Chesapeake CEO says "deeply sorry"; shares tumble

Wed May 2, 2012 8:41pm EDT

Chief Executive Officer, Chairman, and Co-founder of Chesapeake Energy Corporation Aubrey McClendon talks on his mobile phone as he walks through the French Quarter in New Orleans, Louisiana in this March 26, 2012 file photo. REUTERS/Sean Gardner/Files

Chief Executive Officer, Chairman, and Co-founder of Chesapeake Energy Corporation Aubrey McClendon talks on his mobile phone as he walks through the French Quarter in New Orleans, Louisiana in this March 26, 2012 file photo.

Credit: Reuters/Sean Gardner/Files

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(Reuters) - Shares of Chesapeake Energy Corp posted their largest decline in more than three years on Wednesday as Chairman and Chief Executive Aubrey McClendon said he was "deeply sorry" for the turmoil caused by his personal financial dealings.

McClendon is under fire over investigations by Reuters into his personal financial dealings. He characterized many of the reports as "misinformation," without elaborating.

Reuters report of McClendon's operation of a hedge fund that traded in the same commodities the company produces prompted Florida Democratic Senator Bill Nelson to ask the U.S. Justice Department to investigate potential fraud, price manipulation and conflicts of interest.

McClendon said during an earnings conference call on Wednesday: "There's been enormous and unprecedented scrutiny of our company, and of me personally. And a great deal of misinformation has been published, and uncertainty created."

Chesapeake shares fell nearly 15 percent to close at $16.74 on the New York Stock Exchange, their largest decline in more than three years. More than 140 million shares traded, the busiest day in the stock's history.

McClendon did not offer specifics, and analysts did not press him on the Reuters reports that showed he had taken out as much as $1.1 billion in personal loans on ownership stakes in wells the company had given to him. Analysts and academics have said those stakes posed potentially serious conflicts of interest.

On Wednesday, a new Reuters investigation found that McClendon also ran a $200 million hedge fund that was registered at Chesapeake's Oklahoma City office from 2004 to 2008 and traded in the same commodities Chesapeake produces.

"Obviously there is a lot of noise going on personally with management," said Neal Dingmann, an analyst with SunTrust Robinson Humphrey, referring to the stock decline.

The new investigation is prompting lawmakers like Nelson and Senator Bernie Sanders to renew their calls for regulators to crack down on energy speculation. Both Nelson and Sanders have blamed speculators for driving up oil prices.

Sanders said on Wednesday that the Reuters probe into the Heritage Management Co hedge fund also raises serious questions about conflicts of interest and a lack of transparency in the derivatives market.

"CEOs are required to let the public know when they buy and sell large shares of their own company's stock, but trading in energy futures and derivatives is kept hidden from the American public. This is simply unacceptable," Sanders, a Vermont independent, said in a statement.

A company spokesman was not immediately available to comment on Nelson's call for a Justice Department investigation.

Dingmann said investors were also likely disappointed that the company produced more low-cost natural gas than expected in the first quarter, among other factors.

Chesapeake said on Tuesday it would replace McClendon as chairman and bring to an early end its controversial Founders Well Participation Program that gave him stakes in each of the company's wells. The program will run through June 2014, ending 18 months earlier than originally planned.

Chesapeake's largest shareholder, Memphis-based Southeastern Asset Management, will be involved in the search for a nonexecutive chairman and take a more active role in the affairs of the company.

"We will participate in the process of finding a new nonexecutive chairman," Southeastern President G. Stanley Cates said Tuesday at his fund's shareholder meeting.

"The bottom line is, there are positives and negatives of partnering with McClendon, as with anybody, and in our opinion the positives strongly outweigh the negatives, and the negatives have been very actively addressed," Cates said.

Southeastern has a 13.6 percent stake in Chesapeake.

In the wake of Reuters reports, the well program has come under the scrutiny of the U.S. Securities and Exchange Commission and the company disclosed it is a component of an ongoing Internal Revenue Service audit.

McClendon, who co-founded the company, also offered a rare apology for the recent controversy.

"I am deeply sorry for all the distractions of the past two weeks. Through all of this I've learned that there was a desire for more information regarding the FWP program," he said on the Wednesday conference call.

Chesapeake, like other natural gas producers, has suffered as prices for the fuel have tumbled to their lowest levels in a decade as output from shale fields surged, swelling inventories even as a warm winter trimmed seasonal demand.

The company said it had curtailed natural gas production during the first quarter, and it was quickly moving to increase its output of oil and other liquids.

After the market close on Tuesday, Chesapeake reported a first-quarter net loss as it took a noncash charge based on a lower market value for its hedges. Excluding items, the company earned 18 cents a share, well short of the 29 cents expected on average by analysts.

Chesapeake faces a perilous funding gap that some estimate at $6 billion this year. To fill the void, the company aims to raise as much as $14 billion through the sale of assets and other deals.

Even so, low gas prices remain a worry for investors. Chesapeake has no price protection on its gas production, which accounts for 80 percent of its output.

"People are starting to wonder if it is going to be enough this year to cover that cash short to cover the 2012 budget," SunTrust's Dingmann said.

(Reporting By Matt Daily in New York and Anna Driver in Houston; Additional reporting by John Branston in Memphis and Roberta Rampton and Sarah N. Lynch in Washington; Editing by Gerald E. McCormick, Matthew Lewis, Richard Chang and Tim Dobbyn)

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