Bloomberg News

Chesapeake CEO Resigns After Scrutiny on Personal Loans

January 30, 2013

Chesapeake Energy Corp. CEO Aubrey McClendon

Aubrey McClendon’s agreement to resign effective April 1 culminated a shareholder revolt by Carl Icahn and Southeastern Asset Management Inc.’s O. Mason Hawkins that earlier had cost the CEO the chairmanship he’d held for more than two decades. Photographer: F. Carter Smith/Bloomberg

Chesapeake Energy Corp.’s (CHK:US) departing chief executive officer will leave to his successor a shrunken, cash-starved version of what was once the preeminent natural gas producer in the world’s biggest market for the fuel.

Aubrey McClendon’s agreement to resign effective April 1 culminated a shareholder revolt by Carl Icahn and Southeastern Asset Management Inc.’s O. Mason Hawkins that earlier had cost the CEO the chairmanship he’d held for more than two decades. McClendon also relinquished his annual bonus and saw executive perks curtailed amid federal investigations of a portfolio of personal loans that topped $840 million.

Chesapeake climbed 6 percent to $20.11 at the close in New York, after earlier reaching $21.20 for the biggest intraday gain in almost nine months.

Chesapeake lost as much as 43 percent of its market value in 2012 as scrutiny of McClendon’s financial transactions destroyed investor confidence in management and cratering gas prices drained the company of cash. Unfinished tasks facing the next CEO include raising $8 billion from asset sales this year to plug a funding shortfall, and converting a company that pumps enough gas to supply 20 percent of American household demand into an oil producer.

“Companies have life cycles and during various stages it can make sense for some people to leave,” Philip Weiss, an analyst at Argus Research Corp. in New York, said in a telephone interview. “Aubrey McClendon was very good at accumulating land but now that Chesapeake is moving into an asset-harvesting mode, they must have decided they needed someone with another set of skills.”

Board Investigation

An internal board investigation of McClendon’s use of his stakes in thousands of company-owned wells to secure personal loans so far has found nothing improper, Chesapeake said in a statement yesterday released after the close of regular trading.

“The imminent departure of CEO McClendon proves that major strategy changes are likely, and we envision a reduced spending environment that is less reliant on asset sales,” Tim Rezvan, an analyst at Sterne Agee & Leach Inc. in New York, who has a neutral rating on Chesapeake shares, wrote in a note to clients today.

Chesapeake’s 6.775 percent bonds due to mature in March 2019 fell 1.001 cents to 99.749 cents on the dollar to yield 6.824 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Archie Dunham, the former ConocoPhillips chief who replaced McClendon as chairman in June, thanked the outgoing CEO for his “enormous achievements,” in an e-mail to employees. The company isn’t for sale and employee perks such as on-site childcare and a fitness center at the company’s Oklahoma City headquarters won’t be discontinued, Dunham wrote.

‘Philosophical Differences’

In a separate e-mail to Chesapeake employees, McClendon attributed his imminent departure to “certain philosophical differences” between him and the board without elaborating. Dunham and McClendon declined to be interviewed for this story, according to Michael Kehs, a Chesapeake spokesman.

Icahn and Hawkins, who together control 22 percent of Chesapeake’s stock, pushed for McClendon’s resignation after concluding his presence and the controversy surrounding his personal business deals was hurting the company’s share price, a person with knowledge of the discussions said. Icahn and Hawkins didn’t immediately respond to messages left at their offices after normal business hours yesterday.

Company Founder

McClendon, 53, led Chesapeake from its 1989 inception in Oklahoma City, amassing U.S. gas and oil fields that cover an area equivalent to half the size of New York state. As one of the first explorers to embrace horizontal drilling and hydraulic fracturing, McClendon helped usher in a revival of U.S. gas and oil production with discoveries such as the Haynesville Shale in Louisiana and Utica Shale in Ohio.

The success of the drilling methods led to a glut of North American gas that drove prices to a 10-year low in early 2012, causing Chesapeake to cut jobs, curtail capital spending and sell about $11 billion in oilfields and pipelines to help close a gap between cash flow and drilling expenses. The company lost $1.07 billion during the first three quarters of last year and net debt ballooned by 56 percent during that period to $16.1 billion.

