Chesapeake CEO Disavowed Role in 2008 Plunge, Sold Shares

Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon
Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon e-mailed employees on Oct. 10, 2008, urging them “just to ignore” the decline in Chesapeake’s shares, which he attributed to fallout from the global financial collapse triggered by Lehman Brothers Holdings Inc.’s bankruptcy 26 days earlier. Photographer: F. Carter Smith/Bloomberg

Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon disavowed any role in the plunge in the company’s stock price in October 2008 after he had sold more than 31 million shares to meet margin calls.

McClendon e-mailed employees on Oct. 10, 2008, urging them “just to ignore” the decline in Chesapeake’s shares, which he attributed to fallout from the global financial collapse triggered by Lehman Brothers Holdings Inc.’s bankruptcy 26 days earlier. Eighteen minutes before sending the message, the company issued a statement through Business Wire that the CEO involuntarily sold “substantially all” of his Chesapeake shares over the previous three days to satisfy margin calls.

“Finally, let’s talk about the stock price, and what can I say? It’s ridiculous at a multiple of 1.5 x 2009 cash flow, but it’s real and my advice to all of you is just to ignore it,” McClendon wrote in the e-mail, a copy of which was included in court filings in an appeal of a federal court lawsuit in Marshall, Texas, involving a dispute over drilling rights.

Chesapeake, the second-largest U.S. gas producer, has lost almost 40 percent of its market value in the past year as the effect of tumbling energy prices was compounded by questions about McClendon’s personal financial dealings. McClendon, who led a costly push to expand the firm’s gas holdings during the last decade, was replaced as chairman on June 21 by Archie Dunham.

McClendon’s Borrowing

McClendon has been under fire for using personal stakes in the company’s oil and gas wells to privately borrow more than $800 million last year from some of the company’s biggest financiers. He also has been criticized for a wrong-way bet in natural-gas prices that gutted the Oklahoma City-based company’s cash flow, boosted its borrowing costs and spurred its biggest investors to replace more than half the board.

McClendon apologized to shareholders twice in the past eight weeks for the bad publicity surrounding his private investments. The company said in a May 22 presentation prepared for a UBS AG conference that it had withstood an “unprecedented negative media campaign” that failed to reduce the value of its assets.

Michael Kehs, a Chesapeake spokesman, said yesterday the company wouldn’t comment on anything stemming from ongoing litigation.

The Oct. 10, 2008, statement disclosing McClendon’s stock sale was distributed at 3:56 p.m. Oklahoma City time. The e-mail to all Chesapeake employees was issued at 4:14 p.m.

Under an executive perk in place since McClendon co-founded Chesapeake in 1989, he was allowed to buy 2.5 percent stakes in almost every well the company drilled. McClendon used his interest in those wells as collateral to borrow funds to finance his proportionate share of drilling and leasing costs.

$87 Million

After McClendon’s 2008 selloff of Chesapeake shares, the board awarded him an $87 million package in the form of a special bonus and the purchase of his collection of 19th-century maps, according to public filings. He agreed last year to buy back 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.

In the October 2008 e-mail, McClendon told employees there was nothing they or the management team had done to reduce the value of the company by 80 percent in 90 days.

“It’s just investors in full-scale panic across the globe right now, selling whatever they can,” McClendon said in the e-mail.

McClendon also said that given the economic downturn during the second half of 2008, employees needed to focus on holding down expenses.

“It is imperative that we negotiate lease prices reflective of today’s economic conditions,” he said in the e-mail. “So make sure you negotiate everything extra long and hard.”

Drilling Rights

McClendon said in the e-mail that the company had paid twice as much as it should have for drilling rights as plunging natural-gas prices dashed prospects for profitable new wells.

The recommendation that employees reduce lease offers came just days before Chesapeake backed out of a deal to buy oil and gas rights from Peak Energy Corp., Peak’s lawyers said in court filings in the lawsuit. That case, involving leases in the Haynesville Shale formation in Texas, led to a damages award of $19.7 million against Chesapeake.

“What was a fair price 90 days ago for a lease is now overpriced by a factor of at least 2X, given the dramatic worsening of the natural gas and financial markets,” McClendon said in the e-mail.

Ohio, Oklahoma

Chesapeake is shifting drilling rigs away from gas deposits such as the Haynesville Shale toward more profitable oilfields in Ohio and Oklahoma. The company warned investors last month that it may run out of cash as soon as next year if it fails to divest $7.4 billion in assets by the end of December.

Chesapeake said June 8 it will sell its interests in Chesapeake Midstream Partners LP to Global Infrastructure Partners for $2 billion. It also plans to raise more than $2 billion by divesting its pipeline development unit and some central U.S. conduits to Chesapeake Midstream.

The U.S. Court of Appeals in New Orleans will hear arguments next month on whether a judge erred in awarding Peak damages for Chesapeake’s decision to pull out of what Peak said was an agreement to buy shale gas rights in East Texas.

U.S. District Judge John Ward in Marshall, Texas, ruled in September 2011 that Chesapeake officials wrongfully canceled what he concluded was an agreement to buy the energy rights to 5,404 acres held by Plano, Texas-based Peak.

‘Land Grab’

Chesapeake’s lawyers appealed, saying the judge misconstrued what they argued was a tentative agreement in ruling against the company. Chesapeake also argued that the judge erred in concluding that Peak had met its obligations under the agreement, according to court filings.

Peak officials alleged that Chesapeake executives began a “land grab” in eastern Texas and western Louisiana in early 2008, seeking to acquire large swaths of the rights to the Haynesville Shale area. The company relied on an “army of land men” to acquire oil and gas leases in the area, the Texas company’s attorneys said in court filings.

McClendon described the company’s push to acquire rights to the Haynesville Shale formation, saying in a July 2, 2008, call with investors that he was seeking to make Chesapeake “the only game in town for a lot of owners of smaller tracts of land out there.”

‘Unconventional Plays’

“We especially understand the value in today’s world of having a huge land machine that can devour big chunks of land across these massive new unconventional plays,” McClendon said, according to a transcript of the call. “In these plays, if you snooze, you lose. And with over 4,000 land men in the field every day buying new leases, I can assure you that Chesapeake is not snoozing.”

Peak officials contend in court filings that McClendon was personally involved in their deal, approving the land man’s offer of $15,000 per acre and pushing to speed negotiations.

Upon learning Peak officials wanted to see the offer in writing, McClendon sent his negotiator an e-mail urging him to complete the deal promptly. “Sooner the better of course! :)” McClendon said in the July 1, 2008, e-mail, according to court filings.

Four months later, McClendon and other Chesapeake officials weren’t as eager to complete the deal as gas prices continued to fall, Peak’s lawyers said.

“The transaction failed to close because market conditions had changed, Chesapeake ran into cash flow problems and Chesapeake was looking for excuses to back out of its pending deals for Haynesville Shale properties,” the Texas company’s lawyers said in February appeals court filing.

Chesapeake’s Argument

In their court filings, Chesapeake’s lawyers countered that the “letter of intent” between the two companies over the oil and gas leases didn’t amount to a final contract and Peak officials failed to come up with a final list of leases to be covered by the agreement.

“It is undisputed that Chesapeake never agreed to a lease list with Peak” and that means the Texas company couldn’t properly quantify its damages in the case, Chesapeake’s lawyers said in a February appeals court filing.

The case is Coe v. Chesapeake Exploration LLC, 11-41003, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

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