Chesapeake Energy Corp. has dealt with disgruntled shareholders before.
The Oklahoma City company, founded in 1989 by Aubrey McClendon and Tom Ward with a $50,000 investment, has grown into the nation’s second-largest producer of natural gas — trailing only corporate behemoth ExxonMobil Corp.
Chesapeake’s remarkable expansion during the past two decades has been anything but a smooth rise. In public appearances, McClendon sometimes thanks longtime shareholders for staying with the company through difficult times.
“He doesn’t hide the fact that he is a big risk-taker,” said Jake Dollarhide, a Tulsa money manager who bought Chesapeake shares during one of those past tough times. Dollarhide, CEO of Longbow Asset Management, said many shareholders support McClendon’s autonomy and penchant for risk.
“There’s a core group of longtime shareholders who are saying if this is news to you, then you really haven’t been paying attention,” he said. “That’s the wildcatter’s spirit.”
Revelations by Reuters about McClendon operating a hedge fund and taking out huge loans using his stake in company wells as collateral again have roused some shareholders, with at least 11 lawsuits filed in the wake of those disclosures. The company’s largest investor last week notified regulators that it will be taking a more active role in the company’s matters.
Tulsa money manager Fred Russell said shareholders deserve more accountability from Chesapeake’s directors.
“When you have a situation like Chesapeake, you have the most cynical exploitation of public shareholders in today’s publicly traded markets,” said Russell, whose Fredric E. Russell Investment Management Co. holds no Chesapeake stock.
Chesapeake has reacted to the latest controversies, stripping McClendon of his role as chairman of the company, a post he has held since co-founding the firm more than two decades ago. The board of directors also will halt an executive perk that allows McClendon to personally invest in every well the company drills.
The SEC has launched an informal inquiry, and the IRS is examining the well participation program.
Bruce Day, director of securities litigation for Crowe & Dunlevy and a former administrator of the Oklahoma Securities Department, said the SEC inquiry is a “long way” from a full-blown investigation.
Day, who once served in SEC’s enforcement division, said the agency likely is reacting to the recent Reuters reports.
“There’s a long process ahead. That’s the takeaway,” Day said.
In 1997, just four years after Chesapeake became publicly traded, more than a dozen shareholder lawsuits were filed against the company when the stock nose-dived on reports of disappointing drilling results in Louisiana.
The suing shareholders claimed Chesapeake stock prices remained artificially high because company officials improperly withheld information about the drilling results. (The lawsuits were consolidated and, in 2000, dismissed.) McClendon promised to reverse the company’s fortunes.
“We do not anticipate, nor will we tolerate, continued erosion in the value of this company,” he said in August 1997. “We will sell the company before we will allow that to occur.”
Oil and gas prices dropped in 1998, forcing Chesapeake to take write-downs in the value of its properties, contributing to a net loss for the year of $934 million. At mid-1998, Chesapeake’s board authorized management to explore alternatives for the company, including the potential for a sale or merger.
However, with Chesapeake shares falling to less than $1 in 1999, the company successfully pivoted to boost its focus on natural gas production and on Oklahoma assets, and added strategic acquisitions to its business plan.
That corporate makeover, combined with a rebound in natural gas prices amid the firm’s shale gas discoveries, sent the fortunes of Chesapeake and its shareholders soaring. By mid-2008, the stock topped $66.
Another price drop
Soon after Chesapeake shares reached new heights, natural gas prices, along with much of the global economy, collapsed. In late 2008, McClendon was forced to sell nearly all of his extensive Chesapeake stock holdings to pay for loans he had taken to buy the stock.
The board, months later, awarded McClendon a $75 million bonus, and paid him $12 million for a map collection he owned that adorned Chesapeake offices. McClendon later agreed to buy back the map collection to settle a shareholder lawsuit.
Chesapeake’s 2009 shareholder meeting prompted strong words from a few shareholders, including Jan Fersing of Fort Worth, Texas, who verbally confronted McClendon.
“After your embarrassing losses, but with a carefully picked and extremely well-compensated board of directors, Chesapeake shareholder funds were partially used to cover your losses,” Fersing said.
McClendon responded forcefully.
“I’m sorry that you find me as egocentric and greedy,” McClendon said. “But I’ll tell you there’s not a harder working guy out there who thinks every day about how to create shareholder value. And I’m dedicated to that. I’ve been dedicated to it for 20 years. And as long as this board is willing to employ me, that’s what I’ll be dedicated to for the next 20 years.”
Most of the more than 200 shareholders in the room applauded him.
T. Boone Pickens recently tweeted that he likes McClendon’s willingness to invest heavily in his own company.
“Hard to be an entrepreneur if you don’t have skin in the game, and Aubrey always has skin in the game,” Pickens wrote.
In the past two years, Chesapeake has implemented new corporate governance measures and created the position of lead independent director on its board. Most recently, the board said it would hire an independent director with no previous ties to the company to serve as its new chairman.
Running the company
Dollarhide said recent Chesapeake deals have reduced debt and moved the company to a more balanced production of oil and natural gas, just as the company promised last year.
“I think they’ll make the right moves,” he said. “This is just a distraction right now, keeping them from running an energy company.”
McClendon, in a conference call last week with analysts, apologized to investors for the recent distractions.
Day, whose law firm does not represent Chesapeake, said Chesapeake leaders probably should be more concerned about the firm’s operations than the current “media frenzy.”
“Regardless of how good the management is, they have trouble coping with commodity prices which they have no control over,” Day said. “They’ve been extraordinarily successful in gathering a great natural gas base. I wish Chesapeake only the best. It’s extremely important to the well-being of this state and this city.”