Chesapeake Energy, the nation's second-largest producer of natural gas, is facing the threat of lawsuits and calls for management resignation over a little-known practice that shareholders worry indicates troubled times at the major Marcellus Shale player.
The barrage of bad publicity isn't coming from the usual environmental concerns or investor jitters over record-low natural gas prices. Instead, the concern is over a mortgage program by CEO Aubrey McClendon that allows him to take out loans against personal stakes in his company's wells.
The Post-Gazette first reported the existence of the loans in an investigation last month. The news agency Reuters weighed in last week that Mr. McClendon's loans had totaled more than $1.1 billion.
The practice has prompted shareholder lawsuits, seen analysts call for a change in leadership and threatened to quell the rapid-fire expansion of one of the industry's most controversial firms. Chesapeake has leased or swapped significant Marcellus Shale acreage in Pennsylvania and West Virginia, and at one point was acquiring 1,000 acres in Ohio per day.
Mr. McClendon is afforded a 2.5 percent stake in every well drilled through a unique corporate program called the Founders Well Participation Program. He then borrowed against that stake, allowing him to raise cash at a time when competitors are scaling back and waiting for natural gas prices to rebound.
The mortgages are taken out by Mr. McClendon's Jamestown Resources company and are not disclosed to landowners, though notifications of the loans are filed alongside leases at local courthouses.
Oklahoma City-based Chesapeake says the mortgages are an everyday practice, and it posted an extensive defense of the practice on its website.
"The board of directors is fully aware of the existence of Mr. McClendon's financing transactions and the fact that these occur is disclosed in the proxy," the company said in a statement.
Critics say the disclosure on filings to the Securities and Exchange Commission is not enough.
Phil Weiss, an analyst with Argus Research in New York who has criticized Chesapeake's financial practices in the past, called for Mr. McClendon and the board to be fired for keeping the mortgages under wraps from shareholders.
"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, and the apparent unwillingness of the board to put a stop to at least some of these practices, we believe the best thing for investors would be to replace the board and/or the CEO," Mr. Weiss wrote to clients last week.
Shareholders filed a lawsuit against Chesapeake management in Oklahoma City federal court last week -- just one of at least five suits that attorneys across the country said they plan to pursue. The lawsuits allege that Mr. McClendon's mortgaging put the company at risk and that when the loans were revealed, stock prices fell sharply, representing a decline of more than $1 billion in market value.
Chesapeake shares closed at $18 on Monday, up 56 cents. Share prices have fallen almost $2 since last week. This past week saw shares fall to their lowest level in the past 12 months. Last April, shares traded around $32.
The lawsuits target the board of directors and Mr. McClendon, a larger-than-life figure in an industry used to swagger.
He drank a $400 bottle of wine during an interview with Rolling Stone magazine earlier this year. At an energy summit in Ohio last October, he seemed impervious to critics concerned about drilling's environmental effects.
"I'm the biggest fracker in the world. I've done it 16,000 times since 1989, and I'm proud of it," he said.businessnews - marcellusshale
Erich Schwartzel: email@example.com or 412-263-1455.