Reuters: The lavish and leveraged life of Aubrey McClendon

BY JOHN SHIFFMAN, ANNA DRIVER AND BRIAN GROW, Reuters Published: June 7, 2012
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In an annex at the headquarters of Chesapeake Energy Corp, a unit informally known as AKM Operations manages a top company priority: the personal business of its namesake, Chief Executive Aubrey K. McClendon.

According to internal documents reviewed by Reuters, the unit's accountants, engineers and supervisors handled about $3 million of personal work for McClendon in 2010 alone. Among other tasks, the unit's controller once helped coordinate the repair of a McClendon house that was damaged by hailstones.

Fourteen miles south, at Will Rogers World Airport, Chesapeake leases a fleet of planes that shuttle executives to oil and gas fields — and the McClendon family to holiday destinations. On one trip, the clan took flights to Amsterdam and Paris that cost $108,000; McClendon counted the trip as a business expense. In another case, Chesapeake logs show, nine female friends of McClendon's wife flew to Bermuda in 2010 without any McClendons aboard. The cost: $23,000.

Closer to home, McClendon pursues another of his passions: the Oklahoma City Thunder, the NBA franchise in which he owns a 19 percent stake. As with other assets, McClendon has melded his Thunder interest with Chesapeake business. The energy company signed a $36 million sponsorship deal, and it pays up to $4 million annually to brand the stadium Chesapeake Energy Arena.

What hasn't been previously disclosed is that McClendon mortgaged his future proceeds from the team to secure two bank loans.

The AKM unit, the jet flights and the Thunder relationship are part of the lavish but leveraged lifestyle that McClendon has built through Chesapeake, America's second-largest natural gas producer.

From the 111-acre corporate campus that he shaped with a meticulous eye for detail, McClendon has intertwined his personal financial interests with those of the publicly traded corporation he runs to a far greater degree than shareholders may realize, according to interviews, public records and hundreds of pages of internal Chesapeake documents reviewed by Reuters.

McClendon, 52, has put longtime friends on the Chesapeake board and showered them with compensation. Restaurants he has co-owned occupy buildings owned by the energy company. A Chesapeake executive has handled the CEO's personal land and oil- and gas-well transactions.

Few outsiders are privy to the sophisticated universe of services that Chesapeake provides McClendon. The existence and scope of AKM Operations, for instance, hasn't been previously reported.

“I have to be wary when I see this type of pattern of disregarding shareholders' best interests,” said David Dreman, chairman of Dreman Value Management LLP, which owns about 1 million Chesapeake shares. “I think McClendon should go.”

Beyond the mixing of personal and professional, another theme emerges from interviews and records: McClendon's seemingly insatiable desire to own more and more — of everything.

Said a contemporary who knows McClendon well, “If you're competitive like Aubrey, you just always want to own more.”

For Chesapeake, McClendon has overseen a spree of more than 100 real estate purchases in Oklahoma City in recent years worth more than $240 million, property records show. On land steps from the corporate campus, he directed his natural gas company to develop a luxury shopping center. Now, he's planning to open a Chesapeake-owned grocery store.

For himself, McClendon bought his neighbor's house near Oklahoma City and then the one behind that. He acquired a mansion on “billionaire's row” in Bermuda and later added a larger estate. He bought properties in Minnesota and Maui and near Vail, Colorado. He filled cellars in three states with trophy wines, and purchased 16 antique boats valued at $9 million.

Then McClendon mortgaged much of it — and bought more.

'MEDIA FIRESTORM'

Normally, McClendon loves publicity. When Forbes put his face on the cover last fall and declared him “America's Most Reckless Billionaire,” Chesapeake posted the story on its website.

But these are not normal times for McClendon. In the wake of Reuters reports that raised questions about his mingling of personal and corporate interests, the board stripped him of his chairmanship. The company faces IRS and Securities and Exchange Commission inquiries, more than a dozen shareholder lawsuits, and demands for change from its largest investors. Meantime, the board is investigating ties between McClendon's personal financial transactions and Chesapeake's.

Bowing to the pressure, Chesapeake said this week that four current board members will be replaced with new directors chosen by two top investors, activist Carl C. Icahn and Southeastern Asset Management. Along with a new independent chairman expected to be named later this month, the reconfigured board will effectively be controlled by shareholders — a shift expected to serve as a check on McClendon.

Citing the lawsuits, McClendon declined to be interviewed for this story. In mid-May, however, he spoke to several hundred Chesapeake employees about the crisis.

“I encourage everybody to inhale,” McClendon said at one point, according to a partial recording of the meeting reviewed by Reuters. “I'm fine. You're fine. And we're in the middle of a pretty unprecedented media firestorm today. I don't exactly know the origins of it and I don't exactly know when it ends, but I know that it will end, and we will emerge stronger. We will emerge more focused, and we will change in some ways that we probably need to change in.”

