $75 million to pay his share of drilling costs. McClendon has raised millions more by selling interests in his wells to a variety of investors through vehicles known as volumetric production payments, or VPPs. But $1.1 billion is in a different ballpark.

And it’s not just this $1.1 billion in loans. I’ve also learned today that McClendon has entered into two private transactions called volumetric production payments, whereby he has collected more than $130 million upfront from banks and investors in return for delivering to them set amounts of gas from his wells for a certain period of time (in effect he’s sold them a temporary overriding interest). Though Chesapeake’s most recent proxy filing mentions that McClendon has done such VPPs, the deals were not announced at the time they were done, nor were the dollar values.


Much more at the link above.
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