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Chesapeake Energy Needs Ronald Reagan as CEO

By Jim Fink on April 20, 2012

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I miss Ronald Reagan. As a Red Sox fan, I never cared for the allusion to Joe DiMaggio in the last stanza of Simon & Garfunkel’s song “Mrs. Robinson.” The song’s lyrics could easily be improved by making the following change:

Where have you gone, Ronald Reagan? A nation turns its lonely eyes to you. Woo woo woo.

Then again, the five syllables of “Joe DiMaggio” work better than my recommended four-syllable “Ronald Reagan” replacement lyric, but getting the Yankee imagery out of the song is worth the tortured cadence, don’t you think?

But I digress. Without a doubt, Reagan was one of the best U.S. presidents ever. The U.S. public agrees with me. According to a January 2012 Harris poll, Ronald Reagan was ranked the best president since World War II and second-best president in the 236-year history of our nation. Abraham Lincoln was rated the best, but Reagan beat out George Washington, FDR, JFK, and Thomas Jefferson!  A 2011 Gallup poll rated Reagan numero uno — even above Lincoln!

In contrast, the U.S. public in the Harris poll rated the current resident in the White House – creator of the Obamacare monstrosity — the second-worst president since WWII.  Not only has the Congressional Budget Office (CBO) recently announced that Obamacare will cost $820 billion more than President Obama promised the American people prior to Congressional passage in March 2010, but Democratic Senator Jim Webb of Virginia recently criticized Obama’s leadership on the health-care issue:

The manner in which the health-care-reform issue was put in front of the Congress — the way that the issue was dealt with by the White House — cost Obama a lot of credibility as a leader. From that point forward, Obama’s had a difficult time selling himself as a decisive leader.

Where have you gone, Ronald Reagan? A nation turns its lonely eyes to you.

Chesapeake Energy Needs a New CEO

The trigger for my paean to Ronald Reagan is news that Chesapeake Energy (NYSE: CHK) CEO and co-founder Aubrey McClendon has been caught with his hand in the corporate cookie jar yet again. This time, some investigative sleuthing by Reuters has uncovered $1.1 billion in personal loans that McClendon has taken out over the past three years to speculate on Chesapeake natural gas wells.

Under Chesapeake’s Founder Well Participation Program (FWPP) (pp. 60-62), McClendon is granted the right to purchase up to a 2.5% interest in all wells Chesapeake drills in a given calendar year. In exchange for receiving 2.5% of oil & natural gas revenues, he must pay 2.5% of all development and drilling costs. Based on the company’s most recent proxy statement, McClendon has lost about $316 million on the FWPP over the past 3 ¼ years, but the loss may be temporary since revenues are spread out over many years whereas costs are front-loaded. 

While McClendon’s participation in the FWPP was well-known, analysts up to now had thought that McClendon was using his own money to buy the well interests. In fact, it now turns out that McClendon has been buying the Chesapeake well interests with the money of one of Chesapeake’s largest lenders. When Reuters confronted Chesapeake’s general counsel Henry Hood and CEO McClendon about McClendon’s $1.1 billion in previously undisclosed loans, the responses were dismissive:

Hood: “Any loans are Mr. McClendon’s personal business and not appropriate for review or monitoring by the company or public comment.”

McClendon: “I do not believe this is material to Chesapeake. There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way.”

Forbes Magazine characterizes these dismissive comments by Chesapeake’s management as “not only disingenuous but borderline delusional.” Many law professors and attorneys are concerned about McClendon’s conflicts of interest because one of McClendon’s largest lenders ($500 million) is private equity firm EIG Global Equity Partners – which is also one of Chesapeake’s largest financers. Just a couple of weeks ago, EIG invested hundreds of millions of dollars in a special class of Chesapeake preferred stock (6% interest rate) and royalty interests tied to wells located in Oklahoma. This is on top of a similar financing arrangement between Chesapeake and EIG last December in Ohio’s Utica shale region at an even more attractive 7% interest rate plus royalties.

Analysts are worried about two major conflicts of interest:

  1. If McClendon has difficulty paying back his loan to EIG, he could use his position as Chesapeake CEO to offer EIG abnormally favorably investment terms on future Chesapeake deals in exchange for leniency on his personal loan’s payback terms.
  1. McClendon’s personal loans have a clause requiring him to use his best efforts to ensure that other parties with interests in Chesapeake’s wells – including Chesapeake itself – comply fully with all “covenants and agreements” that McClendon has subjected himself to in his personal loans. This clause could compel McClendon to direct Chesapeake to act against its shareholders’ best interests in order to guard himself from legal liability under his personal loans.

While the SEC has rules requiring immediate disclosure of agreements whereby a CEO pledges company stock against personal loans, there is no rule requiring disclosure of loan pledges involving company business interests.  This is a loophole that should be closed and McClendon should be ashamed for violating the spirit, if not the letter, of the SEC CEO loan disclosure rules.

As I wrote back in December 2010 in Chesapeake Energy: Carl Icahn’s Next Target, McClendon’s unethical management practices are longstanding.  Back in 2008, he was forced to sell 31 million Chesapeake shares for $569 million to cover margin calls. These forced sales hurt Chesapeake shareholders directly because the stock fell 39 percent “virtually overnight” when his margin calls became public. McClendon also received a $75 million bonus payment at the end of 2008 to help pay for his participation in the FWPP while Chesapeake shareholders suffered a 59% loss for the year. Oh, and McClendon sold his antique map collection to the company for $12.1 million before being forced to buy it back (with interest) to settle a shareholder lawsuit.

