Chesapeake Energy Corp. stock Wednesday tumbled nearly 15 percent on lower-than-expected earnings and news of a deepening controversy involving CEO Aubrey McClendon.
The stock price drop of $2.86 per share erased more than $1.8 billion from the company's valuation.
The Oklahoma City energy company reported after market close Tuesday that Chesapeake's first-quarter earnings missed analyst expectations by 38 percent. But Wall Street seemed most concerned with Wednesday's news reported by Reuters that McClendon and Chesapeake co-founder Tom Ward from 2004 to 2009 ran a $200 million hedge fund that traded in natural gas and other commodities.
Ward is now CEO of Oklahoma City-based SandRidge Energy.
“I think the collapse in gas prices, coupled with news about the CEO personal financing have eroded investors' confidence. But I think the most damaging allegation is regarding the hedge fund owned by Chesapeake's two founders, which if true could have significant implications on them and the company,” said Fadel Gheit, an energy analyst with Oppenheimer in New York.
Spokesmen representing SandRidge, Chesapeake, McClendon and the Chesapeake directors all declined to comment Wednesday.
Industry observers said the hedge fund has the potential to create numerous conflicts of interest.
“If the hedge fund is trying to get out of a position, he (McClendon) may have an easy buyer by switching to his Chesapeake hat and buying that position,” said Maclyn Clouse, professor of finance at the University of Denver's Daniels College of Business. “That does something that is advantageous to the hedge fund, but may not be advantageous for Chesapeake.”
At the very least, the fund should have been disclosed, Clouse said.
“If there's disclosure and honest explanation to the point that all the parties involved feel there won't be any conflict of interest, then people might feel comfortable with it,” he said. “But I think that's a hard one to sell, which is probably why they kept it quiet.”
A long two weeks for Chesapeake
Chesapeake has been under intense scrutiny since April 18, when Reuters reported that McClendon had borrowed up to $1.1 billion, using his personal stake in Chesapeake wells as collateral. Chesapeake had previously disclosed the Founders Well Participation Program that allowed McClendon to buy into the wells, but the loans had not been disclosed.
In the days that followed, at least half a dozen shareholders have filed breach of fiduciary duty lawsuits against McClendon and Chesapeake's board because of the loans.
Chesapeake's stock price jumped 6 percent Tuesday to close at $19.60 after McClendon agreed to step down as chairman and he and the company agreed to end the well program 18 months early. McClendon will remain CEO and a Chesapeake director, but the company said it will seek guidance from its largest shareholders before choosing an independent chairman.
Chesapeake's stock price erased all of Tuesday's gains and then some on Wednesday when it plummeted $2.86 to $16.74 as nearly 147 million shares changed hands. The company's average volume is just more than 20 million shares per day.
While Tuesday's announcement that the company soon will have an independent director was seen as good news for some analysts and industry observers, Wednesday's revelation may have spoiled the idea.
“I want to know who the chairman will be and what his responsibilities will be before I can fully answer that question,” Argus Research analyst Phil Weiss said when asked his thoughts on the decision to create an independent chairman. “I think today's report from Reuters indicates that there are further problems with the company's governance and the activities raise additional concerns about conflicts of interest.”
What's a hedge fund?
A hedge fund uses advanced investment strategies with the aim of generating high returns. Such funds are often set up as private investment partnerships, and are mostly unregulated because they recruit only accredited (very wealthy) investors.