Steffy: Chesapeake to scrap well program that involved CEO’s loans

McClendon: All is not well (Chronicle file photo)

Chesapeake Energy said it will end a controversial program that allowed its chief executive, Aubrey McClendon, to invest privately in company wells. Last week, Reuters reported that McClendon had borrowed more than $1 billion against his interest in the wells. Chesapeake claimed McClendon’s loans had no bearing on the company, but shareholders were outraged over the lack of disclosure.

In a release today, Oklahoma City-based Chesapeake said its board decided not to extend the well program beyond its expiration in 2015. It also is negotiating the early termination of the program with McClendon, whose employment contract gives him the right to participate in it.

Meanwhile, McClendon also has agreed to provide “supplemental information regarding the interests he has acquired” through the well program since December. And what will those disclosures be? Well, there could be some surprises, because Chesapeake’s release also included this little gem:

Chesapeake also wishes to clarify a statement appearing in its April 18, 2012 press release captioned “Chesapeake Energy Corporation General Counsel Henry J. Hood Issues Statement.” The statement that “the Board of Directors is fully aware of the existence of Mr. McClendon’s financing transactions” was intended to convey the fact that the Board of Directors is generally aware that Mr. McClendon used interests acquired through his participation in the [Founders Well Participation Program] as security in personal financing transactions. The Board of Directors did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions.

In other words, the board knew McClendon was borrowing against the wells, but it may not have known how much or what the terms were.

The bigger problem for Chesapeake’s investors is that McClendon’s loans indirectly speak to the company’s financial position as a whole. He was, after all, merely investing alongside the company on these deals. As Bloomberg News points out, McClendon was buying interests in wells faster than he could find cash to drill them, which is why he needed the loans. The company has essentially been doing the same thing, outspending its cash flow in 19 of the past 21 years.

Chesapeake’s shares have tumbled 22 percent this month, and it isn’t all because of weak natural gas prices. The company’s handling of the loan program, and its poor disclosure of it, paints a disturbing picture. Shaky finances, a CEO who sees the company as his personal playground and a rubber-stamping board isn’t a combination that gives shareholders confidence.