JPMorgan Chase & Co. (JPM:US) and Goldman Sachs Group Inc. (GS:US) compete for banking and trading business from almost all of the world’s largest companies, with one notable exception: Chesapeake Energy Corp. (CHK:US), the second biggest U.S. gas producer now facing a cash-flow (CHK:US) shortage.
For more than a decade, JPMorgan bankers have declined to do business with Chesapeake and its chief executive officer, Aubrey McClendon, 52, said people with knowledge of the matter. In contrast, Goldman Sachs, which once loaned money to McClendon against his wine collection, recently helped arrange a $4 billion loan for Oklahoma City-based Chesapeake and is advising on its efforts to sell assets.
JPMorgan, the biggest U.S. lender by assets, is missing out on a shot at hundreds of millions of dollars in fees paid to banks over the years by Chesapeake, one of the energy industry’s most active dealmakers. Avoiding Chesapeake also limits JPMorgan’s risk (JPM:US) should the gas company’s finances worsen.
“It’s unusual to choose not to do any business with an organization that buys a lot of banking services,” said Douglas Elliott, a fellow in economic studies at the Washington-based Brookings Institution and a former investment banker. “If anything, there’s a tendency to be greedy and want the fees.”
Concerns about Chesapeake’s fast growth and credit quality (CHK:US) played a role in JPMorgan’s decision not to pursue business from the energy firm, said the people, who asked not to be identified because the discussions were private. Competition is already fierce and other banks have an edge, reducing the attractiveness of pursuing Chesapeake work, one person said.
Officials at Chesapeake and New York-based JPMorgan declined to comment.
McClendon is known as one of the energy industry’s biggest risk-takers. Forbes magazine last year called him “America’s most reckless billionaire.” He founded the company in 1989, going on buying sprees that eventually amounted to a portfolio of oil and gas fields that covers an area half the size of New York State.
Along the way, McClendon has outspent cash flow in 19 of 21 years, relying on asset sales or financing transactions to stay afloat. That has sometimes left the company, with unsecured debt rated as junk by Standard & Poor’s and Moody’s Investors Service, exposed to swings in oil and gas prices. Beset by low oil prices, the company put itself up for sale in 1998, failing to secure a buyer.
One of the last pieces of investment-banking work that JPMorgan, then known as J.P. Morgan & Co., did with Chesapeake was a 1996 stock offering, data compiled by Bloomberg show.
In 2008, McClendon asked JPMorgan to renew the relationship after the bank bought Bear Stearns Cos. Bear was a frequent participant in Chesapeake bond and stock offerings, some of which JPMorgan completed after the purchase, said a person with knowledge of the deals.
Steven Black, then co-CEO of JPMorgan’s investment bank, and Douglas Petno, head of JPMorgan’s natural-resources investment banking group, met with McClendon to discuss the matter, the people said. The practice remained in place.
Other senior managers involved in the decision included Kelly Coffey, who ran corporate derivatives marketing and the North American reputational risk committee; Stephen Eichenberger, a credit-risk executive, and Larry Landry, a leveraged-finance banker, the people said. All five didn’t respond to requests for comment.
This group of JPMorgan officials and others inside the bank met repeatedly to discuss Chesapeake’s growth, its credit quality and the proper value of its holdings. One view of the executives was that Chesapeake’s assets (CHK:US), including pipelines and real estate, were strong yet might not provide enough collateral if the company was forced to sell assets later, the people said.
In one meeting of JPMorgan executives in 2008, it was decided that Chesapeake didn’t meet at least portions of the bank’s so-called five P’s of lending: people, payment, protection, purpose and perspective, the people said. Those five P’s, which other banks often call the five C’s -- character, capacity, collateral, capital, conditions -- are used to examine whether a borrower is creditworthy.
JPMorgan never found evidence of wrongdoing at Chesapeake, the people said.
The bank’s position is more of an understanding among its staffers than a formal policy, said people familiar with the situation. Chief Executive Officer Jamie Dimon, 56, was aware of the practice while not involved in making the decision, one person said. The stance on Chesapeake applies across all of JPMorgan’s units, including lending, credit-derivatives and merger-and-acquisitions, said people familiar with the matter.
Junior bankers in the oil and gas investment-banking group are told not to seek meetings with Chesapeake executives to pitch JPMorgan’s services, as they would most other energy firms of Chesapeake’s size, people familiar with the matter said.
Banks occasionally will reject a potential client, said Bradley Hintz, an analyst at Sanford C. Bernstein & Co. and a former chief financial officer at Lehman Brothers Holdings Inc.
“It’s tough to do, because the pressure on these banks is to go out and bring in deals,” he said. “It’s usually a senior person making that decision.”
Chesapeake is a gusher for investment banks. It issued additional stock 13 times since its initial public offering in 1993, generating at least $265 million in fees, and it had 14 bond issues outstanding as of Dec. 31. It’s also the most acquisitive company in the U.S. oil and gas exploration and production industry, with 35 deals in the past 10 years valued at $9.2 billion, according to data compiled by Bloomberg
This year, there will be more business. McClendon is facing natural gas prices near historic lows, and is under pressure to sell billions of dollars of assets to meet obligations. The company’s cash-flow shortfall could reach $22 billion by next year, according to James Sullivan, an analyst at New York-based Alembic Global Advisors.
He’s also contending with a governance crisis. Shareholders including billionaire Carl Icahn replaced a majority of the board and stripped McClendon of his role as chairman after Reuters reported in April that he had borrowed against personal stakes in company wells.
Chesapeake does business with most Wall Street players, including Jefferies Group Inc. (JEF:US), its closest adviser, Morgan Stanley (MS:US), Bank of America Corp. (BAC:US), Citigroup Inc. (C:US) and Credit Suisse Group AG. (CSGN)
Goldman Sachs has developed a tight relationship with Chesapeake, working with the company since at least 2005, when it helped with a $262 million stock offering.
In addition to the recent loan and the asset-sale talks, Goldman Sachs also won major roles in the planned initial public offerings of Chesapeake’s oilfield-services subsidiary and FTS International, a pressure-pumping business 30 percent owned by Chesapeake. In 2009, a Goldman Sachs debt fund helped finance a private-equity firm that bought rights to future oil and gas production from some Chesapeake wells for $412 million.
“Chesapeake is a long-standing Goldman Sachs client and the company and its board recently turned to us for both advice and capital,” said Michael DuVally, a spokesman for New York- based Goldman Sachs. “We’re proud Chesapeake chose us and our involvement is consistent with our focus on helping our clients with their particular needs.”
The Goldman Sachs connection extends to McClendon’s personal wealth. In 2008, the firm filed a notice that it had extended credit to McClendon against his wine collection, at one point considered among the biggest in the U.S. Construction of a $3 million, 31,000-square-foot warehouse to maintain the collection was halted around the same time.
Goldman Sachs helped McClendon liquidate his personal holdings in Chesapeake stock later that year when he sold his stake to meet margin calls, according to a regulatory filing.
“Banking in many ways is still a trust business,” said Elliott of the Brookings Institution. “Different people form their opinions in different ways about who crosses the minimum threshold of trust and who doesn’t.”
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