Chesapeake Says SEC’s Probe Escalated to Investigation
Chesapeake Energy Corp. (CHK) said the U.S. Securities and Exchange Commission’s informal inquiry into outgoing Chief Executive Officer Aubrey McClendon’s private investments in company-owned wells escalated into an investigation.
Chesapeake was notified by the SEC that the probe had graduated to the next level on Dec. 21, the Oklahoma City-based natural gas producer said in a public filing today. Chesapeake also disclosed today that it continues to supply documents and other information to a federal grand jury in Michigan investigating the company’s conduct in auctions of gas-drilling leases.
Chesapeake, once the pre-eminent U.S. gas producer, lost as much as 39 percent of its market value since the beginning of last year as a supply glut that collapsed profits was compounded by evaporating investor confidence in management. The board announced five weeks ago that McClendon will step down by April 1 as the company seeks buyers for billions of dollars in oilfields and other assets to plug a cash-flow deficit that Chesapeake estimated may reach $3.5 billion to $4 billion this year.
Chesapeake fell 2.4 percent to $19.67 at the close in New York. The shares earlier dropped as much as 3.7 percent, the largest intraday drop since the company’s announced on Feb. 25 that it agreed to sell a stake in an Oklahoma oilfield for two- thirds less than its estimated value.
The board said on Feb. 20 that its 10-month probe of McClendon’s private financial transactions found no intentional misconduct in his use of personal stakes in thousands of company-owned wells to obtain more than $800 million in loans.
The transactions reviewed by the board’s audit committee and the Lord Locke Bissell & Liddell LLP law firm included McClendon’s borrowing from EIG Global Energy Partners LLC, a private-equity firm that bought preffered shares in two Chesapeake subsidiaries in 2011 and 2012.
The company also found no evidence of antitrust violations during Chesapeake’s 2010 acquisitions of drilling rights in a Michigan shale formation, according to the Feb. 20 statement.
The Justice Department and Michigan’s attorney general began inquiries last year into e-mailed communications between Chesapeake and Encana Corp. (ECA) in the run-up to a 2010 auction of state-owned leases. The e-mails included discussions of dividing up Michigan counties for bidding by each company.
Chesapeake announced an agreement this week to sell 50 percent of an 850,000-acre swath of Oklahoma drilling leases to China Petrochemical Corp. for $1.02 billion, or about $2,400 an acre. The per-acre price was less than the $7,000 to $8,000 that Chesapeake said it was worth in a July presentation.
Chesapeake, which failed to meet its 2012 asset-sales goal, plans to auction $4 billion to $7 billion in oilfields and other properties this year to cover drilling expenses and lower debt, according to a presentation published on the company’s website on Feb. 25. Chesapeake last year posted its biggest annual loss since 2009.
Chesapeake was surpassed as the largest U.S. gas producer in June 2010, when Exxon Mobil Corp. (XOM) purchased XTO Energy Inc. for $34.9 billion.
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