Exclusive: Chesapeake documents detail how CEO fuses personal, corporate interests

OKLAHOMA CITY Thu Jun 7, 2012 6:56am EDT

Chief Executive Officer, Chairman, and Co-founder of Chesapeake Energy Corporation Aubrey McClendon walks through the French Quarter in New Orleans, Louisiana March 26, 2012. REUTERS/Sean Gardner

Chief Executive Officer, Chairman, and Co-founder of Chesapeake Energy Corporation Aubrey McClendon walks through the French Quarter in New Orleans, Louisiana March 26, 2012.

Credit: Reuters/Sean Gardner

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OKLAHOMA CITY (Reuters) - Aubrey K. McClendon, the chief executive officer of Chesapeake Energy Corp, has intertwined his personal and financial interests with those of the publicly traded company he runs to a far greater degree than shareholders may realize, according to interviews, public records and hundreds of internal Chesapeake documents reviewed by Reuters.

The executive has deployed a team of Chesapeake employees to handle his personal business affairs and uses the corporate jet regularly to ferry family members and friends to holiday destinations, the internal records show.

McClendon's use of Chesapeake resources is so extensive that a special unit, informally known as "AKM Operations," is housed on the corporate campus and employs six full-time employees and the time of scores of others to carry out accounting and engineering services.

In 2010, Chesapeake employees spent more than 15,000 hours working on McClendon's personal projects at a cost of about $3 million, according to internal records reviewed by Reuters. In 2011, another document shows, Chesapeake workers did almost $3.2 million in work for McClendon. That document indicates McClendon reimbursed the company for all but $250,000 of this spending in each year, as required by his contract. In the past, AKM Operations tasks have included overseeing work to repair hailstone damage to a home McClendon owned.

The corporate flights are detailed in internal logs reviewed by Reuters. They show that McClendon took $2.25 million worth of business flights in 2010, and often brought family members along. This included trips valued at more than $100,000 to Europe and India that were billed as business flights.

McClendon also took a combined $1 million worth of personal flights in 2010 and 2011, a perk allowed under his 2008 employment contract. Flight logs show that this included frequent trips from Oklahoma City to Bermuda, where the McClendons own vacation properties. On one flight, nine friends of McClendon's wife took a Chesapeake-leased jet to Bermuda without any McClendons aboard.

Other records that show McClendon has leveraged his future profits in the Oklahoma City Thunder, the NBA team in which he owns a 19 percent stake. The team has a $36 million sponsorship deal with Chesapeake.

Chesapeake declined to comment, as did a spokesman for McClendon.

This article contains excerpts from a Reuters Special Report to be published at 0700 EDT (1100 GMT), "The Lavish and Leveraged Life of Aubrey McClendon."

These details are emerging after Reuters reported other arrangements that analysts say pose potential conflicts of interest between McClendon's interests and those of Chesapeake shareholders. Articles in April and May, for instance, reported that the CEO has arranged more than $1.5 billion in personal loans using his interest in company-owned wells as collateral, including $1.3 billion from EIG Global Energy Partners, which is also a large source of funding for Chesapeake.

The company faces a liquidity crunch brought on by heavy borrowing and a sharp fall in natural gas prices and easing crude oil prices. That crunch is now being exacerbated by a loss of investor confidence triggered by the revelations about McClendon's financial dealings.

(This article contains excerpts from a Reuters Special Report to be published at 0700 ET/1100 GMT, "The Lavish and Leveraged Life of Aubrey McClendon.")

(Editing by Michael Williams)

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Comments (2)
CountNegroni wrote:
“That document indicates McClendon reimbursed the company … as required by his contract.”

So what’s the news here?

Jun 07, 2012 2:09pm EDT  --  Report as abuse
eclements wrote:
This article tries it’s best to be sensationalist by presenting bits and pieces of facts and trying to weave a pattern of “apparent” excess. If Chesapeake was trading at $60 and Natural Gas at $6 or $7 there would be no story at all – instead pundits would be writing about Aubrey Mcclendon as one of the greates CEO’s in America. Unfortunately gas is now hovering in the neighborhood of $2, and the actions of past years are being re-examined in that context. Here are a few more facts to help a reader evaluate the current state of things at Chesapeake:

1. Chesapeake set out to identify and develop new sources of Natural Gas within our borders. And they succeeded – beyond anyone’s expectations. The current market pricing reflects to vastly increased supply of gas, with consumption limited by infrastructure and weather.

2. New points of steady, year round demand are coming on line continuously – in the form of Gas powered electrical generation facilities.

3. Demand for NG as a surface transportation fuel is increasing. Buildout of infrastructure in this area continues as an ever-faster pace, including recent moves by Royal Dutch Shell. Were it not for misguided efforts by government leaders, including several previous generations, to emphasize Ethanol, Wind and Solar instead of Natural Gas this process would be further along.

4. Facilities originally designed to import LNG into our country – dating back to 2006 – 2008 when Natural gas spiked to over $12 – twice – are being retrofitted to export LNG to nations where this fuel trades at a significant premium to American prices. These exports will help drain bloated reserves rather quickly.

As these factors continue to evolve the supply glut will repidly fall back into balance, driving up prices. When that happens Chesapeake’s economies of scale will once again be an asset instead of a liability.

As for executive compensation, apparentlyl shareholders don’t like reading 10K’s and Proxys. Much has been disclosed on these topics, its not some revalation coming to light for the first time – to be recounted breathlessly by a reporter trying to imply wrongdoing where it doesn’t exist. This article glosses over reimbursements made by Aubrey for personal benefits, and somehow implies that he inappropriately benefits from 12 months “float” on some costs be reimbursing at the end of the year. The average float would be about half of that figure, and given the current low borrowing costs and investment returns is basically in insignificant cost.

I would like to see firm proof that any critic of Chesapeake predicted current market conditions back in 2006 or 2008 when businesses and consumers were paying extremely high prices for natural gas. Today those same businesses and consumers are enjoying significant savings due to new supplies of Natural gas.

As for Oklahoma City, virtually every person in our city has a friend, family member or neighbor employed by Chesapeake. These are good jobs with good benefits, and are a significant asset to the Oklahoma City area. Countless non-profit organizations – and those they serve – have benefitted from Chesapeake’s generosity. Real Estate purchased around Chesapeake’s campus has increased in value, however by national standards would still be considered reasonable. This is the same phenonemon which drove up land values around Orlando as Disney expanded, or between Dallas and Fort Worth as DFW airport developed. Today’s land values in those areas are not the same as land values of five or ten years ago – BECAUSE Chesapeake is in the area.

20:20 hindsight makes it very easy to second guess any business leader’s actions. Taken as a whole, Chesapeake is an amazing sucess story – one built on the vision of a couple of leaders who set out to scale up and idea and build an energy company from the ground up. The next chapters of that story remain to be written, however history has often shown that investors often fail to predict the future as they base their prediction of the present instead of considering obvious signs of change coming. Energy companies are – by their nature – “boom and bust.” Investors choosing to invest in Chesapeake should understand exactly what they are buying, and what the risks are – as well as the potential returns.

Jun 11, 2012 1:29am EDT  --  Report as abuse
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