A major turn of events has left Chesapeake Energy (CHK) on the precipice of being left in the "investor's doghouse" -- or even of not being in business much longer.
Besides the low natural gas prices that we know about already, the SEC investigation does not sit well with investors. There is a serious controversy whereby the founder, Aubrey McClendon, was using his personal stakes in the company to borrow almost $1 billion.
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Whether this is considered inappropriate or not is best left up to the investigation, but it is quite interesting to see how the company reacted to the news. The Chesapeake board has removed McClendon as chairman, though he remains chief executive. They also scrapped the Founder Well Participation Program (FWPP). This starts in mid-2014 and means he will receive no compensation of any kind after it is terminated. Evidently this program provided him with a contractual right to participate and invest (as a working interest owner) up to 2.5% working interest in new wells drilled on the company's leasehold land. It is thought he used his stake as collateral to borrow money to keep up with further investments as the company expanded.
The company's response to all these moves is quite interesting. According to Pete Miller, the company's lead independent director, McClendon has also been made to give up the chairmanship. Miller also said that the separation of chairman and chief executive would improve Chesapeake's performing governance. As a concerned investor, I would ask why he was allowed to hold two positions like that at the same time when having them separate would govern the company better. Why wasn't this brought up before the investigation?
Terminating the FWPP program served to eliminate one source of controversy. The company belives that scrapping this program sends a positive signal to the market and will likely improve shareholder value. So what were they doing, devaluing shares of investors for their own gain? And McClendon apologized that his actions caused such controversies. These actions by the company (after the fact) are supposed to reflect its determination to uphold strong corporate governance standards? Why were McClendon's actions permitted to begin with if they would cause so much controversy if found out by the SEC? The board expects investors to just roll over and believe suddenly they are determined to uphold strong upright governing standards?
Investors are not taking this sitting down. Recently, a Federal lawsuit was filed in Oklahoma City. The lawsuit accuses Chesapeake of not adequately disclosing the existence of the loans, while Chesapeake has maintained the loans were McClendon's personal business -- not good for investor relations. On top of that, the lawsuit also states the company's cost for personal jet travel of top executives and directors totaled nearly $14 million over the past five years.
The final nail in the coffin may be the fact that weeks before he was stripped of the chairmanship, McClendon arranged an additional $450 million loan from a longtime backer, according to a person familiar with the transaction. A spokesperson for McClendon declined to comment, and a spokesman for Chesapeake didn't respond to a request for comment, so its interesting that the board -- which backs all these transactions -- is preaching how ethical things are going to be now.
This is but one reason why Chesapeake has fallen from grace in the eyes of investors. No one is buying the cheap jargon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
