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.
Reuters also reported the U.S. Securities and Exchange Commission has opened an informal inquiry into the Chesapeake's well program, citing an unidentified source in the SEC's regional Fort Worth, Texas, office.
The SEC doesn't confirm or deny the existence of informal inquiries or investigations.
Danne Johnson, a law professor at Oklahoma City University, said investors shouldn't read too much into the SEC news. Johnson is a former staff attorney and branch chief for the SEC's Enforcement Division in New York City.
Johnson said informal inquiries are used to gather information by staff attorneys and aren't an indication that wrongdoing has occurred. The next step, a formal investigation, involves issuing subpoenas and compelling witnesses to testify.
“As a staff attorney, if the things you're able to collect look like you might need to spend a little more time, then you have to get permission from someone higher up in the enforcement division to open up a formal inquiry,” Johnson said.
Bruce Day, a director at the Crowe & Dunlevy law firm in Oklahoma City, said informal inquiries by the SEC happen frequently and could cover any number of subjects. Day, chair of the firm's securities group, is a former SEC attorney and administrator of the Oklahoma Securities Department.
“It would be a private, confidential inquiry,” Day said. “I don't think it is newsworthy. The only thing that counts is if you're the subject of a formal SEC proceeding. All the rest of it is just gossip.”
Meanwhile, analysts praised the move to end the well program.
Oppenheimer analyst Fadel Gheit said Chesapeake should have abandoned the program years ago, but that Thursday's news was good for shareholders.
Still, Chesapeake's stock dipped more than 3 percent Thursday, closing down 57 cents at $17.56 a share. It has dropped more than 8 percent since news of McClendon's loans broke last week.
Weiss said he was troubled by the fact that McClendon secured financing for the well program from companies involved with Chesapeake without the board's knowledge.
“It reinforces my view that changes need to be made,” said Weiss, who last week urged the company to replace McClendon and its board.