An Oklahoma Tale (Pitchforks Optional)

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If you don’t live in Oklahoma or north-central Texas, then you may not be familiar with one of Oklahoma’s most highly-publicized corporations, Chesapeake Energy (NYSE: CHK), an independent producer of natural gas founded twenty years ago by Aubrey McClendon and Tom Ward. According to Wikipedia, Chesapeake is the third largest producer of natural gas in the United States (behind majors BP and ConocoPhillips), and at one time they were one of the fastest growing companies in the Southwest. They swallowed up one independent gas production company after another, and eventually ended up with huge lease stakes in the gas-rich Haynesville and Barnett shale formations in Texas, Arkansas, and Louisiana. They are headquartered in Oklahoma City in a sprawling 50 acre corporate campus that itself swallowed up a huge chunk of what was once one of the city’s prime locations for retail shops and restaurants.

Even though natural gas prices headed into a prolonged slide in 2007, Chesapeake’s amazing growth during the previous ten years, plus the revenue potential of its gas leases, kept analyst’s hopes high. In fact, Aubrey McClendon’s aggressive yet affable corporate leadership style earned him a nod by Forbes Magazine in 2005 as one of America’s top performing executives. And McClendon’s own faith in Chesapeake was so strong that he sunk more and more of his personal wealth into Chesapeake stock, eventually owning over 33 million shares (approximately 5%) of the company, which was worth about $2 billion at its July 2008 peak of $74 per share.

Then the bottom fell out. As natural gas prices began to fall steeply in the summer of 2008, Chesapeake shares, which had always been linked short-term to natural gas prices, followed suit. And after the market slumps of September and October took their toll on Chesapeake stock, McClendon was in serious trouble. He had bought many of his shares on margin, and when the stock price plummeted toward the $30 range, he was forced to begin dumping his shares in order to cover the margin calls. By the end of 2008, McClendon had sold virtually all of his stock, flooding the market and pushing the trading price as low as $11 a share. Since then, Chesapeake has struggled to maintain a trading price of $20 a share.

Then came word about Chesapeake’s debt problems. After their market capitalization meltdown, the company was forced to hold a fire sale and liquidate $6 billion worth of gas leases, in exchange for cash and Chesapeake stock. At the time of those lease sales, Chesapeake’s SEC filings reported the following:

As of September 30, 2008, we had long-term indebtedness of approximately $14.3 billion, with $3.474 billion of outstanding borrowings drawn under our revolving bank credit facility. Our net indebtedness represented 43% of our total book capitalization at September 30, 2008. As of November 25, 2008, we had approximately $13.8 billion of long-term indebtedness outstanding, with $3.474 billion outstanding under our revolving bank credit facility and $209 million outstanding under Chesapeake Midstream Operating’s midstream revolving bank credit facility. (emphasis added)

At the end of January, Chesapeake sold $1 billion worth of 6 year bonds, which was double the size of the debt offering that they had originally announced a month earlier. At least one analyst opined that Chesapeake’s management was “losing its credibility.”

Okay, so why am I telling you all of this? Because in spite of the fact that 2008 was the most dismal year in Chesapeake Energy’s history, an SEC filing made yesterday revealed that the company gave Aubrey McClendon a 2008 compensation package that exceeded $112 million, almost four times what he earned the previous year, and one of the largest executive compensation packages of any Fortune 500 company for 2008. The package included a $975,000 base salary, $32.7 million in stock, and a one-time $75 million bonus. Apparently McClendon has a personal stake in many of the company’s gas wells, and the company explained the bonus as a way to help McClendon pay the out-of-pocket expenses he owes on those wells. How thoughtful.

Right now it’s hard to tell if the whirring sound I keep hearing this morning is the sound of 4,000 pitchforks being sharpened, but it’s doubtful that the average Chesapeake employee is going to be happy about this revelation. Nor will the millions of other Chesapeake stock holders, mineral lessors, or others whose lives have become entangled with this giant company. Regardless of how Chesapeake’s PR department spins this, the damage has already been done, and there is no way that they will ever be able to convince most of us that McClendon’s executive compensation was anything but an unfettered raid on the corporate piggy bank in order to make up for the loss of his billion-dollar personal fortune.

I’ve traditionally been a defender of executive pay and corporate bonuses, especially in the recent case of AIG, where employees who bore no responsibility for the company’s financial woes, and who had agreed to work for $1 salary, were being unfairly punished when they had done nothing wrong. But that is obviously not the case here. Chesapeake’s stock meltdown was due in large part to the direct actions of its CEO. I am not a Chesapeake employee, but I know many of them, and I have heard plenty of stories about 401K accounts and stock options that were effectively wiped out last year. None of those people received additional cash from the company in order to cover their losses. And neither should the man who was largely responsible for those losses.

Excuse me. I think I have a grinding stone around here somewhere …

Needless to say, I’m not the only blogger unhappy with this deal.

[ADDENDUM: As an Oklahoma City resident I am fully aware of the fact that Chesapeake Energy has in fact done our city “A World Of Good” (as their slogan goes) in terms of positive economic growth. However I feel that it iss appropriate to speak out about what I see as an inexplicable action by Chesapeake’s Board of Directors.]

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