Chesapeake Energy Corp. CEO Aubrey K. McClendon over the past three years has taken out more than $1 billion in personal loans to finance his stakes in company wells and their operations, news that led some disapproving investors on Wednesday to head for the exit.

The company's shares ended the day at $18.07/share, off 5.49%, versus a closing price of $19.12 on Tuesday. A year ago Chesapeake was trading at $35.75.

Disclosures about McClendon's personal loans first were reported by Reuters, which with financial experts, said it reviewed thousands of company documents. The loans were done with board of director approval and disclosed in company reports, according to the company.

Reuters noted that McClendon had secured several loans in his long and storied career, but in the past three years, the amount of the loans, and the terms, had escalated:

Reuters said it uncovered the personal loan through a review of the minutes of a February 2011 meeting between EIG and the New Mexico State Investment Council, the state's public investment fund.

EIG COO Randall Wade, who was seeking an investment from New Mexico, was asked about an investment in McClendon's well interests, and he apparently "boasted" that EIG had a special relationship with Chesapeake after providing pre-initial public offering financing for the company in the late 1980s.

"In fall 2008, Mr. McClendon didn't have liquidity to participate in the (well) program in 2009, at which point EIG entered into discussions with him" and formed a special purpose entity (SPE) called Larchmont Resources, Wade reportedly said. Through the SPE, EIG apparently acquired the rights to all of McClendon's well stakes for 2009 and 2010 and set up another SPE -- Jamestown Resources -- to control McClendon's well shares in 2011, with rights to 2012, Reuters reported.

"EIG sweeps 100% of the cash flow generated by those projects until EIG has gotten all of its money back plus a 13% realized return," Wade reportedly told New Mexico investors. EIG also receives a 42% cut of McClendon's share of the well profits "in perpetuity," he apparently said.

EIG over the past few months has provided financial backing to big company endeavors. Earlier this month Chesapeake sold the preferred shares of newly formed subsidiary CHK Cleveland Tonkawa LLC (CHK C-T), as well as a 3.75% overriding royalty interest in the first 1,000 new net wells to be drilled, to an investment group led by GSO Capital Partners LP, an affiliate of the Blackstone Group.

CHK C-T owns about 245,000 net leasehold acres in the Cleveland and Tonkawa liquids-rich tight sands plays in Oklahoma's Roger Mills and Ellis counties. The purchasing group included TPG Capital, Magnetar Capital and EIG. Chesapeake retained all of the common equity interests in the subsidiary (see Shale Daily, April 10).

Last November Chesapeake sold $500 million of perpetual preferred shares of CHK Utica LLC to EIG, and followed that sale up a month later with another $750 million sale to EIG (see Shale Daily, Dec. 6, 2011; Nov. 4, 2011). CHK Utica owns about 700,000 net leasehold acres within the EIG AMI in the Utica Shale, which covers 13 counties in eastern Ohio.

"Through the financial transaction led by EIG, our drilling program in CHK Utica is almost entirely funded for the foreseeable future (including cash flow from anticipated production)," said McClendon at the time. "We have achieved very strong initial drilling results in the wet natural gas and dry natural gas areas of our Utica Shale play and are beginning to accelerate our evaluation of the oil area of the play, which the EIG transaction will help enable."

Chesapeake holds all the common interests in CHK Utica. The company's average net revenue interest on its Utica Shale leasehold is about 83%, which it said compares favorably to net revenue interests in the Haynesville, Barnett and Eagle Ford shale plays of 75%. As part of the EIG transaction, Chesapeake committed to drill a minimum of 50 net wells a year through 2016, up to a minimum cumulative total of 250 net wells.

Chesapeake spokesman Jim Gipson on Wednesday provided NGI's Shale Daily the company's responses to the Reuters story, answered by Land & Legal General Counsel Henry J. Hood. McClendon's interest in the Chesapeake wells, the so-called Founders Well Participation Plan (FWPP), about which NGI has previously reported, is a "contract between Mr. McClendon and Chesapeake that has existed since 1993 and was approved by 2005 by the shareholders by a wide margin," Hood noted.

"The company does not have the unilateral right to terminate the program until 2015, as expressly approved by the shareholders in 2005," he said. "The program has grown over the years as Chesapeake has grown, but the basic structure has remained the same -- Mr. McClendon purchases the same 2.5% working interest in every well in which the company participates and has to pay his share of the costs for each well based on a clear procedure approved by the shareholders and overseen by the board of directors. While the size of the program has grown as Chesapeake has grown, the risk to Mr. McClendon has not increased materially because the property base has been built up over two decades and there is significant diversity built into the FWPP because the interest acquired is a relatively small interest in a large group of wells.

"Thus, any individual well is immaterial to the company and to Mr. McClendon. Even though the program has grown, the FWPP still effectively aligns Mr. McClendon's interests with the interests of Chesapeake's shareholders during any period that Mr. McClendon participates in the FWPP."

McClendon's potential conflicts of interest are "a nebulous unspecified issue that is proposed to be solved by unspecified disclosure. The FWPP is clearly a related party transaction [SPE] and every year the company makes extensive disclosure in the proxy, including amounts expended and the detail on how the FWPP works. We do not believe any conflicts of interest exist, but if any arise there are numerous mechanisms to counteract any such conflict..."

The FWPP "clearly aligns Mr. McClendon's interest with the company's, while the business processes and the foregoing guard against any conflicts of interest arising," Hood said. The mechanisms put in place by the board avoid conflicts of interest and "we do not believe Mr. McClendon's financing arrangements have created or increased any risk to the company over the life of the FWPP.

"Loans secured by oil and gas assets are commonplace in the industry and have been employed by Chesapeake corporately during its entire 23-year existence and by Mr. McClendon during the 20 years the FWPP has been in existence, thus increasing the alignment of interests between Mr. McClendon and the company because both have loans and pay interest on the capital provided through such loans. Moreover, the lending market is transparent, with both lenders and borrowers possessing detailed knowledge of available and actual terms," said Hood. "Most loans of any size are funded through large syndicates of multiple lenders (in fact, Chesapeake has 34 lenders in its various credit facilities), so there is limited ability of lenders or borrowers not meeting market terms due to the various duties and obligations that exist in the many inter-relationships.

"Lastly, given the small interest held by Mr. McClendon and the number of other owners in the company's wells, in any default, his lenders are practically limited to obtaining title to the Mr. McClendon's oil and gas interests under the FWPP and then seeking recovery of any residual liability from the borrowers. As a result, it is reasonable to conclude the loans do not create, increase or exacerbate any risks in the FWPP."

The latest controversy isn't the first in which McClendon is the central figure.

In October 2008, as the global financial crisis was taking hold, McClendon was forced by margin calls to involuntarily sell 31.5 million shares in Chesapeake, "substantially all" of his company shares. Last year McClendon agreed to reimburse Chesapeake for selling his antique map collection to the company in 2008 for $12.1 million and apparently reaping $4 million in profit.

On Monday, Chesapeake, which continues to shed assets or secure partners to pare debt, laid plans to launch its diverse onshore oilfield services unit through an initial public offering (IPO), but the separate company would continue to be closely tied to its main customer, Chesapeake (see Shale Daily, April 18).