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Chesapeake Governance Big Question Mark

Chesapeake Energy Corp. on Friday ended the week as it started -- with questions about corporate governance hounding the company.

As it attempts to shift from being the second largest natural gas producer in the United States to positioning itself as an oil and liquids threat, the company has been planning to sell up to $14 billion in assets, but in a Form 10-Q filing with the Securities and Exchange Commission Friday it said it may have to delay sales because low gas prices could stretch its ability comply with credit covenants.

Shareholders bolted on Friday, with more than 76 million shares trading hands, versus a daily average of about 24 million. The stock lost 13.8% of its value in one day to end the week at $14.81.

Many long-time shareholders apparently said enough was enough following the latest revelations, which include reports on Thursday that the company has $1.4 billion in unreported liabilities from 10 volumetric production payments (VPP), with $300 million due this year.

The Wall Street Journal reported that Chesapeake has about $1.4 billion of previously unreported liabilities over the next 10 years through its VPPs, which it called off balance sheet transactions. Most of the costs "will hit this year and next, at a time when the company needs to raise substantial cash to cover operating expenses and its move into the more lucrative oil business."

The Journal stated that it reviewed 10 VPP documents filed in county courthouses in four states, which it said showed Chesapeake's liability is "far larger than previously thought by investors and analysts, most of whose estimates were lower than $600 million." Based on the newspaper's calculations, the costs total $300 million in 2012, which Chesapeake confirmed, and $270 million in 2013. "Another roughly $800 million is expected between 2014 and 2022, the documents indicate."

Chesapeake has publicly disclosed that it gained $6.4 billion from the VPPs that were completed in onshore leaseholds, but it hasn't reported the costs associated with the contracts.

The company early on Friday sent a revised proxy statement to shareholders, promising to introduce performance-based awards as part of McClendon's pay package this year. The variable annual pay plan was approved by the board in December after more than 40% of the shareholders last year voted against Chesapeake's executive compensation plan and said McClendon's was "too high." In 2011 McClendon's compensation amounted to around $17.9 million, and the year before he took home about $21 million.

In a cover letter that accompanied the proxy statement, McClendon and lead independent director Pete Merrill, who also is CEO of National Oilwell Varco, acknowledged what shareholders and the rest of the investment community already know.

"As you know, the past month has been a challenging time for our company," wrote the duo. "The enormous scrutiny of Chesapeake has created distraction in the marketplace...We would like to take this opportunity to emphasize the board's continued commitment to serving the interests of our shareholders and improving corporate governance."

T. Boone Pickens, pro-gas advocate and personal friend of CEO Aubrey McClendon, also disclosed that his investment firm BP Capital has dumped all of its shares in the company.

Pickens told CNBC during an interview in Las Vegas on Thursday that BP Capital's entire stake in Chesapeake, valued at about $13 billion -- or about 9% of BP Capital's equity -- has been sold. "I don't like the position he's in," Pickens said of McClendon.

However, he said he "wouldn't count Aubrey out." Chesapeake's planned asset sales are wise and the company could be headed for better times, he told the network. McClendon "is a good friend" and "has done some innovative things."

Last Monday Southeastern Asset Management, which is the company's largest shareholder, urged Chesapeake to consider selling the company (see Daily GPI, May 8).

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