By Joe Carroll and Jim Polson - May 3, 2012 4:00 AM GMT+0700
Chesapeake Energy Corp. (CHK) Chief Executive Officer Aubrey McClendon told investors he’s “deeply sorry” that his personal finances have come under scrutiny as shares fell the most in more than three years.
“I’m deeply sorry for all of the distractions of the past two weeks,” McClendon, co-founder of Oklahoma City-based Chesapeake, said on a conference call today. McClendon said the company may have to sell more assets than planned to cover a gap between cash flow and revenue if natural-gas prices remain depressed. These sales won’t interfere with debt-reduction targets or plans to boost oil production, he said.
Aubrey McClendon, co-founder of Chesapeake Energy Corp., is "deeply sorry for all of the distractions of the past two weeks." Photograph: AP Photo
Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon raised concern among some of his biggest investors, including Southeastern Asset Management, after news reports last month showed that he used his stakes in company wells as collateral to borrow hundreds of millions of dollars. Photographer: F. Carter Smith/Bloomberg
Chesapeake dropped 15 percent to $16.74 at the close in New York, the biggest decline since December 2008. The company reported an unexpected first-quarter loss yesterday, cut cash flow estimates, reduced its drilling budget and said it may run out of money next year under the weight of the lowest gas prices in a decade. Chesapeake needs gas prices of $5 a thousand cubic feet in 2014 to achieve its $7 billion cash flow goal for that year, McClendon said.
The shares have dropped 50 percent in the past year. The impact of falling gas prices has been compounded by media reports that McClendon was using personal stakes in the company’s wells to obtain loans. Chesapeake said yesterday it would strip McClendon of his role as chairman and appoint an independent person to the position he has held since co-founding the company in 1989.
Chesapeake’s board said it will call an early halt to an incentive program that allowed McClendon to amass personal stakes in thousands of company-operated wells.
Biggest Investors
McClendon raised concern among some of his biggest investors, including Southeastern Asset Management, after Reuters reported last month that he used his stakes in the wells as collateral to borrow hundreds of millions of dollars. Southeastern Asset Management, which holds a 13.6 percent stake in the company, today filed to change its status to an activist investor so it can pursue talks with management or third parties to boost the company’s value.
Potential conflicts between his personal and professional duties overshadowed the CEO’s efforts to shave a net debt load that swelled to twice the size of Exxon Mobil Corp. (XOM)’s at the end of 2011.
“The market has been catching up to the debt-laden, smoke- and-mirrors investment model they employ,” said Steve Shafer, chief investment officer for Covenant Global Investors, an Oklahoma City-based hedge fund that manages $320 million. “Chesapeake has a lot of debt and it needs a lot of debt going forward and that sets up a potentially scary situation.”
End the ‘Controversy’
Covenant Global doesn’t own Chesapeake shares.
“We are eager to put the controversy of the past two weeks behind us and focus all of our energies on delivering on our key endeavors,” McClendon said on the conference call today.
Chesapeake reported a first-quarter loss of $71 million, or 11 cents a share, compared with a loss of $205 million, or 32 cents, a year earlier, the company said in a statement yesterday. Excluding one-time gains and losses, per-share earnings were 18 cents, less than the 28-cent average of 34 analysts’ estimates compiled by Bloomberg.
Cutting Estimates
The gas producer slashed its full-year 2012 and 2013 operating cash flow estimates by as much as 48 percent and increased the amount of assets it plans to sell. Chesapeake said it may run short of cash next year after completing more than $20 billion in asset sales to close a funding gap and pay down debt.
The asset sales won’t impede Chesapeake’s plan to increase oil output to 250,000 barrels a day in 2015, Chief Financial Officer Domenic Dell’Osso said during the call.
The cost to protect against losses on Chesapeake’s debt jumped to the highest since September 2009. Credit-default swaps on the company jumped 3.5 percentage points to 7.6 percent upfront as of about 3:30 p.m. in New York, according to CMA, which is owned by CME Group Inc.
McClendon agreed to a board request to terminate the so- called Founder Well Participation Program in June 2014, 18 months early, without additional compensation, Chesapeake said in a separate release yesterday. He’ll retain the CEO position and won’t relinquish any of the well stakes he acquired during the past 23 years, said Michael Kehs, a Chesapeake spokesman.
“They need to keep this guy on a short leash and this is the right way to do it,” said Mark Hanson, an analyst at Morningstar Inc. (MORN) in Chicago, said in a telephone interview yesterday.
Owning Well Stakes
As of Dec. 31, McClendon, 52, had $846 million in loans financing his participation in the well-ownership program. The program, which allowed him to own as much as 2.5 percent of almost every well the company drilled, required that he pay development costs proportionate to his stake.
As Chesapeake has grown during the past two decades, McClendon’s need for cash to cover his well costs expanded along with the company’s. McClendon’s personal cash crunch was exacerbated by a plunge in gas prices that delayed the point when wells drilled in recent years began to turn a profit, Hanson said.
McClendon had $573 million in losses on his well stakes during the past three calendar years as lease and drilling expenses overwhelmed gas and oil revenue, the company said in a regulatory filing. During the first quarter, he piled on another $88 million in losses.
The Internal Revenue Service has been reviewing the well- investment program since March 2010 as part of audits of the company’s 2008 and 2009 tax returns, Kehs said yesterday.
To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net
To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net
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