Chesapeake Energy Corp. received its strongest bit of good news in two weeks on Monday when it’s stock received an upgrade.
BMO Capital Markets analysts Dan McSpirit upgraded the stock to “outperform.”
Chesapeake has drawn scrutiny from Wall Street over the past two weeks after revelations that CEO Aubrey McClendon used his personal stake in Chesapeake wells as collateral for personal loans without fully disclosing the information.
Despite the potential conflicts of interest, McSpirit said Chesapeake “is a company with a deep and wide asset base, and one that has fundamental value, in our opinion.”
Chesapeake’s stock price has tumbled 48 percent since August largely because of falling natural gas prices. McSpirit said the stock price is too low.
Chesapeake “presents an attractive opportunity for investors looking to venture out on this risk curve,” he said.
The stock price jumped after the upgrade, closing up 72 cents, or 4 percent, to $18.44 on the Nasdaq.
Al Armendariz, the Environmental Protection Agency’s administrator for the region that includes Oklahoma, has resigned from his post after coming under fire from lawmakers for comments about industry regulation.
Last week, longtime EPA critic and Oklahoma Sen. Jim Inhofe, R-Tulsa, made reference to Armendariz’s comments about “crucifying” some companies in the oil and gas industry to make an example out of them for others. Armendariz made the comments in 2010. He apologized for them last week. The Obama White House defended the EPA’s regulatory approach last week but distanced itself from Armendariz’s remarks.
Armendariz said he was resigning so controversy over the comments wouldn’t be a distraction to work at the EPA. The Associated Press has more here.
Meanwhile, here’s the bio page for the acting administrator for Region 6, Sam Coleman.
Chesapeake Energy Corp. CEO Aubrey McClendon in the late 1990s borrowed money from a former Chesapeake director using his stake in Chesapeake wells as collateral, Reuters reported Friday.
The wire service cited a June 1998 document filed in Oklahoma Co0unty court that showed the loan between McClendon and now-retired director Frederick Whittemore, who served on Chesapeake’s compensation committee. The loan’s terms and amounts were not disclosed.
Ron Hutcheson, McClendon’s personal spokesman, acknowledged to Reuters the existence of the loan but said the deal between Whittemore and McClendon ended in March 1999. He did not say whether the debt was repaid.
The document showed that McClendon listed as collateral a company called Chesapeake Investments LP. According to Reuters, McClendon used the investments company to hold interests in the Chesapeake Energy Corp. wells he acquired through the controversial Founders Well Participation Program.
For an independent board member on the compensation and corporate governance committees to be doing a deal with the CEO, that’s something that would be inappropriate governance and that should be disclosed,” said David Larcker, a corporate governance specialist and professor of accounting at the Stanford University Graduate School of Business.
Chesapeake Energy Corp. CEO Aubrey McClendon has agreed to give up a perk that allows him to invest in every well drilled by the company, but apparently other executives at the company aren’t allow to dabble in the business.
Bloomberg reports the Chesapeake executives who oversee finance, acquisitions and operations at the company are barred by their employment contracts from investing in any oil and gas activity outside of their job duties.
Don Delves, president of a Chicago-based corporate governance advisory firm, questioned the equity of that arrangement.
“As a shareholder, I’d want to know why the CEO is allowed to invest in these properties, but these other executives are not. This has the potential to create differentiated interests within the company and its management team.”
A Chesapeake spokesman did not respond to Bloomberg’s request for comment.
EIG Global Energy Partners apparently does not regret its decision to loan as much as $875 million to Chesapeake Energy Corp. CEO Aubrey McClendon.
McClendon secured the loans to fund his share of Chesapeake’s drilling costs under the Founder Well Participation Program, which has allowed him to buy a 2.5 percent stake in all company wells since 1993.
The Chesapeake co-founder has been criticized by some analysts for creating a potential conflict of interest because EIG also bought $500 million in preferred shares of Chesapeake subsidiary CHK Utica in November. The company has denied any conflict of interest in the deals.
EIG Chief Executive R. Blair Thomas sent a letter to some investors this week defending the firm’s loans to McClendon, a source told Reuters.
Thomas blamed the media for “making something out of nothing” in reporting on the McClendon loans.
EIG could not be reached for comment late Thursday afternoon.
Reading between the lines, it appears Chesapeake Energy Corp.’s board of directors is not too pleased with what its chief executive has been up to on his own time.
The board defended CEO Aubrey McClendon when Reuters reported last week that he had secured up to $1.1 billion in loans to finance his participation in a unique program that allows him to buy a stake in every well drilled by Chesapeake.
The company posted a statement from the board on its website April 18 after the Reuters report.
“The Board of Directors is fully aware of the existence of Mr. McClendon’s financing transaction and the fact that these occur is disclosed in the proxy. Additionally, the total amount of his cost obligations and revenue attributable to the FWPP for each year are detailed in the proxy. The Founders Well Participation Program fully aligns the interests of Mr. McClendon with the company and the Board of Directors supports this program as does the majority of its shareholders.”
That statement was removed from Chesapeake’s website last week (but it can be seen here) and replaced with an almost identical one from General Counsel Henry Hood.
On Thursday, the company clarified Hood’s statement to indicate the board did not review or approve McClendon’s deals or the terms of those transactions.
The board also is reviewing financing arrangements between McClendon and any third party that has or may have a relationship with Chesapeake.
Analysts said McClendon’s deals were a potential conflict of interest, a charge the company rejected.
