Chesapeake Energy Corp., the U.S. natural-gas producer criticized for allowing its top executive to invest in the company's wells, prohibits other senior managers from the same practice.
Executives who oversee finance, operations and acquisitions for Oklahoma City-based Chesapeake have employment contracts that bar them from any investment or involvement in the oil and gas industry outside of their duties for the company, a review of Securities and Exchange Commission filings showed.
Chairman and Chief Executive Officer Aubrey McClendon has been borrowing hundreds of millions of dollars annually — some from Chesapeake's financiers — to participate in a perk reserved only for the CEO that allows him to buy stakes in company-owned wells. After defending the well-ownership policy last week, directors yesterday said they will halt the program and review McClendon's loans. Chesapeake shares have fallen 25 percent this month.
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"As a shareholder, I'd want to know why the CEO is allowed to invest in these properties, but these other executives are not," said Don Delves, president of The Delves Group, a Chicago-based corporate-governance advisory firm. "This has the potential to create differentiated interests within the company and its management team."
Jim Gipson, a Chesapeake spokesman, didn't respond to telephone or e-mail messages seeking comment. Directors didn't respond to requests for comment or couldn't be reached.
Chief Financial Officer Domenic Dell'Osso's November 2010 employment agreement includes a clause that bars him from engaging in any business activities independently of the company, including any investments or participation in owning, drilling or supplying equipment to oil and gas wells.
The agreement permits Dell'Osso to retain any royalty interests, well stakes or publicly-traded securities acquired prior to his employment by Chesapeake, or inherited.
The same language is included in the employment agreements for Chief Operations Officer Steven C. Dixon and Executive Vice President of Acquisitions Douglas J. Jacobson.
McClendon reaped a $61 million pre-tax gain by selling some of his well stakes in 2011, according to a statement he issued yesterday. He obtained loans through his control of three private companies — Arcadia Resources LP, Larchmont Resources LLC and Jamestown Resources LLC, which held a combined $846 million in outstanding loans at the end of December, according to the statement.
Satisfying Obligations
Under the incentive plan known as the Founders Well Participation Program, McClendon has been allowed to buy stakes of as much as 2.5 percent in most of the wells the company drilled for more than two decades. To satisfy an obligation to pay leasing and drilling costs proportionate to his stake in each well, McClendon has borrowed the cash, using his well interests as collateral.
The CEO has been criticized by investors and analysts for borrowing from firms that do business with Chesapeake because of the potential for conflicts of interest.
"It's not something I'd seen before and it sets the company apart from the rest of the group," said Tom Nelson, who counts $13.5 million in Chesapeake shares among the $450 million he co-manages for Guinness Atkinson Asset Management Ltd. in London. Such "exceptional financial arrangements," Nelson said, are "a source of suspicion and anxiety" for investors.
McClendon obtained a personal line of credit for $1 billion last year from EIG Management Co. LLC, a unit of EIG Global Energy Partners LLC, which participated in a $1.2 billion preferred-shares purchase in a Chesapeake subsidiary three weeks ago.
Directors said they and the CEO have agreed to negotiate an early termination of the Founders Well program, which is scheduled to expire in 2015, and to review all loans with third parties that also do business with Chesapeake.
"Shame on the board," said Fadel Gheit, an oil and gas analyst at Oppenheimer & Co. in New York. "This is a very unusual, very unorthodox privilege and they should have gotten rid of it long ago."
Canceling the well-ownership program "puts the company back in line with its industry peers, which is what the market wants to see," Nelson, the Guinness Atkinson fund manager, said.
Stock Ownership
As CFO, Dell'Osso, a former Jefferies & Co. banker who helped Chesapeake structure a series of forward gas sales prior to joining the company, is required under his employment agreement to own at least 25,000 Chesapeake shares. Dell'Osso owned 355,471 shares as of March 30, according to data compiled by Bloomberg.
McClendon has been investing in wells since at least 1983, first on the basis of handshake agreements and later under formal contracts, said Tom Ward, who merged his closely-held company with McClendon's in 1989 to create Chesapeake.
From the outset, McClendon and Ward bought personal stakes in company-operated wells, continuing the program after the company became publicly traded in 1993, Ward said in a telephone interview. After leaving Chesapeake in 2006 to start SandRidge Energy Inc., Ward instituted a similar well investment program.
As gas prices began to collapse in the middle of 2008, Ward said he sold his Chesapeake well stakes to a third party he declined to identify. He sold his interests in SandRidge-operated wells back to the company and ended the wells- investment perk.
Marcus Rowland, an early Chesapeake investor who went on to serve as CFO for 18 years, also purchased stakes in company wells, McClendon said during a presentation to analysts in Oklahoma City in October 2010.
Rowland stepped down as CFO in 2010 and now is CEO of FTS International LLC, a Fort Worth-Texas-based hydraulic-fracturing company part-owned by Chesapeake. McClendon and Dell'Osso are directors. Rowland didn't return a phone message seeking comment.
Bloomberg News
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