The board will release final results of its review of McClendon’s financial transactions on Feb. 21, when announcing fourth-quarter results.

Smooth Transition

“While I have certain philosophical differences with the new board, I look forward to working collaboratively with the company and the board to provide a smooth transition to new leadership,” McClendon said in the statement.

McClendon’s departure under a mutual agreement with the board will be treated as a “termination without cause” rather than a retirement, said a person with knowledge of his departure terms, who spoke on the condition that he not be identified.

Those terms will entitle McClendon to compensation including $34 million in accelerated vesting of restricted stock that he was awarded previously, and about $12 million in cash severance and benefits to be paid out over four years, the person said.

A retirement before Dec. 31 of this year, according to a May filing detailing severance terms, would have required McClendon to repay part of a special $75 million cash payment the company awarded him in 2008. The “clawback” would be worth about $11 million based on an April departure, according to a formula disclosed in the filing.

No Clawback

Based on the terms of a termination without cause, Chesapeake won’t collect any clawbacks from McClendon in connection with his resignation, the person with knowledge of the matter said.

McClendon’s denouement may signal Chesapeake is preparing to sell new bonds to refinance older, more expensive debt, Gregg Brody and Jason Homler, JP Morgan Chase & Co. credit analysts, said in a note to clients.

“The company may have wanted to wait until this announcement occurred,” Brody and Homler wrote in the note yesterday. The company “is likely to tap the capital markets to term out debt” before additional cash-generating asset sales are finalized.

Chesapeake lagged U.S. energy producers such as Devon Energy Corp. (DVN:US) in shifting rigs from gas fields to higher-profit oil prospects, leaving the company more vulnerable to slumping gas prices.

“You can be the smartest guys in the room but you may be in the wrong room,” McClendon said during a March interview in a restaurant on the company’s Oklahoma City campus. “It’s not enough to be the smartest guys in the room. Sometimes you have to be hungry, sometimes you have to be lucky, and you have to be open to change.”

Well-Investment Program

McClendon’s fall from grace began in April after media reports spotlighted personal loans he obtained using minority stakes in company-owned wells that he had been allowed to gather for his private portfolio. Chesapeake stock lost 20 percent of its value that month as scrutiny of McClendon’s personal transactions compounded the impact of free-falling prices on a company whose output was more than 80 percent gas.

Under an executive perk designed to align McClendon’s personal interests with those of the company, the CEO acquired stakes as large as 2.5 percent in almost every well Chesapeake drilled during the past 24 years. McClendon took out loans backed by his well stakes to fund his portion of costs. At the end of 2011, he owed $846 million on those loans, the company reported on April 26.

Some of the loans came from companies that were involved in separate financial transactions with Chesapeake. The Internal Revenue Service and U.S. Securities and Exchange Commission began probes.

Board Changes

In addition to deposing McClendon from the chairmanship, Icahn and Hawkins installed new board members to intensify oversight of a management team that outspent cash flow in 19 of the past 21 years. Chesapeake said last year it would halt the well-investment program at the center of McClendon’s loan portfolio next year rather than the original termination date at the end of 2015.

“Aubrey has every right to be proud of the company he has built, the world-class team of people at Chesapeake and the collection of assets he has assembled, which in my opinion, are the best portfolio of energy assets in the country,” Icahn said in a statement yesterday.

McClendon raised more than $30 billion since 2008 selling burgeoning shale assets to companies including Exxon Mobil Corp. (XOM:US), Paris-based Total SA (FP) and Cnooc Ltd., China’s largest offshore energy producer.

“I have the utmost confidence in you and the company’s future and I will always treasure the time we have spent together building Chesapeake into the unique and dynamic company that it is today,” McClendon said in his e-mail to employees late yesterday.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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Companies Mentioned

  • CHK
    (Chesapeake Energy Corp)
    • $24.67 USD
    • -0.10
    • -0.41%
  • DVN
    (Devon Energy Corp)
    • $70.97 USD
    • -0.59
    • -0.83%
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