Chesapeake's McClendon is Back Borrowing Money

Chesapeake Energy CHK CEO Aubrey McClendon has reportedly borrowed as much as $1.1 billion over the last three years against his holdings in thousands of Chesapeake wells and as if that move wasn't questionable, he didn't see fit to tell shareholders about it. The loans allow McClendon to take a 2.5% stake in every well the company drills. As Reuters reported, potential conflict arises because McClendon's collateral on the loans is his 2.5% interest in the wells. Both Chesapeake and McClendon told Reuters the transactions don't represent a potential conflict of interest. The company, whose board has been hand-picked by McClendon, added the deals are private and there was no need to publicly disclose them. It should be noted that when Forbes interviewed McClendon last year his 2.5% stakes in Chesapeake wells were disclosed. McClendon's interests in the wells is in turn peddled to sucker state pension funds by a hedge fund as an exclusive insider alternative asset they can invest in with very favorable, risk-free returns given McClendon's ability to make sure he meets the terms of the deal, Forbes reported today. It would appear the loans are legal, but that the ethics of a company executive borrowing funds to take stakes in company projects and then use the stakes as collateral walks a fine line of what shareholders would be willing to tolerate. That's even more so the case with Chesapeake, a company whose shareholders have been down this road before with the hyper-aggressive McClendon and a company that has seen its shares plunge roughly 50% since August 2011 amid tumbling natural gas prices. McClendon, who co-founded Oklahoma-based Chesapeake in 1989, has been no stranger to balance sheet controversy over the years. It was McClendon that led Chesapeake head first into expanding its natural gas assets, making the company the second-largest U.S. producer of the downtrodden commodity behind only Exxon Mobil XOM. That looked like a great idea when nat gas commanded $14 per MMBtu in July 2008. Then the commodities bubble burst and the global credit crisis hit, events that nearly destroyed Chesapeake. In October 2008, it was disclosed that McClendon had to sell almost all of his 33.4 million Chesapeake shares to meet margin calls. Blowing away the theory that insiders know their company best, McClendon sold his shares in 2008 for less than $18 after the stock had traded as high as $74 a year earlier. McClendon's misfortune with his company's stock continues to this day. He bought 11,000 shares in November 2011 for just under $23. Today, the stock trades for less than $18. Again, news of Chesapeake and McClendon not disclosing these sweetheart deals (media outlets reported that analyst covering the company we're unaware of these loans until contacted for comment on the story) probably isn't all that surprising and all one needs to do is keep using 2008 as the reference point. Despite the value destruction endured by Chesapeake investors that year, McClendon was still one of the highest paid CEOs of an S&P 500 company, the board favorably altered his contract, lowering the amount of Chesapeake shares he was required to hold in the process and the company paid him $12 million for a collection of road maps. For now, Chesapeake is in the midst of a substantial debt reduction program that includes rampant sales of U.S. shale assets and a spin-off of its oil services business. At the end of 2011, Chesapeake had long-term debt of $10.3 billion and that could easily be what scares off potential acquirers. The U.S. Natural Gas Fund UNG has lost more than two-thirds of its value this year and nat gas prices are below $2 per 1,000 cubic feet for the first time in a decade, so it's fair to say revelations of yet another dubious McClendon financial gambit are ill-timed to say the least. Unfortunately, the real victims are Chesapeake investors. For more energy sector trading ideas, please click HERE.