Chesapeake Says First Lien on CEO’s Oil Wells Shield Holders

Chesapeake Energy Corp. (CHK) said shareholders are protected if Chief Executive Officer Aubrey McClendon defaults on personal loans because the company holds first liens on oil and natural-gas wells he used for collateral.

McClendon, the co-founder and chairman of the second- largest U.S. gas producer, has been using his 2.5 percent stakes in some Chesapeake wells as collateral for personal loans, the Oklahoma City-based company said today. Chesapeake and its investors aren’t at risk should the CEO default because the company has an overriding claim to the oil and gas that flows from those wells, General Counsel Henry J. Hood said today.

Chesapeake tumbled as much as 10 percent for its worst intraday performance since August after news reports this week that the structure of McClendon’s personal loans wasn’t fully disclosed to shareholders and created potential conflicts of interest.

“Since Chesapeake is not a party to the loan documents, the liens and provisions do not reach Chesapeake’s intangible assets,” Hood said in an e-mailed statement today.

Although Chesapeake and its investors are insulated from any risks associated with McClendon’s personal financial commitments, “this highlights ongoing poor corporate governance issues related to the company,” Amir Arif, an analyst at Stifel Nicolaus & Co., said today in a note to clients.

359th-Richest American

McClendon didn’t address the loans when he met with analysts and investors during an Independent Petroleum Association of America conference in New York today.

The 52-year-old McClendon, who ranked 359th on Forbes magazine’s list of wealthiest Americans last year, has had the right to buy stakes in Chesapeake wells since 1993, Hood said. The arrangement requires the CEO personally to pay a proportionate share of drilling costs on those wells.

The company didn’t disclose the size of the loans McClendon has obtained based on his well holdings. Reuters, citing documents filed with county recorders in several states, said they amounted to $1.1 billion during the past three years.

Chesapeake has been selling stakes in oilfields and plans an initial share sale for its drilling business to cope with a cash crunch precipitated by falling U.S. gas prices.

The value of the furnace and power-plant fuel declined 52 percent in the past year as intensive drilling techniques enabled Chesapeake and rivals such as Devon Energy Corp. (DVN) to extract gas from previously-impenetrable rock formations, flooding North America with supply.

‘Spooking Investors’

Chesapeake fell 5.5 percent to $18.06 at the close in New York, after earlier dropping to $17.17. The shares have fallen 44 percent in the past year.

The company’s bonds were the most actively traded U.S. corporate securities by dealers today, with 189 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Chesapeake’s $1.3 billion of 6.775 percent notes due March 2019 fell 1.875 cents to 97.125 cents on the dollar to yield 7.3 percent, Trace data show.

“In our view, today’s news is spooking investors because of a similar situation in late 2008 when personal margin calls for the CEO ended up resulting in the CEO selling off a majority of his ownership in the company, which put additional downward pressure on the stock,” wrote Arif, who has a“buy” rating on Chesapeake shares.

Margin Calls

Chesapeake shed 39 percent of its value in October 2008, touching a 4 1/2-year low of $11.99 that month, as McClendon liquidated most of his Chesapeake shares to cover margin calls triggered by the global financial collapse. The stock already was under pressure from plunging demand and prices for the company’s main product: natural gas.

At the time, McClendon also sold his collection of 19th- century maps to the company to raise cash for margin calls. He agreed last year to repurchase the maps for $12.1 million plus interest to settle a 2009 lawsuit by the Louisiana Municipal Police Employees’ Retirement System that challenged his compensation package.

Exxon Mobil Corp. (XOM), based in Irving, Texas, is the largest U.S. gas producer.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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