Some analysts even called on Chesapeake to replace McClendon and/or its board.
That could start happening as soon as this summer.
Two board members – Oklahoma State University President Burns Hargis and former Union Pacific CEO Richard K. Davidson – face re-election at the company’s June 8 shareholders meeting, while 80-year-old energy analyst Charles T. Maxwell will leave the board after the meeting because he has reached mandatory retirement age.
This story is still developing, but Energy Reporter Jay F. Marks has a web update here.
Chesapeake Energy Corp. said this morning it will wind down its Founder Well Participation Program, a unique perk for founder and CEO Aubrey McClendon.
The company came under fire last week after Reuters reported McClendon had secured up to $1.1 billion in personal loans against his interests in the program. It allows McClendon to invest up to 2.5 percent in each well drilled by Chesapeake, although he still has to pay for the upfront drilling costs.
Chesapeake said the program was described in regulatory filings and the loans were McClendon’s personal business. Some investors, though, said the details weren’t adequately disclosed and some of the loans involved lenders that had separate business relationships with the company. At least two groups of investors sued the company, the board and McClendon, citing inadequate disclosure and conflict of interest.
Now Reuters, citing an unnamed source, said the SEC’s Fort Worth office has opened an informal inquiry into the Founder Well Participation Program.
Shareholders approved the Founder Well Participation Program in 2005. It’s set to expire in 2015.
UPDATE, 2 p.m.:
Ratings firm Standard & Poor’s has downgraded Chesapeake’s debt one notch, from BB+ to BB, citing concerns over corporate governance:
Turmoil resulting from these developments–and from potential revelations resulting from the board investigation–could hamper Chesapeake’s ability to meet the massive external funding requirements stemming from its currently weak operating cash flow and aggressive capital spending.
UPDATE, 2:30 p.m.:
Below is a separate release put out by McClendon that provides some details on the loans he took out against his interests in the well participation program. It says McClendon had taken out a total of $846 million in loans through Dec. 31. “All of the loans were from third parties and none of them were from Chesapeake or its affiliates,” the statement said.
UPDATE, 3:15 p.m.:
Chesapeake shares fell 3 percent in heavy trading today. Shares ended the day at $17.56, down 57 cents from Wednesday’s close. Trading volume was more than 49 million shares, more than twice the typical daily volume.
The American Lung Association is out with a new State of the Air report today ranking air quality for metro areas across the county. Generally, Oklahoma fares well in comparison, but both Oklahoma and Tulsa received an “F” for the number of ozone days from 2008 to 2010.
Ozone alerts peak in the summer in Oklahoma. That’s when the nitrous oxide and volatile organic compound emissions from power plants and vehicles combine with heat and the sun to create ozone. High ozone levels can make it harder to breathe for people already susceptible to asthma or other lung diseases. Air quality organizations say ozone can be curtailed by not filling up vehicles and not mowing yards during ozone alert days.
The latest State of the Air report showed some improvements in Oklahoma. A previous report, ranking counties from 2005 to 2007, gave an “F” to nine Oklahoma counties. Tulsa and Oklahoma counties were on that list, too.
The American Lung Association takes a tougher stance on ozone than the Environmental Protection Agency. In the latest EPA report, Tulsa avoided federal sanctions for ozone. Tulsa had 25 ozone alert days in 2011.
Boone Pickens spoke on CNN’s “Starting Point” this morning about oil, natural gas and taxes. The billionaire oilman said his plan for increased production and use of domestic oil and natural gas is better than the plans proposed by President Barack Obama and GOP challenger Mitt Romney.
He said government policies should encourage increased oil and natural gas production throughout North America and that trucking fleets should move to natural gas instead of diesel.
Chesapeake Energy Corp.’s stock price improved Monday even as more analysts voiced opinions against the company’s longstanding program that allows CEO Aubrey McClendon to participate personally in company wells.
The stock price added 56 cents a share, or 3.2 percent, to $18 on the New York Stock Exchange. The price is still 5.9 percent below last Tuesday’s closing price of $19.12 before news broke that McClendon has used his personal stake in Chesapeake wells as collateral for personal loans of up to $1.1 billion.
Reuters reported Monday that McClendon at least twice has sold some of his personal stake in Chesapeake wells along with Chesapeake sales.
In March 2011, Chesapeake sold producing wells and lease acreage in Arkansas to BHP Billiton for $4.75 billion. Chesapeake said at the time that McClendon and two companies he owns personally were “parties to the purchase agreement.”
The filing said McClendon received the same terms as Chesapeake in the sale, but did not record how much McClendon received personally. Chesapeake mentioned the sale again in its 2011 proxy statement, noting that McClendon reimbursed the company for transaction costs associated with the sale.
Reuters also reported that Chesapeake did not disclose McClendon’s personal participation in a July 2008 sale of land and producing wells in Oklahoma to BP Plc for $1.75 billion.
Analyst Scott Sprinzen with Standard & Poor’s released a report Friday calling Chesapeake’s corporate governance practices “controversial.”
…that Mr. McClendon has entered borrowing agreements with third parties who have other substantial business dealings with Chesapeake heightens the potential for problematic conflicts of interest, or perception thereof.”
Sprinzen elaborated on his comments in an interview with The Oklahoman on Monday.
There are shortcomings in the Founder Well Participation Program. That benefit to the CEO lends itself to potential conflicts of interest. This type of transaction where the CEO can and does sell assets in conjunction with the company’s transactions underscores that point.”