Rolling Stone says that McClendon uses Chesapeake as his own personal “piggy bank” and I have to agree. According to at GMI Ratings, a corporate governance research and ratings firm:

Chesapeake’s behavior and governance raise concerns that over the long term “significant shareholder loss” may occur.

Institutional Shareholder Services (ISS), another corporate governance firm, was so disgusted with McClendon’s behavior last year that it recommended that shareholders vote to remove McClendon from Chesapeake’s board of directors, citing an “apparent unresponsiveness of directors to the shareholder franchise” and “failure to address significant compensation issues.” Unfortunately, McClendon survived the shareholder vote.

In the second quarter of 2011, Carl Icahn sold out of his entire stake in Chesapeake and has now moved on to a tender offer for Midwest oil refiner CVR Energy (NYSE: CVI). While Icahn achieve a short-term profit in Chesapeake, longer-term shareholders have lost big time. Since my December 2010 article on Chesapeake and Icahn was published, Chesapeake has underperformed the Natural Gas Index (AMEX: ^XNG) by more than 33 percentage points:

Source: Bloomberg

Don’t say I didn’t warn you.

Bottom line: investors are well-advised to avoid Chesapeake Energy. With regard to McClendon’s newly-discovered $1.1 billion loan scandal, let me end by quoting Ronald Reagan, who said during his 1980 debate (50-second mark) with Jimmy Carter over national health insurance (a precursor to Obamacare), and his 1984 debate with Walter Mondale over tax increases:

There he goes again!

Ronald Reagan squashed Carter’s socialized-medicine proposal and Mondale’s tax-hike plan. If Ronald Reagan was Chesapeake Energy’s CEO, he would similarly end all of the corporate looting going on under McClendon. Unfortunately, Reagan is not here to clean up the mess. With McClendon continuing his unethical ways, it’s likely that Chesapeake Energy’s stock will also continue its underperforming ways.

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Stock Talk

  1. avatar
    Neil Pender Reply April 22, 2012 at 12:11 AM EDT

    They need to investigate how many times CHK gave away millions of investor funds on bogus land deals. As in the case of Romac Energy of Longview Tx. The deal was approved by Aubrey and Romac collected 5 million dollars. Romac never assigned any leases to CHK yet Chk tendered another 7.8 million to them. Romac sued Chk for breech and with CHK help within one month of filing changed their name to Stoneridge Energy. From that point the 2 were working together again on another project. Seems one party to Romac (Jeffrey Dale Thomas) was a buddy of Aubrey’s. I know because I have copies of emails to prove it. However 12.8 million was spent and CHK recieved nothing in return. Nice to always help a friend out with company funds as in this case.

  2. avatar
    Tom Reply April 21, 2012 at 10:08 PM EDT

    Has anyone seen fit to tell Jim Kramer about this ??? Aubrey was one of his “favorites” among CEO’s. This is Kramer’s biggest blunder since UNH his “all time favorite stock” blew up. Do your homework Jim !! How can any of us small investors do proper research if people like Kramer with a full time paid staff can’t keep up with the bad guys ?

  3. avatar
    R m smith Reply April 21, 2012 at 4:01 PM EDT

    This article is not even bad, it’s pitiful . Yes Ronnie was likable but a dud as a President. Many of his votes for best President probably came from those who didn’t recognize the names of these early statesmen, but knew their Hollywood actors. Yes, he lowered taxes but he didn’t get his budget cuts passed and left the country a fiscal trainwreck.

    As to your diatribe on “Obamacare Monstrosity”, what’s the Republican plan? Where is the empathy for the uninsured children of parents who can’t pay for insurance or have pre-existing conditions?

  4. avatar
    ruth chodrow Reply April 21, 2012 at 12:48 PM EDT

    I’m sorry I did not know about Mcclendon”s shinanigins. I just couldn’t understand why the stock kept going down and down.I own some of the stock and kept thinking an energy stock should be going up not down.If I sell now of course I will bw losing money. If I stay put i am afraid the co. can go under.

  5. avatar
    willy Reply April 21, 2012 at 9:04 AM EDT

    Ronald Reagan this best president, I think this guy is borderline delusional,
    what a rewrite of history. President Reagan sold missiles to terrorist to fund an illegal war in Nicaragua, against the laws of the United States Congress, thereby trying to circumvent and undermine the constitution of these United States.

  6. avatar
    John Neubauer Reply April 20, 2012 at 6:40 PM EDT

    In my opinion, Reagan was not the number one president. Reaganomics did not work with Reagan’s trickle down [or tinkle down] economics. He was not particularily bright but did surround himself with qualified people. In my book, Reagan, Harding and Buchanan are bedfellows.

  7. avatar
    Bernie Reply April 20, 2012 at 6:03 PM EDT

    You gotta be kidding! I always thought Ronald Reagan was one of the worst presidents in history. He was all smoke and mirrors and slept most of his time in the white house while his advisors ran things. He may have had some popularity nationally but not worldwide. Many felt he was a bully on the international stage and not much different than the “Bush” presidents to follow. Personally, I always felt Jimmy Carter had real compassion for others and wanted to make a difference. Unfortunately, many saw this as a weakness. Carter did not get the respect he deserved!