Chesapeake Energy's Investors, Analyst Call For Change
04/20/2012| 01:17pm US/Eastern
--Natural-gas company faces call for ouster of CEO
--Chesapeake has lost $800 million in market value since Tuesday's close
--Investor lawsuit filed against company
By Ben Lefebvre
Investors and at least one market analyst are putting pressure on Chesapeake Energy Corp. (>> Chesapeake Energy Corporation) to rein in--and, in at least one case, replace--its chief executive in the wake of revelations detailing $1.1 billion in personal loans he took using his stakes in the company's wells as collateral.
The loan revelations, disclosed Wednesday, gave further ammunition to investors critical of Chesapeake Energy CEO and co-founder Aubrey McClendon, who over 12 years has built the company into the second-largest natural-gas producer after Exxon Mobil Corp. (XOM). In October 2008, McClendon drove down the price of the company's shares by selling $569 million of his own stock in the company to pay back margin calls from his stock brokers.
For the past three years, McClendon took out loans against 2.5% stakes in Chesapeake wells that the company allowed him to buy under its Founders Well Participation Program. McClendon used those holdings to secure $500 million in loans from private-equity firm EIG Global Energy Partners, which was also in financial dealings with Chesapeake. The loans were first revealed by Reuters on Wednesday.
On Thursday, the Deborah G Mallow IRA SEP Investment Plan filed a lawsuit against McClendon and Chesapeake Energy's board of directors. The suit, filed in the U.S. District Court, seeks that the company disclose all information relating to the McClendon loans, establish independent oversight of the loans and abolish the company program that allowed McClendon to buy personal stakes in the company's wells.
"Such huge loans raise serious conflicts of interest; they can easily cloud the CEO's judgment on key issues," the plaintiff's complaint stated. Attempts to reach the plaintiff were unsuccessful. A Chesapeake spokesman wasn't immediately available to comment on the lawsuit.
An analyst also called for McClendon's, or the board's, ouster.
Given the "questionable nature" of McClendon's actions, the board's approval of the program and the company's high debt level, "the best thing for investors would be to replace the board and/or the CEO," Argus energy analyst Phil Weiss wrote in an analyst note issued Friday. Weiss has a "sell" rating on Chesapeake shares.
"Now that this comes out, it makes my concern greater that there are other things going on that we can't see," Weiss said in an interview. "My level of concern about some sort of impropriety has grown; my concern about cooking the books has grown."
In an interview with Dow Jones last Wednesday, McClendon refused to discuss the loans, calling them a personal matter unrelated to Chesapeake. Chesapeake legal counsel Henry Hood has said McClendon's loans hadn't put the company's finances at risk.
Chesapeake stock was trading at $17.82 mid-morning Friday, down 6.5% since Tuesday's close. The company has lost about $800 million in market value since details of McClendon's loans appeared Wednesday.
-By Ben Lefebvre, Dow Jones Newswires; 713-547-9201; firstname.lastname@example.org