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Chesapeake stock drops, despite coming end of CEO's well program

Chesapeake Energy Corp.'s board and CEO Aubrey McClendon have agreed to negotiate an early end to the program that allows him to invest in every well drilled by the company.
BY JAY F. MARKS Published: April 27, 2012

A potentially expensive question remains after Thursday's announcement that Chesapeake Energy Corp. will discontinue the program that allows CEO Aubrey McClendon to buy a personal stake in each well the company drills.

What will it cost?

The Founder Well Participation Program has been part of McClendon's compensation package since 1993, but it was brought to the fore last week after a news report indicated McClendon had secured up to $1.1 billion in loans to fund his participation.

Chesapeake shareholders approved the program for a 10-year term in 2005, but McClendon and the company's board have agreed to negotiate an early end to it. The current term ends in 2015.

Argus Research analyst Phil Weiss said the decision is a step in the right direction for Chesapeake, but he wondered what it will cost to end the program.

“Clearly Aubrey is not going to give up his right to participate for another 3-4 years without expecting to be compensated,” he said. “My question is how much.”

Weiss said he didn't want to hazard a guess on that issue.

“There are a lot of things we don't know about the particulars that make it difficult to determine,” he said. “The fact that there could be $1.1 billion of loans against the value of the existing interest means the figure could be pretty substantial.”

Chesapeake declined further comment on Thursday's announcement, citing pending litigation by shareholders.

McClendon on Thursday revealed that he and his companies owe $846 million on loans secured by his stake in Chesapeake wells, as of Dec. 31. His share of the production from those wells was valued at $852 million, based on commodity prices at that time.

That disclosure came after McClendon consulted with other members of the company's board.

Chesapeake had said the nine-member board was “fully aware” of McClendon's financing deals, but the company clarified that statement Thursday to indicate the board did not review or approve those transactions or their terms.

The board is reviewing the financing arrangements between McClendon and third parties that had a relationship with the company, according to Thursday's announcement.

Reuters reported last week that McClendon had secured a $500 million loan from EIG Global Energy Partners, a private equity firm that also invested in preferred shares of a Chesapeake subsidiary. He got another $325 million from another entity affiliated with EIG.

The firm's CEO, R. Blair Thomas, maintained the loans were proper this week in a letter to some investors, according to another Reuters report. He blamed the media for “making something out of nothing” in reporting about the loans.

April 23: Power Play Blog - Chesapeake stock price...

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