Chesapeake financing draws criticism

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 PricewaterhouseCoopers, monitored by the Securities and Exchange Commission and partners with some of the biggest, most reputable companies in the industry.

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 understand.”