Oklahoma City-based Chesapeake Energy Corp. throughout its history has used a variety of financing techniques to raise the money it has needed to grow into one of the largest oil and natural gas producers in the country.
While analysts, academics and industry observers have a variety of views on Chesapeake, one thing they all seem to agree on is that the company's financing structure is among the most complicated in the industry.
Much of what makes Chesapeake's finances difficult to follow is that the company is willing to use just about any option available, said Oppenheimer analyst Fadel Gheit.
“Complicated doesn't necessarily mean good, bad or indifferent. It just means it's complicated,” he said.”Even though Baskin Robbins has 31 flavors, people usually stick to just two or three. Chesapeake opted for the full menu.”
Chesapeake has funded its drilling operations through common stock offerings, preferred stock offerings, senior notes, asset sales, joint ventures and Volumetric Production Payments, or VPPs.
Chesapeake embraces the idea that it is willing to look at any financing option available.
“Shareholders should know that we are working very hard to deliver the maximum value and the maximum long-term return,” Chesapeake spokesman Michael Kehs said. “While some of these strategies have been unpopular with some, we believe they've created the best asset base in the industry and will generate the best return as well. I would expect that our shareholders expect us to be looking at all options available and constantly striving to see where new value can be created.”
Others, however, believe Chesapeake's finances are unnecessarily complex.
“One of the things true about any oil and gas company is their balance sheets are incredibly nontransparent,” said Maclyn Clouse, professor of finance at the University of Denver's Daniels College of Business. “Chesapeake's balance sheet is much more complex than the rest of the industry. They are using off-balance sheet debt and every type of derivative product available. It is very hard to understand from their statements for an average investor or anyone not incredibly well-versed in oil and gas accounting.”
Critics have argued that the company is using financing structures that do not appear on the balance sheet as debt but create an obligation for the company to pay cash dividends or natural gas volumes in the future.
Tom Price, Chesapeake's senior vice president of corporate development and government relations, called the claims unfounded.
He pointed out that the company is audited by Pricewater
Chesapeake's financial complexity — coupled with recent claims of failing to fully disclose CEO Aubrey McClendon's personal activities tied to the company — have led some observers to compare Chesapeake with another energy company known for using complicated accounting to hide the truth of its finances.
“In Enron's case, you had a lot of debt obligations that weren't on the financial statements even though Enron was liable to pay for those as well,” Clouse said. “Enron was not as strong as it looked on paper. This is an industry that is not transparent even in its simplest state. When you throw in these complexities, it makes it harder and harder to
Clouse said his biggest concern about the way Chesapeake is financing its operations is that it is using preferred stock that requires the company to pay a relatively large dividend, joint ventures that include drilling costs and VPPs that require the company to produce a certain amount of natural gas and oil.
“Most of this is going to show up off the balance sheet,” Clouse said. “That was some of the stuff Enron did. It just made the company look better than it was and look less risky than it was.
Others, however, dismiss any comparison to Enron.
“They don't know what they're talking about,” Gheit said of those who would put Chesapeake in the same category as Enron. “Enron had computer screens that were not even connected to anything. They were trading in air. Chesapeake has the strongest asset portfolio in the industry and has joint ventures with the largest companies in the world. These people are not idiots. You can't assume all these companies across the board were so stupid as to give Chesapeake and Aubrey $15 billion if they didn't have quality assets.”
However, some analysts are concerned they're seeing a similar pattern.
“Is Chesapeake a direct comparison to Enron? No,” said Philip Weiss, an analyst with Argus Research in New York. “Are you going to find a direct comparison? No. Every one of these situations is a bit different. When I think about the potential of Chesapeake being like Enron, it's not because it is exactly like Enron, but it is
Chesapeake's Price said the company's transactions are not hidden and that the details of all transactions are spelled out in news releases and in regulatory filings.
“We have more transparency in our press releases than anybody else,” Price said. “We answer more questions than anyone else. Our earnings conference calls are an hour and a half long.”
Still, the Oklahoma City company should learn some lessons from the failed Houston energy giant, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas.
“Where the comparison is unfair is that Chesapeake is trading and selling hard assets while Enron was not,” Bullock said. “The caution is that anytime you have that much leverage and anytime you are spending that much more than you are receiving in cash flow, there are potential problems. All that being said, there is no sign of evidence of any illegal activity of any kind at Chesapeake at this point. I think all discussion about that should be based on facts and not supposition.”
Chesapeake's Kehs said the company's financing strategy fits German philosopher Arthur Schopenhauer's view that all truth passes through three stages: First it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
“Our strategy falls somewhere along that continuum,” Kehs said.