Chesapeake Energy Corp.'s most recent contract with CEO Aubrey McClendon specifically allowed him to participate in hedge funds that trade in natural gas, but barred him from directing such a fund, according to regulatory filings.
McClendon's 2009 contract said he can invest in a hedge fund as long as it does not actively engage in oil and natural gas production activities and as long as McClendon “does not directly or indirectly provide input, advice or management,” Reuters reported Tuesday.
Spokesmen for Chesapeake and McClendon declined to comment Tuesday.
Reuters reported last week that McClendon and Chesapeake co-founder Tom Ward — now CEO at SandRidge Energy Inc. — ran a $200 million hedge fund from 2004 to 2008. A veteran trader who helped run the fund told Reuters that McClendon engaged in “near daily” communications and “exhaustive” calls to help direct the fund's trading.
Ward has said he doesn't see anything wrong with the arrangement, and Chesapeake and McClendon have not commented on the report about Heritage Management Co. LLC.
A hedge fund uses advanced investment strategies designed to generate high returns. The funds are often set up as private partnerships, and are mostly unregulated because they recruit only accredited — very wealthy — investors.
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 with some of the same lenders who have given money to Chesapeake.
In the following days, at least 11 shareholder groups have filed lawsuits against McClendon, the company and its directors.
On May 1, McClendon said he will step down as chairman, while retaining his title of CEO.
The company's stock price has dropped 11 percent since April 18, closing Tuesday at $16.93, down 20 cents on the day.
“I think the collapse in gas prices, coupled with news about the CEO's 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," Fadel Gheit, an energy analyst with Oppenheimer in New York, said last week.
Over the past three weeks, Chesapeake has drawn increasing attention from analysts, shareholders, the media and other industry observers. That attention is likely to continue, said David Lei, an associate professor of management at Southern Methodist University's Cox School of Business in Dallas.
“What brings up the issue with greater force and salience now is that typically when you look at issues like this of potential malfeasance, it opens up everybody's radar to look for more,” Lei said. “If it is an isolated case and the stock price improves, this will be forgotten in a few years. But if it is a pattern, even if there are no legal sanctions, it probably is harder for him (McClendon) to defend.”
As for the company's future, Lei said Chesapeake has strong assets and talented leadership.
“The longer-term effect really depends on gas prices,” he said. “If natural gas prices continue the 25 percent rally we've seen over the past week, that could help the company and McClendon. But if prices are stagnant, the company is going to have to sell more assets.”
Chesapeake plans to sell some of its holdings and secure joint ventures in oil-rich plays to raise up to $14 billion this year.