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.
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.”
Houston-based Apache Corp. is donating $350,000 to the city of Woodward to pay for a new tornado warning system, the oil and natural gas company announced Monday.
Woodward was ravaged by a tornado on April 15 after a power outage knocked out most of its storm sirens. Six people died and more than 20 were injured.
Apache’s donation will allow the city to replace its tornado warning system with new equipment that will include battery backup and redundant controls. Installation is expected to begin this week.
Mayor Roscoe Hill praised Apache for its donation.
”Apache is a long-term corporate citizen ofWoodward. This very generous contribution demonstrates their profound commitment to our community. By dedicating funds to upgrade our early warning systems, Apache is saving lives, and we are extremely grateful.”
Apache executive Rob Johnston said Woodward is a hub for the company’s operations in western Oklahoma.
“Our hearts go out to the families who were impacted by this devastating event. This donation is one way for Apache to help the community rebuild, rebound and be prepared for future tornadoes.”
Argus analyst Philip H. Weiss on Friday said Oklahoma City-based Chesapeake Energy Corp. should replace its directors and CEO Aubrey McClendon.
When we consider the full financial picture at Chesapeake, including its high debt levels (both on- and off-balance-sheet), 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 an analyst report released Friday.
Weiss lowered his rating on Chesapeake to “sell” from “hold.” He also suggested the company end its Founders Well Participation Program. Under the program, McClendon can personally participate in a 2.5 percent stake in every well Chesapeake drills. The program has been previously disclosed. This week’s controversy centered around up to $1.1 billion in previously undisclosed loans McClendon has received using the stake in the wells as collateral.
We have long noted our unfavorable view of (Chesapeake’s) Founders Well Participation Program…The company claims the program better aligns the interest of its CEO with shareholders. We strongly disagree. If this were truly the case, we think more companies would have similar programs.”
The report pointed out that Oklahoma City-based SandRidge Energy Inc. — whose CEO is Chesapeake co-founder Tom Ward — is the only company Argus is aware of that has had a similar program. SandRidge discontinued its plan two years after adopting it.
The fallout surrounding Chesapeake Energy Corp. CEO Aubrey McClendon’s personal loans on company drilling projects could hurt Chesapeake”s bond rating, according to a report by Bloomberg on Friday.
McClendon in February said the company is on pace to becoming investment grade by the end of the year. But credit-default swaps on the bond market this week indicate that Chesapeake’s lenders have less confidence that the company will repay its debt. Chesapeake had $10.6 billion in long-term debt as of the end of 2011.
Marc Gross, a money manager at RS Investments in New York, said the news this week has “severely tainted the company.”
There is no chance of an IG (investment grade) rating” over the next three years, he said. Chesapeake is “more likely to get downgraded than upgraded.”
The oil refinery in Wynnewood seems poised to change hands for the second time in a year.
Owner CVR Energy Inc. on Thursday announced it is signed a transaction agreement with activist investor Carl Icahn, who has offered to buy the majority of the Sugar Land, Texas-based company for $30 a share.
CVR Energy’s board had resisted Icahn’s takeover efforts but relented after shareholders recently indicated their willingness to accept Icahn’s tender offer.
The board is not recommending that shareholders accept Icahn’s price because it believes the company’s long-term value exceeds $30 a share, according to the company’s announcement.
“I am gratified that CVR’s board of directors has decided to let the owners of the company decide for themselves whether to accept our offer. I’ve believed all along that our offer is a “win-win” for shareholders and thank all shareholders, that have tendered, for their support,” said Icahn in a regulatory filing on Thursday, according to Forbes.
CVR Energy acquired the Wynnewood refinery last fall from Denver-based Gary-Williams Energy Corp.