Chesapeake Developed Shopping Centers as Gas Prices Fell

Chesapeake Energy Corp. (CHK), under fire from investor Carl Icahn for focusing on “non-core assets,” has amassed more than $300 million of real estate in its home- town Oklahoma City area, including shopping centers.

The exact size of Chesapeake Land Development Co.’s holdings, valued according to county tax records, is unclear from public filings. The empire, which has built at least two retail developments from scratch, has also included a church, houses and a grocery store.

The real estate subsidiary is “absolutely” an example of costs that Chesapeake will have to rein in, said Fadel Gheit, an analyst at Oppenheimer & Co.

Chesapeake’s home-town development projects illustrate how it can be difficult to distinguish between the personal interests of Chief Executive Officer Aubrey McClendon, who once said he might have been a developer in another life, and those of the company he leads. According to county real estate records, Chesapeake is the landlord for the upscale restaurant Deep Fork Grill, of which McClendon owns 49.7 percent.

“I’m really kind of surprised,” said Brian Gibbons, an analyst at Creditsights Inc. in New York who rates Chesapeake bonds a buy. “They should not be involved in real estate development.”

Chesapeake, the U.S. energy explorer battered by collapsing natural-gas prices and growing investor mistrust, will report to shareholders at its annual meeting tomorrow about plans to replace almost half its board under pressure from its biggest investors. Icahn, whose newly acquired 7.6 percent stake makes him the second-largest shareholder, is urging “cost savings initiatives” and a more conservative approach to spending, according to a June 4 federal filing.

Selling Assets

Southeastern Asset Management Inc., the largest shareholder with 13.6 percent of shares, also urged Chesapeake in a May 7 letter to focus more on its oil and gas business and sell assets outside that core. Facing a cash shortage, Chesapeake is in advanced talks to sell virtually all of its pipeline assets in transactions that may raise more than $4 billion, said two people with knowledge of the matter.

The real estate unit is putting “the same creativity and innovation” into its industry as the parent company has used in energy, according to the land segment’s Web site.

Michael Kehs, a spokesman for Chesapeake, declined to comment on Chesapeake’s real estate holdings.

’Bread and Butter’

Almost every energy company will have excess land it needs to sell over time and may even develop some of it, Gheit, the Oppenheimer analyst, said. Still, Chesapeake should be paying more attention to its “bread and butter” oil and gas business, he said.

“I guess we totally missed this one,” Gheit said of Chesapeake’s real estate subsidiary. “We knew about their fancy campus.”

For years the company has been buying land around its corporate headquarters campus in northern Oklahoma City. It has also added numerous amenities to the campus itself, including a soccer field, jogging track and several restaurants.

The real estate purchases have stretched far beyond the campus to include several office buildings more than a mile away. Closer to the campus, the company has built two retail developments and bought a third existing shopping center, adding up to an estimated 100,000 to 200,000 square feet of retail space, said Roy Williams, chief executive officer for the Greater Oklahoma City Chamber of Commerce.

The real estate moves have improved the neighborhood around the headquarters campus from an area with run-down buildings and “class B” office space, Williams said.

Reshaping Town

“I think they’ve totally reshaped that whole area of town,” he said. “Now, it’s a destination.”

Other large oil companies, including Devon Energy Corp. (DVN) and SandRidge Energy Inc. (SD), are also making an impact on the Oklahoma City economy with real estate purchases.

In October, Whole Foods Co. began a 20-year lease with Chesapeake for a store across the street from the headquarters campus on land that was formerly home to one of the city’s oldest funeral homes.

McClendon, who uses Arcadia Farm LLC as one of his personal investment companies, told Forbes last year that if it weren’t for the oil and gas industry, he would have been an accountant “or a real estate developer, which is something I have found quite enjoyable and useful in oil and gas development, and it has been helpful in leading the development of our large corporate campus in Oklahoma City.”

Unclear Distinctions

Arcadia Farm and related entities own real estate valued for tax purposes by the Oklahoma County appraiser at more than $24 million.

Chesapeake Land Development Co. and other Chesapeake-named subsidiaries own land and buildings valued at more than $300 million, according to the county assessor’s office. That includes the headquarters campus office buildings.

The distinction between the publicly traded company and McClendon’s Arcadia is not always clear. In 2002, for example, McClendon and his wife owned real estate that shared the same post office box as Chesapeake Energy and an entity known as Deep Fork Farm LLC, which later changed its named to Arcadia Farm, according to deeds.

Chesapeake also owns properties north of its campus that are within a mile of a personal real estate project of McClendon’s that was planned to house his personal wine collection, at one point considered one of the country’s largest. Construction on the $3 million, 31,000-square-foot warehouse stopped around the time McClendon faced financial difficulties in 2008.

Deep Fork

In four federal filings between April 29, 2008, and May 4, 2009, Chesapeake said it used the catering services of Deep Fork Grill and that McClendon was a 49.7 percent owner in the restaurant. It did not note that it owned Deep Fork Acquisition LLC, the entity listed on the county assessor’s tax rolls now as the owner of the restaurant property. A Sept. 20, 2011, filing with the Oklahoma County Clerk’s office describes Chesapeake as the owner of Deep Fork through a series of mergers between 2006 and 2008.

While Williams, of the Chamber of Commerce, has not worked with McClendon personally on any real estate projects, the two have worked together on behalf of several non-profit groups.

“Aubrey really likes things that are different; he likes things that are ’first,’ ’best’ or ’only,’” Williams said. “He doesn’t like to have another something that everybody else has.”

To contact the reporter on this story: David Wethe in Houston at dwethe@bloomberg.net

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

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