--Early cessation of founder's well-participation program may not pacify investors
--SEC conducting informal investigation into company -media report
(Updates with investor comment in 10th paragraph, details about S&P downgrade in last two paragraphs.)
By Ben Lefebvre and Tess Stynes
Chesapeake Energy Corp. (CHK) said Thursday its board and Chief Executive Aubrey K. McClendon have agreed to negotiate the early termination of a program that allows him to invest in new wells, a practice that has troubled investors and cost the energy company hundreds of millions of dollars in market value.
The so-called founders well participation program provides McClendon, who is also the company's founder, the right to own up to 2.5% of new oil and gas wells. Along with its effort to end the program early, Chesapeake said it intends not to renew the program after its expiration date at the end of 2015.
The discovery that McClendon used his well stakes as collateral to borrow up to $1.4 billion from a private-equity firm that has done hundreds of millions of dollars in deals with the Oklahoma City company in the past year has led investors to ask for changes in the way the company is run, including calls to replace its board and CEO.
The company said Thursday it is reviewing financing arrangements between McClendon and any other third party that has had or may have a relationship with the company.
Chesapeake stock has fallen as much as 10% since details of McClendon's borrowings appeared in the media on April 18. Shares were down 2.8% at $17.62 late Thursday.
The cessation of the well-participation program will do little to reassure investors who are more concerned about McClendon's attitude toward the company, said Morningstar analyst Mark Hanson. "At the end of the day, it was about Aubrey and how he ran his company," Hanson said. The program "didn't add one more dollar of debt, but it was a microcosm of his management style."
Chesapeake also disclosed that the companies holding McClendon's interest in Chesapeake wells owed $846 million to third parties. These companies hold about 810 billion cubic feet of natural-gas equivalent, consisting mostly of natural gas. They account for about 147 million cubic feet of natural-gas equivalent a day of oil and gas production.
Chesapeake on Thursday also aimed to clarify a statement earlier this month that indicated it was aware of McClendon's financing transactions, saying it was generally aware that he used interests acquired through the well-participation program but didn't have knowledge of specific transactions or their terms.
The board's walking back of its earlier statement came hours before news reports that the U.S. Securities and Exchange Commission may investigate the Chesapeake's wells program, fueling some investors' criticisms that the governing body is only responding to possible government action.
"It is interesting that they've done a 180 on this only after the SEC news," said Dave Dreman, chairman of Dreman Value Management LLC, which holds 1.7 million Chesapeake shares.
Chesapeake, which borrowed billions of dollars to make itself the second-largest U.S. natural-gas producer after Exxon Mobil Corp. (XOM), has been under pressure recently to overhaul its corporate governance. Analysts have warned that the company's financial structure and liquidity concerns could present a risk for shareholders.
Also Thursday, Fitch Ratings and S&P lowered their outlooks on Chesapeake. Fitch lowered its outlook on Chesapeake's double-B rating--two notches into junk territory--to stable from positive. S&P lowered its rating to double-B and issued a negative outlook.
Fitch said the change reflects the weak outlook for U.S. natural-gas prices coupled with the company's still aggressive spending plans for next year. Chesapeake's current spending plans are expected to result in a funding gap of $7 billion to $8.5 billion, which will be funded through asset sales and monetizations potentially valued at $10 billion, Fitch said.
In commenting on the borrowings by Chesapeake's CEO, S&P said the turmoil resulting from revelations of McClendon's borrowing and potential further details resulting from the board investigation could hamper Chesapeake's ability to raise cash to meet its "massive" external funding requirements.
The terms of the well program represent "a significant governance deficiency," S&P said in its announcement.
-By Ben Lefebvre and Tess Stynes, Dow Jones Newswires; 713-547-9201; email@example.com