In recent weeks, Reuters has reported that McClendon used his stakes in company wells to arrange $1.55 billion in financing from a major financier of Chesapeake and others; that a Chesapeake board member lent money to McClendon; that he sold his share of at least two large energy plays at the same time Chesapeake divested its interest; and that he operated a private $200 million hedge fund from Chesapeake offices.

“You can pick up the paper every day and read something negative about me or about the company,” McClendon told his employees during the May meeting. “I would not have wished the past month on my worst enemy.”

'MY WAY'

McClendon's fate will have implications well beyond Chesapeake. He has been one of the most influential CEOs of his generation, credited and sometimes cursed for championing the drilling technique known as hydraulic fracturing, or fracking. The controversial method has led to a vast boom in U.S. natural-gas production.

That boom has reduced American reliance on foreign energy and enriched his company and his hometown. Using his own cash and Chesapeake's, McClendon has helped rebrand Oklahoma City through philanthropy and real estate development. Once largely defined by a tragedy — the domestic terrorist bombing of the Alfred P. Murrah Federal Building in 1995 — the state capital is now emerging as a center of sports and culture.

In no small part, that revitalization was fueled by McClendon's vision and his commitment to the community and to Chesapeake. Subordinates say McClendon has four children — Will, Callie, Jack and Chesapeake. They are only partly joking.

McClendon routinely works through weekends, and employees often wake to emails he has sent between midnight and dawn. He expects instant answers.

“He will ask me a question and push back when I hesitate,” said McClendon's longtime architect, Rand Elliott. “He'll say, ‘Rand, what if we paint it blue?' And I'll say, ‘Let me think about it.' He'll insist, ‘No, I want you to give me an answer right now.' I asked him once, ‘Aubrey, why do you need to know now? How is it you can make decisions so quickly?' He said, ‘I make hundreds of decisions every day. I've gotten pretty good at it. And I think I hit 90 percent of them right.'“

McClendon is often portrayed as a visionary — a Mellon or Rockefeller of his time: Chesapeake's geologists helped identify North American basins that may hold a hundred-year supply of natural gas. Yet those hefty reserves have pushed natural gas prices to among the lowest levels in a decade.

The CEO takes the long view, projecting optimism and self-confidence. In his most recent annual statement to shareholders, McClendon used the word “bold” 27 times to describe his stewardship of Chesapeake: “We made the bold decision...” “This is clearly a bold plan...” “We accelerated the next bold move...”

He's also a micro-manager — not necessarily meddlesome, employees and business associates say, but obsessed. No aspect of a project is too granular. He helped pick the kind of peanuts served at a restaurant he owns. He inserts commas into press releases and measures the distance between Redbud trees near his office.

“I'll say, ‘I'd like all the tulips to be red,'” architect Elliott recalled. “He'll say, ‘No, no, they've got to be multicolored.''

Chesapeake is now a Fortune 500 company with 13,400 employees. It has grown so big and McClendon has sold so much stock — dumping $569 million during a personal financial crisis in 2008 — that he now owns less than 1 percent of the company.

Yet in many ways he still runs Chesapeake the way he did when he co-founded it with 10 employees in 1989. He meets every new Oklahoma City employee, in groups of 30 or 40, during an hours-long session. He takes out a large advertisement in the local paper that includes the pictures of the new hires.

McClendon also closely monitors their work, internal records show. Every six months he spends the bulk of a week in meetings to personally consider proposed bonus payments to hundreds of employees. The documents show the CEO gets briefed on matters as obscure as whether to discipline a mechanic in Texas who chronically complains to colleagues about his pay.

To McClendon, “every detail matters,” said his minister, the Reverend Patrick Bright. Leaving church one Sunday, McClendon spotted a low-hanging tree branch that posed a traffic hazard. “Before I finished saying goodbye to everyone, I had an email from Aubrey,” the minister recalled. “It was a picture of the branch sent from his phone.”

Friends and colleagues say land is another preoccupation.

Under McClendon's direction, Chesapeake engaged in what the company described as a “land grab” to dominate shale plays around the country. According to internal emails and former executives, Chesapeake began paying above-market prices to squeeze out competitors. At times, former employees said, McClendon was too quick to approve deals.

“He is very easy to pitch because his general inclination is to say ‘yes,'” said one former employee. “It was really surprising. There weren't a lot of questions.”

Last fall, McClendon held forth on his business philosophy during a forum on “creativity and conscious capitalism.”

“I've always been comfortable thinking things through and doing it, more or less, my way,” McClendon said. “You can be as creative as you want, but if you're … unwilling to work on the details, to see those put into action, then creativity is just dreams, or worse, hallucinations.”

