Chesapeake Energy Corp. shares tumbled 5.5 percent Wednesday After a published report showed that CEO Aubrey McClendon has borrowed up to $1.1 billion against his stake in Chesapeake wells.
Reuters reported Wednesday that the loans were to fund McClendon's investment in Chesapeake's Founder Well Participation Program, under which McClendon can take a 2.5 percent stake in every well drilled by the company.
Sources quoted in the article questioned whether McClendon's personal debt level on the company wells has created a conflict of interest and whether the company should have more thoroughly disclosed the financing deals.
Chesapeake has denied conflict or wrongdoing in the matter.
“The Founders Well Participation Program (FWPP) has been in place since the company's founding and was reapproved by shareholders by a wide margin in 2005,” Chesapeake said in a statement Wednesday. “The terms and procedures for the program are clear and detailed in every proxy for all shareholders to see.”
Under terms of the program, McClendon can buy into a stake in all the company's wells, but he cannot choose to participate only in some of the wells.
While the well participation program has been included in Securities and Exchange Commission filings, Chesapeake has not disclosed that McClendon has used his stake in the wells as collateral for loans. Records discovered by Reuters show McClendon has borrowed up to $1.1 billion, which is the same amount Forbes estimates to be McClendon's net worth.
Chesapeake said the program is legal and ethical and that it provides an additional incentive for McClendon to work hard for the success of the company.
“Loans secured by oil and gas assets are commonplace in the industry and have been employed by Chesapeake corporately during its 23-year existence and by Mr. McClendon during the 20 years the FWPP has been in existence, thus increasing the alignment of interest between Mr. McClendon and the company because both have loans and pay interests on the capital provided through such loans,” Chesapeake General Counsel Henry J. Hood said in a statement.
The news drew a wide range of reaction Wednesday on Wall Street. The company's stock price dipped more than 10 percent early in the day before recovering to a loss of 5.5 percent, or $1.06 a share, to close at $18.06. The price drop erased nearly $640 million of the company's value of $11.6 billion.
Chesapeake was the second most actively traded stock on Wednesday with more than 93.5 million shares changing hands, more than five and a half times the average volume of almost 16.9 million shares exchanged.