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Thursday, April 19, 2012

Forbes Take on Aubrey/Well Participation

I think this is a pretty sensible take on Aubrey and his latest PR mess:


Wednesday, in a story from Reuters, came revelations that Aubrey McClendon, chief executive of Chesapeake Energy, had borrowed more than $1.1 billion against his personal stakes in oil and gas wells controlled by Chesapeake.


The size of the loans is pretty shocking (equal to more than one-tenth of Chesapeake’s total long-term debt), as is the clear and undeniable implication that McClendon is up to his eyeballs in conflicts that should lead every shareholder to question whether he has their interests or his own at heart. At one point on Wednesday investors drove down Chesapeake shares more than 10%. They closed down 5.5% on Wednesday, and have fallen by half since last August, hammered by debt loads and low natural gas prices

Here is the core of what is wrong with McClendon’s massive borrowing: Chesapeake is severely capital constrained (a result of high debt loads, reckless spending on ever more shale gas acreage and rock bottom natural gas prices) to the point that the company is trying to sell billions of dollars in assets this year to make ends meet. At the same time this is going on, McClendon has been competing directly against his own company for access to the capital markets in order to shore up his own finances — without telling shareholders the extent of his financings.
Doesn’t he owe it to shareholders to put their capital needs ahead of his own? Shouldn’t shareholders know that the ceo of their company has found someone to lend him $1.1 billion against assets that they co-own with him? That’s an amount of money that is certainly material to a company with an equity market cap of $12 billion and debt load of $10 billion. This is an obvious conflict of interest, insufficiently disclosed, that should not be allowed to continue.
Entire article:

5 comments:

  1. I strenuously disagree with your assertion that this is "is a pretty sensible take". No, it is asinine.

    The author tries to claim that "McClendon has been competing directly against his own company for access to the capital markets in order to shore up his own finances..." What??? How???

    If an explanation can be made to support this claim, then it might be worth discussing. Unless/until then, it has the appearance of a desperate "journalist" willing to do anything for a couple of page views.

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  2. Thanks for the comment.

    I don't think it is asinine. Chesapeake has been involved in transactions with EIG for hundreds of millions of dollars.

    Additionally McClendon is getting over a billion in cash from them.

    Don't you think the terms for lending $2 billion against shale gas assets are likely going to be more expensive than if the same entity was lending $1 billion?

    The greater the exposure EIG has to these assets, the more expensive their terms likely are. EIG's risk is increased, so must then be their expected reward

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  3. "Don't you think the terms for lending $2 billion against shale gas assets are likely going to be more expensive than if the same entity was lending $1 billion?"

    Perhaps. But I think there's as good a chance (50/50) that the rate would be unaffected.

    Also, that argument seems to suggest that EIG is the only source of capital for either party. There has been no evidence presented that suggests that that assumption is remotely accurate.

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  4. I think your points are valid.

    What is unquestionably true though is that for most people the entire well participation arrangement is a bit iffy. And combined with a billion dollars in debt it makes you wonder about the judgement of the man in charge.

    Aubrey comes off as greedy and lacking in judgement when it comes to risk taking. And the stink of that might hand over CHK's share price for a long time.

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  5. And indeed, I think your points (in your most recent comment) are valid, too.

    The well participation is an absurd perk, and Aubrey is a greedy risk taker. These two items have been known for years (if not decades), or should have been known by anyone owning the stock (the program details have been in the proxy since inception).

    But the points being asserted by the article author remain absurd, asinine, and outrageous. It's a sloppy piece of work that reeks of desperation and is devoid of truth.

    ReplyDelete