The tycoon added a wry joke. “There are some areas in our business where creativity is not particularly welcome — for instance, if you're an accountant.”

TOM SAWYER

With his warm face, rimless glasses and distinctive white mane, the athletic McClendon is sometimes mistaken for former NFL quarterback Archie Manning, the father of football superstars Peyton and Eli Manning.

Like the Manning brothers, McClendon comes from a family of achievers. He is a great nephew of former Oklahoma Governor Robert Kerr, co-founder of U.S. oil-and-gas pioneer Kerr-McGee Corp. His wife, Katie, is a Whirlpool heiress, and her relative, Kate Upton, is a Sports Illustrated swimsuit cover model.

“To say that he grew up with a silver spoon is wrong,” said Chesapeake senior vice president Thomas S. Price Jr., a confidant. “The implication is that he pulled the lever on the slot machine in life and ding-ding, got lucky — and nothing could be further from the truth.”

McClendon worked hard for everything he has accomplished, friends say, and his competitive drive emerged at an early age.

He received his first business lesson as a teenager, mowing neighborhood lawns in suburban Oklahoma City, the friends say. McClendon competed against a boy named Shannon Self, and one day noticed that Self's younger brother was cutting some of Self's lawns. McClendon discovered that his competitor had sub-contracted the work to his brother. Self was mowing more lawns and making more money than McClendon with less effort.

“He calls it his 'painting the fence' story, the scene where Tom Sawyer gets his friends to whitewash the fence,” said a friend.

The episode served as an early example of McClendon's penchant for collecting smart and loyal friends and keeping them close. Self became a founding Chesapeake board member and remains a McClendon legal adviser.

A review of proxy statements shows that from 1995 through 2005, while Self served as both a Chesapeake board member and a partner shareholder in successive law firms, those firms billed Chesapeake for $6.3 million in legal work. Self retired from the board in 2005 with 232,972 Chesapeake shares then worth $4.8 million and another 288,750 stock options.

Self wasn't the only board member to profit handsomely while supervising McClendon. Until just a few weeks ago, when pay and perks were curtailed in response to public scrutiny, the Chesapeake board was one of the most generously paid in the U.S. oil and gas industry, according to a review of proxy statements.

From 2009 through 2011, Chesapeake paid $13.3 million in total compensation to 10 non-executive board members. By comparison, Exxon Mobil, the world's third-most-profitable company in 2011, paid 13 non-executive board members $9.9 million during the same period.

Though Self left the board in 2005, McClendon's friend continued to exercise a perk bestowed on board members — flying on Chesapeake-leased aircraft. In 2009, logs show, Self flew with his family from Oklahoma City to the Grand Caymans. In total, Self and family members logged $150,000 worth of personal flights on Chesapeake planes in 2010, records show.

Self did not respond to requests for comment.

Other Chesapeake board members were such frequent fliers in 2010 that some logged far more personal flights than business flights on company-leased jets, internal documents show.

Corporate plane use for business and personal flights is considered a prime perk for American executives and board members. It is legal if properly disclosed, though personal trips can be subject to income tax.

Chesapeake discloses such travel but only for board members and a few top executives. It does not detail how many flights each individual took, or where and with whom the individual traveled. Reuters reviewed internal company logs, which list specific flights and include dates, airports and passenger lists.

Board member Merrill “Pete” Miller, for example, the chief executive of National Oilwell Varco and Chesapeake's lead independent director, took $160,000 in free personal flights — twice as much as he spent on business travel.

Former Oklahoma governor and current board member Frank Keating spent $57,000 in business flights, mostly to shuttle between Oklahoma and Washington, and $175,000 worth of personal flights. A round-trip flight with 10 friends to Alaska cost Chesapeake shareholders $71,000.

Miller did not respond to requests for comment. Keating referred questions to Chesapeake, which did not respond.

WEEKENDS IN BERMUDA

Even the board's most frequent fliers cannot rival McClendon's use of jets that the company leased. His contract permits him to take unlimited business or personal flights for free (though he must pay taxes for certain personal flights). Friends and family, the contract says, also fly for free.

On June 15, 2010, a Gulfstream 550 jet leased by Chesapeake departed Oklahoma City bound for Amsterdam with three passengers: McClendon and his two sons, Jack, now 26, and Will, 19.

McClendon gave a speech to a natural-gas conference shortly after arriving, then took the next two weeks off for a family vacation. According to logs reviewed by Reuters, the trio was joined by McClendon's wife, Katie, and together the four flew back from Paris. The charter flights cost $108,000 and were billed as “business,” the logs show.

The flights were among 155 business charters McClendon logged in 2010 at a cost of $2.25 million. He brought family members along for at least 17 of those flights, billed as business expenses and valued at more than $370,000.

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