Tuesday, May 8, 2012

More Disturbing Reports Regarding Chesapeake

From the Chicago Tribune:
In its latest employment contract with CEO Aubrey McClendonChesapeake Energy Corp gave him permission to trade commodities for himself after he already had begun doing so.
Giving the CEO explicit license to play the markets represented an extraordinary incentive that enhanced one of corporate America's most generous compensation plans and reinforced the unique treatment afforded to McClendon by Chesapeake.
Oil and gas producers say they typically prohibit such trading by executives because of the potential for conflicts of interest. Indeed, Reuters found that McClendon, 52, was granted greater leeway to participate in external ventures than were his top lieutenants.
The 2009 contract did, however, limit McClendon in at least one way: Months after his personal hedge fund shut down, the agreement explicitly banned McClendon from taking an active role in any hedge fund.
The contract raises new questions about what Chesapeake board members knew of McClendon's personal investments, and whether his dealings might be at odds with his fiduciary responsibilities as head of the second-largest natural gas producer in the United States.
It isn't clear why Chesapeake changed the contract. Two board members declined to comment, and Chesapeake spokesman Michael Kehs said only that McClendon's employment contracts "fall under board review." Through a personal spokesman, McClendon also declined to comment.Some lawyers and commodity-trading analysts said they were troubled by provisions in McClendon's agreements with the company. At a minimum, they said, McClendon could be distracted from his job at Chesapeake by his outside business activities.
They also said McClendon could have used privileged Chesapeake information to advance his own trading.
"This is edge-of-the-universe contract language," said Saul Cohen, a retired securities lawyer who formerly served as general counsel at investment bank Lehman Brothers.
Last week, Chesapeake's board stripped McClendon of his chairmanship after Reuters reported that he had taken $1.1 billion in personal loans against his stakes in Chesapeake wells during the past three years. The loans, which came mostly from an investment-management company that also did business with Chesapeake, hadn't been disclosed to shareholders. The Securities and Exchange Commission and the Internal Revenue Service have launched inquiries.
Read the rest of the article here.

Another analysis of the concerns stemming from Chesapeake's dealings comes from Rigzone.

For the past few weeks, energy investors have been treated to a spectacle involving corporate governance of the second largest natural gas producer in the nation and a controversial and once a high-flying stock. The drama unfolding at the Chesapeake Energy Corp. campus in Oklahoma City has raised shareholder ire (lawsuits), forced the company's founder to yield both his role as board chairman and his participation in a special drilling arrangement with the company, and attracted investigations by the Securities and Exchange Commission and the Internal Revenue Service. As a director of three publicly-traded companies and the chairman of the governance committee of two and a member of a third, we have been troubled by the corporate governance revelations and the circus underway at Chesapeake.
We do not enjoy criticizing companies and their managements, but there are situations where the criticism is warranted due to the fallout from the events underway on the image of all other energy companies. Such a situation now exists in our view. The industry is being attacked for many fundamental issues – the risk of deepwater drilling, the pollution from horizontal drilling and hydraulic fracturing, making record profits while not paying a fair share of corporate taxes, and manipulation of commodity markets. Energy corporate scandals hurt the image of the energy industry much like the downfall of Enron tarred the industry for a number of years.
Having to rely solely on public regulatory filings and media reports, we admit to having limited information regarding the dealings that led to the scandal. This means we take to heart Chesapeake CEO Aubrey McClendon's admonish on last week's earnings report conference call that "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." That said, however, the events and disclosures over the past several weeks and the history of Mr. McClendon and his board of directors raise serious questions about corporate governance at Chesapeake.
The current furor stems from recent disclosure that Mr. McClendon, who has a nice executive perk of being able to personally invest in all the wells his company drills, had extensive personal loans based on the value of his interests in these Chesapeake wells. He has pledged those interests to the financial institutions extending the loans. Additionally, the company had dealings with several of those financial entities that were providing the personal loans to Mr. McClendon. While this situation may not be illegal, the propriety of the dealings is in serious question when it was revealed that Mr. McClendon's loans totaled over $1 billion. The Founder Well Participation Program (FWPP), the special arrangement allowing Mr. McClendon to invest in the drilling of these wells, was begun in 1993. The program was approved by the shareholders in 2005 and was scheduled to run for 10 years, but clearly not all the details surrounding Mr. McClendon's personal finances related to the program had been disclosed either to shareholders, or, it appears, fully to the board of directors. We don't know whether any of his financial arrangements were disclosed to the members of the board's compensation committee that is responsible for supervising the FWPP program, but we doubt it based on the series of press releases claiming the board knew about the details and then backtracking on that statement.

Read the rest of the article here.  This is another passage from it that I found interesting:
The history of Chesapeake and Mr. McClendon is one of bold moves and brash attitudes. The company has been nearly bankrupted by this approach to running the business, but it has also been wildly successful at times. In other words, Chesapeake is not your typical "widows and orphans" stock. The company's past successes cannot be ignored, but on the other hand, how they were achieved has raised many eyebrows. If one looks at the compensation of the members of the board of directors, the cash and stock component provided approximately $385,000 ($153,000 in cash and $232,000 in restricted shares; these are approximate since each director earned slightly different amounts) of compensation last year. Directors also are provided the use of an executive jet, which resulted in about $200,000 being credited to each director's total compensation last year. That means many Chesapeake directors are reported in the company's proxy statement to have received approximately $585,000 in total compensation in 2011. We find this pay level eye-catching as Exxon Mobil Corp., one of this nation's largest corporations, directors received $100,000 in cash plus 2,500 restricted shares, worth $185,000, for a total of $285,000 in total compensation last year. Each ExxonMobil director was also credited with $420 of compensation representing his pro rata share of a travel accident insurance policy.

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