Bloomberg News

Chesapeake’s McClendon Said Company Overpaid for Leases

June 26, 2012

Chesapeake’s McClendon Said in E-Mail Firm Overpaid for Leases

The Oklahoma City-based company has been shifting drilling rigs away from gas deposits such as the Haynesville Shale toward more profitable oilfields in Ohio and Oklahoma. Chesapeake warned investors last month that it may run out of cash as soon as next year if it fails to divest $7.4 billion in assets by the end of December. Photographer: Daniel Acker/Bloomberg

Chesapeake Energy Corp. (CHK:US) Chief Executive Officer Aubrey McClendon told employees in a 2008 e-mail the company paid twice as much as it should have for drilling rights as plunging natural-gas prices dashed prospects for profitable new wells, according to court filings.

McClendon said the natural-gas provider overpaid for leases just days before Chesapeake backed out of a deal to buy oil and gas rights from Peak Energy Corp., Peak’s lawyers said in court filings in a lawsuit. That case, involving leases in the Haynesville Shale formation in Texas, led to a damage award of almost $20 million against Chesapeake.

“What was a fair price 90 days ago for a lease is now overpriced by a factor of at least 2X, given the dramatic worsening of the natural gas and financial markets,” McClendon said in the October 2008 e-mail, according to an appellate filing by Peak’s lawyers in the case.

Chesapeake, the second-largest U.S. gas producer, has lost almost 40 percent of its market value in the past year as the effect of tumbling energy prices was compounded by questions about McClendon’s personal financial dealings. McClendon, who led a costly push to expand the firm’s gas holdings during the last decade, was replaced as chairman last week by Archie Dunham.

On the day McClendon wrote the e-mail in 2008, the CEO disclosed that he had liquidated most of his Chesapeake shares to cover margin calls, according to a U.S. Securities and Exchange Commission filing.

Maps Bought

That year, the board gave McClendon an $87 million bailout in the form of a special bonus and by buying his collection of 19th-century maps, according to public filings. He agreed last year to buy back the maps for $12.1 million plus interest to settle a 2009 lawsuit by the Louisiana Municipal Police Employees’ Retirement System that challenged his compensation package.

Jim Gipson, a Chesapeake spokesman, didn’t immediately return phone and e-mail messages today seeking comment on McClendon’s e-mail that was included in court filings.

The Oklahoma City-based company has been shifting drilling rigs away from gas deposits such as the Haynesville Shale toward more profitable oilfields in Ohio and Oklahoma. Chesapeake warned investors last month that it may run out of cash as soon as next year if it fails to divest $7.4 billion in assets by the end of December.

Asset Sales

Chesapeake said June 8 it will sell its interests in Chesapeake Midstream Partners LP (CHKM:US) to Global Infrastructure Partners for $2 billion. It also plans to raise more than $2 billion by divesting its pipeline development unit and some central U.S. conduits to Chesapeake Midstream.

The U.S. Court of Appeals in New Orleans will hear arguments next month on whether a judge erred in awarding Peak $19.7 million in damages for Chesapeake’s decision to pull out of an agreement to buy shale gas rights in East Texas.

U.S. District Judge John T. Ward in Marshall, Texas, ruled in September 2001 that Chesapeake officials wrongfully reneged on an agreement to buy the energy rights to 5,404 acres held by Plano, Texas-based Peak.

Chesapeake’s lawyers appealed, saying the judge misconstrued the agreement in ruling against the company. Chesapeake also argued that the judge erred in concluding that Peak had met its obligations under the agreement, according to court filings.

The case is Coe v. Chesapeake Exploration LLC, 11-41003, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com; Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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Companies Mentioned

  • CHK
    (Chesapeake Energy Corp)
    • $29.02 USD
    • -0.29
    • -1.0%
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