Chesapeake Energy Corp. (CHK) Chief Executive Officer Aubrey McClendon agreed to sell $88 million of his personal oil and gas interests to investment vehicles created by Wachovia Corp. three weeks after his company used the bank in a similar $600 million deal, a court filing shows.
The same Wachovia bankers worked on both August 2008 transactions, known as volumetric production payments, according to documents filed last year by Chesapeake in a Manhattan federal court. The deals came after a separate January 2008 Wachovia transaction that yielded McClendon $44 million, the documents show.
Chesapeake’s board is scrutinizing McClendon’s efforts to finance his personal holdings after media reports on his borrowings led Chesapeake to strip him of his chairman’s title and end a special program that allowed him to invest in company wells. The board said last week it’s examining McClendon’s arrangements with any company that did business with Chesapeake.
“It’s in the interest of the other parties to give him a break on his transaction if they get a break on larger transactions with the company,” said John Coffee, a law professor at Columbia University, who’s written on corporate governance. “There’s a concern,” especially if the transactions weren’t disclosed to shareholders, he said.
Since 1993, McClendon has had the right to invest alongside Chesapeake in every well that it drills, buying as much as a 2.5 percent working interest. He said on April 26 that he had loans of $846 million outstanding on his personal holdings as of Dec. 31.
“The VPP sales were separate, arms-length transactions that were independently negotiated on market-sensitive terms,” Chesapeake said in a statement. Ron Hutcheson, a spokesman for McClendon, declined to comment.
Volumetric production payments allow the owner of wells to get cash up front in exchange for future production of oil and gas, delivered according to a schedule over a period of years. Chesapeake has been a frequent user of VPP’s to finance its well-drilling program, completing 10 transactions since 2007 to raise $6.4 billion.
Buyers of VPP’s are usually special-purpose vehicles set up by Wall Street investment banks, according to the complaint in a 2010 lawsuit filed against Oklahoma City, Oklahoma-based Chesapeake in federal court in New York. The banks typically syndicate loans linked with the VPP’s to other banks or hedge funds, according to the complaint.
The plaintiff in the case, Mary McCall, said she was a holder of a minority interest in some Chesapeake wells. She argued Chesapeake’s and McClendon’s VPP transactions were selling gas that rightly belonged to her.
Chesapeake and McClendon filed the documents detailing the VPP transactions to support their request to have the case dismissed. A judge granted that motion last year, and McCall is appealing.
The documents show that Wachovia helped set up at least three VPP transactions in 2008 -- two for McClendon’s personal holdings, and one for Chesapeake.
On Jan. 31, 2008, a partnership owned by McClendon, called Chesapeake Investments LP, agreed to sell rights to future gas production from some of McClendon’s interests to a new entity known as TW Investors LLC for $44 million, the court papers show. The new entity shared an address with Wachovia’s headquarters in Charlotte, North Carolina (NII), according to the documents.
Two Wachovia bankers, Robert Christensen and William Eustis, were the only people listed as officers of TW in the documents. Wachovia also set up commodity swap transactions to facilitate the deal, the documents show.
Then on Aug. 1, Wachovia helped set up the $600 million VPP transaction with Chesapeake, known as Sooner Gas Trust, the filings show. This time, a unit of Wells Fargo & Co. (WFC) that handles asset-backed securities was named as the entity’s “owner trustee.” Sooner’s officers were listed as three Wachovia bankers, including Christensen and Eustis, as well as a group from Capital One Financial Corp.’s energy-finance unit. Wachovia also provided swaps as part of the transaction.
On Aug. 21, McClendon’s personal company sold another VPP through Wachovia, for $88 million, the court documents show. The new entity was called Blue Devil Trust, and Wells Fargo was again the “owner trustee.” Wachovia’s Christensen and Eustis were designated as Blue Devil’s officers, and again the bank provided commodity swaps.
Wachovia was sold to Wells Fargo in 2009. Mary Eshet, a Wells Fargo spokeswoman, declined to comment or to make the bankers available for interviews. Neither Christensen nor Eustis returned phone calls seeking comment.
Chesapeake has disclosed some details of its own VPP’s in securities filings. It said in a filing last month that it doesn’t “review or approve financings of Mr. McClendon’s personal assets.” It added that disclosures about revenue from his personal well interests “include revenue attributable to volumetric production payments owed to third parties under transactions that Mr. McClendon has entered into from time to time.”
Reuters reported on April 18 that McClendon arranged to borrow as much as $1.1 billion against his personal well holdings. His largest personal lender was EIG Global Energy Partners, which has also financed Chesapeake, the report said.
The Wall Street Journal reported that McClendon has personally borrowed from Wells Fargo, Goldman Sachs Group Inc., and Bank of America Corp., all of which have been awarded investment banking business from Chesapeake.
The court documents in New York show that McClendon used the same deal team -- Chesapeake executives, bankers, and lawyers -- for both his personal transactions and the company’s.
That includes outside legal counsel from C. Ray Lees, of Oklahoma City-based Commercial Law Group PC, and financial advice from Jefferies Group Inc. (JEF) Doug Jacobson, identified as an executive vice president at Chesapeake Energy, signed the Sooner Gas transaction on behalf of his company, and is also listed as an officer of McClendon’s personal company in both of those VPP transactions.
Lees and Jacobson didn’t return phone calls seeking comment on the transactions. A Jefferies spokesman, Richard Khaleel, declined to comment.
The case is McCall v. Chesapeake Energy Corp., 1:10-cv- 08897, U.S. District Court, Southern District of New York (Manhattan).
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