Chesapeake Energy (CHK) CEO Aubrey McClendon is facing criticism after a Reuters report revealed that he borrowed $1.1 billion against his 2.5% stake in the company's wells, a perk known as the Founder Well Participation Program (FWPP).
The FWPP has been public knowledge for years -- indeed, McClendon has taken part in the FWPP since 1993, as Chesapeake's response to Reuters noted. Under the plan, McClendon receives a 2.5% share in assets from every well the company drills. He is also responsible for a 2.5% share of the well's costs, one reason for the sizable borrowings; according to proxy statements cited in the Reuters piece, McClendon lost some $258 million on the FWPP in 2009 and 2010. McClendon should see long-term returns, but the amount of upfront costs required for his participation in the FWPP clearly necessitates at least a portion of the massive borrowing.
That borrowing, however, had not been disclosed by Chesapeake until Reuters broke the story, and the news initially sent the stock down by some 10% (it recovered, closing down a bit over 5%). The news of McClendon's dealing brought back memories of 2008 when, as commonly cited in recent coverage, McClendon bought nearly $1 billion in Chesapeake stock on margin. In the late 2008 market tumult, the stock slid, falling another 40% in one October week as McClendon's stake was liquidated. The CEO received a $112 million pay package that year, yet notoriously sold his map collection for $12 million to Chesapeake; that transaction was later reversed after a shareholder lawsuit.
In both cases, some have argued, McClendon was simply betting on his own company's success. As the company itself stated in its response to Reuters, the FWPP "effectively aligns Mr. McClendon's interests with the interests of Chesapeake shareholders." From this standpoint, the two incidents -- the 2008 margin calls and the 2010-12 personal loans against the FWPP collateral -- simply look like an aggressive "wildcatter" CEO who may be overcompensated, but whose aggression has built the country's largest natural gas producer from scratch in a little over two decades. As CNBC's Jim Cramer put it, he "wouldn't care" about McClendon's decisions if the company weren't struggling.
But there is more to the story than just the two national incidents, spaced four years apart. Here in Oklahoma City, the hometown Chesapeake and I share, the news of McClendon's massive bet is unsettling, but unsurprising. As a popular local blog pointed out, the local newspaper barely covered the story. The blogger questioned whether McClendon's ties to the city's elite might have discouraged coverage; it is just as likely that most citizens would register little surprise at McClendon's leverage. Stories about Chesapeake spending are rampant around town. An outside contractor, who is currently working on the company's rapidly expanding campus, told me tales of Chesapeake chefs flying on Chesapeake jets to road games played by the University of Oklahoma football team when their services are requested by executives for tailgate parties, as well as his company's own employees working on private projects on the company dime. Even the company's lavish headquarters -- with its infamous on-site Botox treatments and three restaurants -- seems more appropriate in Silicon Valley or on Wall Street. These things hardly seem necessary to compete for the workforce in a midsized city with rather modest values.
I myself am a huge fan of the Oklahoma City Thunder, who play in the recently renamed Chesapeake Energy Arena. Chesapeake signed a 12-year contract for the arena rights at a total cost of nearly $40 million. Chesapeake has been a sponsor of the team since its move from Seattle in 2008; the team's broadcasts on local network Fox Sports Oklahoma are blanketed with commercials for Chesapeake.
Why would Chesapeake -- which is a household name state-wide, being a major employer in the capital city and a party to thousands of land deals across Oklahoma -- need to advertise to an audience a) who is already familiar with the company, and b) of whom only a tiny minority will interact with the company in a meaningful way? Why would a company executive claim that the arena deal provided "a powerful natural gas branding opportunity" in an industry where branding is essentially meaningless? One answer is that Aubrey McClendon is one of the team's owners, and seems to have little compunction in spending Chesapeake money -- shareholder money -- to prop up his ownership of a team in the NBA's third smallest market.
Senator Everett Dirksen famously said (supposedly): "A billion here, and a billion there, and suddenly you're talking real money." In Chesapeake's case, it's millions here, and thousands there -- but it adds up. As Forbes' Christopher Helman notes, McClendon's loans against FWPP assets total more than one-tenth of Chesapeake's total debt, an astounding figure. But there is more to the story than the eye-popping billion-dollar figure released on Wednesday. It's the millions here and millions there that represent "real money" transferred from shareholders for the benefit of management. Just because Chesapeake's reckless attitude toward its shareholders has only made national news on a few occasions doesn't mean that attitude has not been there all along. Here in Oklahoma City, Wednesday's news just seems like business as usual.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.