Editor's Note: On Wednesday, we aired a video segment concerning Chesapeake Energy, it's CEO Aubrey McClendon, and a Reuters story concerning certain personal loans obtained by Mr. McClendon. In the segment, we made statements that implied that Mr. McClendon used company assets to secure the loans. We want to clarify that Mr. McClendon apparently only used his personal interest in company assets to secure loans, and not company assets. We apologize for any misunderstanding.
Shares of Chesapeake Energy (CHK) dropped as much as 10% today on a Reuters report that CEO Aubrey McClendon may have taken as much as $1.1 billion in previously undisclosed loans secured using his stake of company oil and gas wells as collateral.
Reuters says the loans are being used to finance McClendon's re-investment in the same assets he's using as collateral. It's a leverage scheme only a derivatives trader could love.
It's not simply the fancy accounting driving CHK lower today. In the attached video my Yahoo! Finance colleague Aaron Task and I discuss McClendon's prior double-dealings, including his panicked selling of CHK stock in order to meet a margin call. The 2008 sale of 31 million CHK shares helped drive the stock 40% lower in one week.
If Reuters is to believed, this time could be different for CHK and McClendon; it could be much worse.
CHK's lawyers claim the loans, totaling more than 1 billion, are immaterial to shareholders, comically offering that "if there were any conflicts of interest they would have surfaced by now," as Task notes with a sneer. The lawyers are being "oily," to be polite.
Obviously McClendon had the incentive and ability to minimize the price paid for the the wells. He could indirectly drive it lower by managing the wells in a manner designed to make them appear less valuable than they are. More directly, McClendon could set the price himself and simply underpay. Regardless, the sole reason to make an investment is the belief that an asset is underpriced. By definition, McClendon paid less than he thought the interest in the wells was worth.
The way to maximize CHK shareholder value would have been to auction off the assets to the highest bidder or, should a reasonable bid fail to materialize, do nothing. Instead, a portion of assets belonging to CHK shareholders were sold to the company CEO at an undisclosed price.
You do the math.
Going forward McClendon now has the interest on a $1.1 billion loan to service. He needs cash every month—and lots of it. With natural gas trading at historic lows, it's not in CHK's best interest to be maximizing output into weak demand. A CEO with the vig running on $1.1 billion has entirely different concerns than your average "Buy and Hold" investor.
If Reuters is to be believed, Aubrey McClendon has nakedly taken advantage of his position as CEO of Chesapeake to profit at shareholder expense. Were his actions legal? Spun correctly and under the letter of the law, there's a good chance they were.
Was McClendon abusing his role and victimizing shareholders to his own personal benefit? Yes; yes he was. That's why so many shareholders are voting with their feet today.
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