Chesapeake CEO Continues to Have Financial Maneuvering Questioned

From Reuters:

(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.
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 precise amounts earned by McClendon on those deals remain unclear. That's because Chesapeake has never disclosed his returns on sales of his interests in the company's wells in Securities and Exchange Commission filings.
Chesapeake declined to comment on the transactions, citing pending shareholder lawsuits filed since last week in response to the loan article. The company had previously said it did not disclose McClendon's return on sales of his personal well stakes to the SEC because it views them as private transactions that are not required to be reported.
After Reuters asked Chesapeake last week about McClendon's benefit from selling his share of wells alongside the company, Chesapeake amended its preliminary 2012 proxy to mention the fact that McClendon has sold well interests. It left the amounts earned blank, and the proxy indicated that it would divulge data only from 2011, not prior years.
"From time to time, Mr. McClendon has sold (well plan) interests separately and concurrent with sales by the Company of its interests in the same properties," the company wrote. "(During 2011, Mr. McClendon advises that he realized $ million from such sales, net of his $ million share of deal costs. According to Mr. McClendon, his net investment in these properties was $ , including lease costs and well costs paid to the Company, less revenues paid by the Company.)"
The company's proxies have also mentioned a third way in which McClendon has monetized his well interests: He has sold future oil and gas production from his share of Chesapeake wells to investors in exchange for cash. But the proxy statements do not divulge the amounts or the timing. On April 19, Forbes reported McClendon raised $130 million from two such deals, known as volumetric production payments, or VPPs.
Chesapeake declined to comment on those transactions, saying they were private and citing the pending shareholder suit.
The sales of future energy production by McClendon prompted one analyst to say he believed such deals were a new risk for conflict of interest.
"If the CEO entered into a (volumetric production payment) for well interests, Chesapeake would not be able to shut in the well due to poor economics (i.e., $1.90 natural gas) without compromising the CEO's VPP transaction," said Tim Rezvan, an oil and gas industry analyst with Sterne Agee, who had downgraded Chesapeake shares last week on news of McClendon's loans. "It could present a conflict of interest between CEO Aubrey McClendon and VPP participant Aubrey McClendon."
Chesapeake spokesman Michael Kehs called that interpretation "inaccurate," saying: "The company can and has on multiple occasions shut in production from wells where the production is subject to a VPP transaction with a third party, including Mr. McClendon's."
In August, Reuters was first to report on another opaque personal transaction: how McClendon cashes in on the well plan by selling his share of the oil and gas alongside the company.
The one deal previously disclosed by Chesapeake came in March 2011, when the company sold acreage and producing oil-and-gas wells in Arkansas to mining giant BHP Billiton for $4.75 billion. In a filing with the SEC, Chesapeake said McClendon and entities he controls - Larchmont Resources LLC, Jamestown Resources LLC and Chesapeake Investments - were "parties to the purchase agreement."
The filing said McClendon and his affiliates received the same deal terms as Chesapeake. The documents didn't say how much McClendon received from BHP for his interest in the wells. The deal is mentioned again in the company's 2011 proxy statement, which notes that McClendon reimbursed the company for transaction costs related to the deal.
The other deal - in which Chesapeake did not disclose McClendon's personal participation in securities filings - came in July 2008, when the company sold land and producing gas wells in Oklahoma to BP Plc for $1.75 billion.
In response to questions from Reuters in August, a company spokesman said that "similar to the BHP transaction, Mr. McClendon and Chesapeake sold their separate assets to BP as requested by BP." The company said the deal was too small relative to Chesapeake's enterprise value at the time to warrant a filing that disclosed McClendon's personal participation.
McClendon has elected to take a 2.5 percent interest in Chesapeake wells in every quarter since the second quarter of 2003, according to data provided by Chesapeake. In 1999, McClendon did not participate in the well program. But in the other years from 1995 to early 2003, he took stakes ranging from 1 percent to 2 percent. He has elected to participate again this year, at 2.5 percent.
In its proxy statements, Chesapeake does report that McClendon is allowed to conduct a range of financial transactions with his well interests. And it says that McClendon has sometimes sold well interests at the same time as the company.
McClendon and Chesapeake have said there is no conflict of interest. The company says the well plan aligns McClendon's interests and Chesapeake's by requiring that he fund his share of the cost of production and participate in every well drilled in a given year.
More pay days from well sales may be in the pipeline for McClendon.
A prospectus seen by Reuters shows that Chesapeake is seeking to sell 37,800 net acres in West Texas. Selling alongside the company are two of McClendon's personal companies - Larchmont Resources and Chesapeake Investments. The prospectus was prepared by Albrecht and Associates, an oil and gas divestment specialist in Houston.
A projected price for the sale could not be determined. The deal, which was expected to close in December 2011, has not been completed. Harrison Williams, an Albrecht executive named in the prospectus, did not return a call seeking comment.
Also, Chesapeake has told investors it plans to sell its 1.5 million acres in the Permian Basin in West Texas and New Mexico, as part of its plan to raise as much as $12 billion through asset sales. Permian fields, which contain vast amounts of oil and natural gas, are red-hot properties among bidders.
Since 2008, Chesapeake has drilled at least 367 wells in regions that include the Permian Basin, according to the company's financial disclosures. The precise number of wells - and the value of McClendon's potential share - remains unclear.
Because McClendon is selling his personal well interests controlled by his own companies, he effectively becomes an additional - and potentially competing - participant in Chesapeake's deals, said analysts.
"If your CEO is no longer a partner, but a third party, it can introduce all sorts of problems," said Charles Elson, a corporate governance expert and professor of law at the University of Delaware. "The CEO and the company's interests may no longer be aligned."
(Reporting by Brian Grow and Anna Driver; editing by Michael Williams and Blake Morrison)

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