Chesapeake CEO Sold `All' Stock to Meet Margin Calls

By Steven Bodzin and Dan Lonkevich

Oct. 10 (Bloomberg) -- Chesapeake Energy Corp. said its chief executive officer, Aubrey McClendon, involuntarily sold ``substantially all'' of his common shares of the company's stock over the past three days to meet margin loan calls.

``These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis,'' McClendon said in today's statement. ``In no way do these sales reflect my view of the company's financial position or my view of Chesapeake's future performance potential.''

McClendon, 49, owned 33.5 million shares, or 5.8 percent of the company's common stock, according to a Sept. 30 filing with the U.S. Securities and Exchange Commission. He was the company's third-largest shareholder.

Chesapeake, this year's worst-performing petroleum producer in the Standard & Poor's 500, fell 6.7 percent in New York trading today amid concern hedging contracts won't protect the company against a plunge in natural-gas prices. McClendon's divestiture was announced after the close of regular trading on U.S. stock markets.

``You have to imagine Aubrey's lost a large portion of his fortune,'' Benjamin Dell, an analyst at Sanford C. Bernstein & Co., said today in a telephone interview. He rates the stock at ``market perform'' and owns none.

More than three-quarters of McClendon's $18.7 million in compensation last year was stock awards. The annual compensation helped boost McClendon to 134th place on the Forbes 400 list of wealthiest Americans this year from 220th place last year.

Price Revealed

Company spokesman Jeff Mobley declined to comment beyond the content of the statement. He said in an interview the company will soon file forms that will show what price McClendon received for his shares.

Investors are concerned that Chesapeake and other U.S. oil and gas producers have hedging contracts with financial firms and other counterparties that won't be able to pay for their output at the agreed-upon prices because of the global credit crisis, said Robert Goodof, who helps manage $25 billion at Loomis Sayles & Co. in Boston.

Oil and gas producers use hedging contracts to lock in prices and ensure adequate returns from their wells and sufficient cash flow to pay off their debt.

McClendon is the second oil chief executive officer in as many days to reveal company stock sales. XTO Energy Inc. Chief Executive Officer Bob Simpson sold more than $101 million of stock, according to an Oct. 8 filing with the Securities and Exchange Commission.

XTO Stock Sale

Simpson, 60, sold shares of the Ft. Worth, Texas-based company at prices ranging from $34.64 a share to more than $39.50 a share, the filing said.

The sales represent about a third of Simpson's stake in XTO. He was the company's tenth-largest shareholder.

Chesapeake also has so-called knockout swap contracts on more than one-third of its 2009 production, and those deals don't obligate the buyers to take gas when prices drop to $6.28 per thousand cubic feet of the heating and power-plant fuel, according to analyst Joseph Allman of JPMorgan Chase & Co. in New York.

Gas futures traded in New York dropped to $6.65 today and have plunged 50 percent since the end of June.

``With natural gas close to $6.60, we think the concern about Chesapeake's knockout swaps is legitimate,'' Allman said in a note to clients. He rates Chesapeake shares ``neutral.''

A portion of the company's hedging positions contain such provisions, Chesapeake said in a separate statement.

Kick out Swaps

``The company has consistently utilized kick out swaps for a portion of its production, and over the past 57 months, only four months have resulted in any portion of the company's hedges being kicked out.''

In response to the lower gas prices, Chesapeake plans to further cut its capital expenditures by about $1.5 billion in 2009 and 2010 through reduced drilling and lower leasehold expenditures.

The company on Sept. 22 lowered its capital expenditure budget by $3 billion through 2010.

To ensure its revolving credit can be fully used during these ``turbulent economic times,'' the company said it borrowed the remaining capacity of its facility at the end of the third quarter. It has invested the cash proceeds in short-term U.S. Treasury and other highly liquid securities.

Lehman Brothers

Chesapeake said it has cash and cash equivalents of about $1.5 billion as of Sept. 30. All 36 lenders that participate in Chesapeake's revolving credit facility fully funded their commitment, except for Lehman Brothers Holdings Inc., which didn't fund its $11 million share of the advance, the company said.

Chesapeake's financial exposure to Lehman Brothers included unpaid gas sales and derivates contracts. Chesapeake said it received cash payment for all natural-gas marketed through a former affiliate of Lehman Brothers. The company estimates a loss on terminated derivate contracts and the net value of hedges with Lehman won't be more than $50 million.

The company said it has hedging arrangements with 19 different counterparties.

To contact the reporter responsible for this story: Dan Lonkevich in New York at dlonkevich@bloomberg.net; Steven Bodzin in New York at sbodzin@bloomberg.net.