Chesapeake recently made the news again for Aubrey’s rather creative financing.
This is from Gas Briefing Daily and I no longer have a subscription so…
Chesapeake shares tank on news of CEO’s loans
Chesapeake Energy Corp’s stock was pummeled Wednesday, hitting a new 52-week low as skittish investors sold shares in the Oklahoma City producer in the wake of news that its CEO floated $1.1bn in loans using his 2.5% interest in company wells as collateral.
I want to see shareholders upset over the sacrifice zones their investments create. But, I’ll settle for this today.
From smart person:
from the article: an unusual corporate perk that offers him a chance to invest in a 2.5 percent interest in every well the company drills. McClendon in turn is using the 2.5 percent stakes as collateral on those same loans, documents filed in five states show.from the article: Both McClendon and Chesapeake said the loans don’t pose any conflict of interest. And they are private transactions that the company has no responsibility to disclose or to vet, Chesapeake said. “There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way,” McClendon wrote in an email to Reuterand this: McClendon’s biggest personal lender, EIG Global Energy Partners, has also been a big financier for Chesapeake.question: this is how these guys parse words……..the loans have chesapeake wells as collateral but audrey the riskbaron doesn’t think that binds chesapeake. so when he defaults on his loans, the “biggest personal lender” becomes the owner of those 2.5 percents right?sounds to me like the lender has a conflict of interest.
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Between the dropping price of natural gas, and what happened to a major company, who’s name begins with the letter “E”, when that company started using “odd” borrowing against various divisions, CHK investors should either stage a revolt, or run for their financial lives!
Now a Law firm is looking at them:
http://www.marketwatch.com/story/harwood-feffer-llp-announces-investigation-of-chesapeake-energy-corp-2012-04-18
Another Law firm joins in the CHK fray:
http://www.marketwatch.com/story/the-law-firm-of-levi-korsinsky-llp-launches-an-investigation-into-possible-breaches-of-fiduciary-duty-by-chesapeake-energy-corporation-2012-04-18
Forbes even comments:
http://www.forbes.com/sites/christopherhelman/2012/04/19/chesapeake-mcclendons-big-borrowing/
From Seeking Alpha:
http://seekingalpha.com/article/509321-the-problem-with-chesapeake-ceo-s-1-1-billion-in-loans?source=marketwatch
There will be audits and fines for non-compliance but, that hasn’t been released. The new regs seem to be focused on oil & gas operators that have many wells concentrated in a single “basin” AND/OR drilling and completion operations (2015).
They have broken up the USA into maybe a 100 basins. Not geologic, not air basins but, something else? If an oil/gas operator operates a number of wells in one of these basins AND has a bit of gas in their production stream, they will need to report their emissions to a website.. If no gas, no emissions, no reporting problem.
I’m sure this will help somehow. It will at least increase the cost of operating the lease & provide “actual theoretical” emission information for more review. I guess that’s a good thing?
Interesting post. Makes one wonder when RRC, COP and others will follow CHK down the toilet?
CHK has to try to make money, even if they ignore Courts:
http://www.huffingtonpost.com/2012/04/19/chesapeake-energy-pennsylvania-township-order_n_1435807.html
Such arrogance!
The Courts (especially in Tx) are worthless and a big wast of our tax money.
Recieving beneficial loan terms on purchases of company assets is not exempt income per IRS code. At a bare minimum this practice ought to be front and center in the CHK Annual Report under executive compensation and be present in one of those extra Box 12’s on Aubrey’s W-2 that is never filled in for us normal people.
I hope the IRS has taken note and taken a swim through Aubrey’s Form 1040.
Okay, full disclosure, I’m no Ed Ireland when it comes to accounting or shale economics. That said, let’s see if I understand this. CHK drills wells, and Frackin Aubrey gets around 2% of the royalty from each well. But then, somewhere along the line, someone loaned him a BILLION dollars (and just out of curiosity, what did he do with the money? Invest it in CHK? Buy CHK stock? An Island in the Caribbean?) Then, to pay back the loan, he has the 2% transferred to his lender. So, if there’s no ‘conflict of interest’ on his part, what was used as collateral? Oh, that’s right, his publicly held company. You know, the one that has those creative accounting processes that’s similar to what made Enron implode in a matter of minutes and ruined a lot of people.
The only upside to this will be watching CHK go tits up and slip under the water like the Titanic. Let’s hope Aubrey isn’t dressed like a woman hidden on a lifeboat.
Of course, some other criminal enterprise will come in and take over their operations and probably be 10X worse. But it’ll be worth it (imho) if we get to have the joy of watch CHK crash and burn.
If they go under, like many of them, I’m sure will.
I ask…how will they clean up their mess?
The same way their messes have always, ALWAYS been cleaned up. We will do it.
Yeah and with our tax money!
I can’t wait for all the Gas Holes (f-ing shale gas holes) go belly up and file bankruptcy and wind up sipping martini’s on the beaches in Barbatios(sp?).
The Cayman Islands are popular, since they don’t have extradition Laws, & low taxes.
http://www.reuters.com/article/2012/04/20/us-chesapeake-idUSBRE83J0QJ20120420
” “The increased disclosure in the proxy is a start, but it’s still disappointing that Chesapeake remains tone deaf to analyst and investors and only seems to take action once they’re called on the carpet … through a journalistic expose such as the one that came to light this week,” Mark Hanson, analyst at Morningstar said in an email sent to Reuters.
Meanwhile, pressure on the company has intensified. Phil Weiss, an oil analyst at Argus Research who has had a “sell” rating on Chesapeake, said in a note to clients on Friday that it was in the best interest for McClendon, the board of directors, or both to step down.
“When we consider the full financial picture at Chesapeake, including its high debt levels, its use of financial engineering, the relatively low quality of its financial data, the questionable nature of some of the CEO’s transactions with the company … we believe the best thing for investors would be to replace the board and/or the CEO,” Weiss wrote in his note to clients. “
It’s hard to imagine a financial naalyst writing a much more damning indictment than that.
Yeah, you’re probably right. Caymen Islands is a more likely place to find ’em sipping martinis on the beach when they go tits up! And good news natural gas spot price is at $1.84, and heading south. Take notice Gas Holes!!!!
It’s not just Aubrey doing this:
http://www.foxbusiness.com/news/2012/04/20/chesapeake-co-founder-ward-also-took-loans-on-well-stakes/
Oops, CHK is ending CEO well loans:
http://fuelfix.com/blog/2012/04/26/steffy-chesapeake-to-scrap-well-program-that-involved-ceos-loans/
“Chesapeake’s shares have tumbled 22 percent this month, and it isn’t all because of weak natural gas prices. The company’s handling of the loan program, and its poor disclosure of it, paints a disturbing picture. Shaky finances, a CEO who sees the company as his personal playground and a rubber-stamping board isn’t a combination that gives shareholders confidence.”