By JONATHAN FAHEY, Associated Press
NEW YORK (AP) — Chesapeake Energy is ending a program that allowed CEO Aubrey McClendon to take personal stakes in the wells it drills as part of his compensation package.
Its board will also review loans that McClendon received from outside groups that may have done business with Chesapeake in the past. The CEO used the loans to buy his stakes in the wells.
Investors have long complained about the program and the freedom Chesapeake's board has allowed McClendon to pursue his personal interests. The discovery of the loans — and a sharp drop in the company's stock — only intensified investors' discontent.
The end of the program, analysts say, is a welcome development.
"(The program) is consistently a sticking point with investors, so this should remove that. It also highlights the board's willingness to be more active," said Michael Hall, an analyst at Robert W. Baird & Co.
McClendon's arrangement allowed him to purchase up to a 2.5 percent interest in every well Chesapeake drills for his own investment portfolio.
In order to pay for stakes in some new wells, McClendon borrowed money — using his stakes in existing wells as collateral — from a group that Chesapeake was negotiating to sell assets to.
Investors complained that the arrangement raised a conflict of interest. They worry that Chesapeake might have sold its assets to the firm because the firm agreed to lend McClendon money, and not because the terms of the deal were the best Chesapeake could have received.
The arrangement was not previously disclosed to shareholders.
Chesapeake also clarified a statement made last week by the company's general counsel, Henry Hood, that suggested the board knew about McClendon's deals. The company now says that while the board of directors did know that McClendon used his well stakes as collateral to secure loans, the board did not know the specific terms of McClendon's transactions.
The existence of the loans was first reported last month in the Pittsburgh Post-Gazette. Company shares plunged last week after Reuters reported McClendon borrowed as much as $1.1 billion from the firm. On Thursday the stock fell 57 cents, or 3.1 percent, to close at $17.56.
Chesapeake denies a conflict of interest exists because, it says, McClendon negotiated the loans separately and did not participate in negotiations on the asset sale.
The company said Thursday that McClendon agreed to end the program that allows him to buy stakes in Chesapeake wells. It was set to expire at the end of 2015.
The companies set up by McClendon to control his personal stakes announced Thursday the total amount owed was $846 million. They said all the loans were from third parties, and none were from Chesapeake or its affiliates. McClendon's stakes in the wells produce 147 million cubic feet of natural gas per day. At today's prices, they generate about $300,000 in revenue per day, or $110 million per year.
Standard & Poor's lowered its rating on Chesapeake's debt to BB, two notches below what is considered investment grade, from BB+. The rating agency cited Chesapeake's need to raise "massive" amounts of money to pay for its expanded drilling plan and reduce debt at a time when low natural gas prices are reducing the company's cash flow.
S&P said the turmoil around the loan developments and potential revelations from the board inquiry could make it harder for Chesapeake to raise money. The bond rating agency Fitch lowered its outlook on Chesapeake's debt Thursday, citing the same reasons.
Jonathan Fahey can be reached at http://twitter.com/JonathanFahey .
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