Steffy: Is Chesapeake’s gunslinger-in-chief headed for the sunset?

Every gunslinger eventually reaches a sunset, and Aubrey McClendon’s may be approaching.

The chief executive and co-founder of Chesapeake Energy, the nation’s second-largest natural gas producer behind Exxon Mobil, has been under fire for more than a month.

Among the concerns: more than $1 billion in loans he borrowed against personal interests in company wells and a $200 million hedge fund he ran betting on commodities that Chesapeake produces.

When natural gas prices were rising, such activities were largely ignored by shareholders and analysts, who were too enamored of Chesapeake’s growth and its stunning success at drilling wells.

Now, the go-go days are over. Natural gas prices have slumped to their lowest in a decade and as the boom receded a tide of troubling practices emerged at Oklahoma City-based Chesapeake.

What investors now see is a large company that’s run more like a small one. Its corporate governance controls are pitiful. McClendon has been allowed by the board to use the company as a financial playground, from the lucrative well deals to the cozy promises to buy playoff tickets for McClendon’s professional basketball team, the Oklahoma City Thunder.

Chesapeake’s board viewed McClendon as the Golden Boy of Gas, and it’s no wonder. The directors themselves are some of the most richly compensated in corporate America, according to, a web site that analyzes companies’ regulatory filings. Director pay ranged from about $346,000 to almost $648,000 last year – with an average of more than half a million dollars – according to the company’s proxy statement.

For that, the board met four times and had eight conference calls.

Lead director Pete Miller, who is also chairman of Houston’s National Oilwell Varco, didn’t return my calls by my deadline.

Much of the directors’ pay is in stock, and the 40 percent decline in Chesapeake’s shares may have caught their attention.

High interest rate

With the company’s finances spiraling downward, and unable to raise more cash without violating its bond covenants, it turned to Goldman Sachs and Jefferies Group. The investment banks agreed to lend it $3 billion at 8.5 percent interest – the highest price Cheaspeake’s paying for any of its more than $13 billion worth of debt.

Earlier this week, McClendon crowed that Goldman offered to add another $1 billion to the deal because of strong demand from investors who wanted to participate in the debt sale implying it was a sign of confidence. It isn’t.

Wall Street knows McClendon is on the ropes. So many vultures wanted in on the deal that Goldman simply extended the line.

Now, Chesapeake is moving ahead with plans to sell assets, starting with a portfolio of oil properties in the Permian Basin of West Texas. Oil, of course, is more valuable than natural gas these days, which means Chesapeake is selling lucrative assets so that it can pay the debt it owes on less profitable ones.

Not surprisingly, Standard & Poor’s cut Chesapeake’s credit rating one notch this week. The company remains investment grade, however, because despite its round-robin financing schemes, it holds some truly lucrative oil and gas properties.

McClendon alluded to this during a conference call Monday with investors. He valued the company’s assets at some $60 billion.

Chesapeake’s enterprise value – its market value and debt minus cash – is about $25 billion.

Takeover bids coming?

If McClendon’s estimate is even close to correct, Chesapeake could soon find itself fending off takeover bids, despite the company’s muddled finances. If it survives, it’s likely to become a smaller company, and it needs to become a less flashy one.

It needs a CEO who can settle in behind the desk and lead the company through what’s likely to be a difficult restructuring. It also needs a board that will enact stricter controls, especially regarding the CEO’s side businesses.

In other words, Chesapeake needs to start acting its size.

It’s not clear if McClendon can give up his highflying ways and accept the role of careful executive. If he can’t, then the gunslinger needs to find his sunset.

Loren Steffy,, is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Follow him online at, and