Chesapeake Business Practices

[ou48A]

Let there be another major hurricane in the Gulf, such as Katrina, and prices will shoot to 13 bucks again, like they did in 2005.

God forbid.

That will not happen.
The supply situation is now drastically different for NG.

A bad hurricane season could send crude oil prices much higher though.

[Doug Loudenback]

While I still do not think that I have a good grip of the issues and/or facts involved, the national press is certainly bearing down today. See this link at Business/Bloomberg, the Wall Street Journal, CNN Money, and locally even this Oklahoman link today, as examples.

I also add that I congratulate the Oklahoman, in this case its reporter J. F. Marks, for apparently being proactive in its reporting. Good reporting journalists and their employers, should have their names mentioned (as should those less worthy).

[Bailey80]

As well, perhaps the Journal Record might rethink whether it requires people to pay to read. Sure, its your right, so whatever you do will be OK, but please don't think that just because something is covered the Journal Record that very many people know about it.

At the least, as a public service, how about providing some dates combined with bullet points which describe the Journal Record's coverage right here ... is that too much to ask?

Well, I don't pretend that the JR has a very large subscriber base, but enough people are buying it to keep me employed anyway. My point was that we are reporting about the company's troubles. It irks me a little when people say that media outlets in the state aren't reporting on what is going on at Chesapeake, because we are. Here's some of our coverage over the past year. I challenge anybody to go through the Oklahoman archives and compare our coverage. This is just a sampling.

4-20-2012:Chesapeake shareholder files lawsuit over McClendon loans (we posted multiple updates on our website through the day on this)
http://journalrecord.com/2012/04/20/...-loans-energy/

4-18-2012: Chesapeake defends McClendon loans
http://journalrecord.com/2012/04/18/...-loans-energy/

12-06-2012: Shareholders: Chesapeake settlement ignores McClendon’s $75M bonus http://journalrecord.com/2011/12/06/...ion-bonus-law/

November 2, 2011: McClendon would repay Chesapeake $12.1 million as part of settlement
http://journalrecord.com/2011/11/02/...lement-energy/

October 19, 2011: Chesapeake to settle shareholder lawsuit
http://journalrecord.com/2011/10/19/...r-lawsuit-law/

September 9, 2011: Investors sue McClendon over 2008 pay http://journalrecord.com/2011/09/09/...ackage-energy/

June 10, 2011: McClendon re-elected as Chesapeake chairman http://journalrecord.com/2011/06/10/...y-firm-energy/

June 27, 2011: McClendon fires back at news report of overstated reserves
http://journalrecord.com/2011/06/27/...serves-energy/

June 3, 2011: ISS: Don’t reappoint McClendon to Chesapeake board of directors
http://journalrecord.com/2011/06/03/...ectors-energy/

April 29, 2011: Chesapeake CEO draws $21M in 2010 http://journalrecord.com/2011/04/29/...n-2010-energy/

February 9, 2011: Continental Resources sues Chesapeake over land deal http://journalrecord.com/2011/02/09/...ne-bad-energy/

December 20, 2010: Icahn builds stake in Chesapeake
http://journalrecord.com/2010/12/20/...ompany-energy/

[Easy180]

Just your standard shareholders suing the CEO...Happens every day lol

[ljbab728]

It's interesting that the board of directors that some are saying should resign is heavy with former Republican political figures.

http://newsok.com/chesapeake-board-o...rticle/3668262

[ou48A]

It's interesting that the board of directors that some are saying should resign is heavy with former Republican political figures.

http://newsok.com/chesapeake-board-o...rticle/3668262

It’s interesting that Aubrey was an Obama supporter in 2008

[onthestrip]

More negative news from Reuters today.
http://www.reuters.com/article/2012/...83M16Y20120423

[Drake]

More negative news from Reuters today.
http://www.reuters.com/article/2012/...83M16Y20120423

More?

Isn't that the exact same article from last week?

[Pete]

No, this is a new article with new concerns being raised:

CEO Aubrey K. McClendon has employed another way to cash in on a perk unique to the company he runs: He sold his share of two large energy plays at the same time the company divested its interest.

Analysts say the deals, which generated $6.5 billion in proceeds, pose a potential conflict because of the possibility that they could have been timed and structured to suit McClendon's personal interests, rather than those of the company he runs.

[Drake]

No, this is a new article with new concerns being raised:

Ahh. My bad. Teach me to skim.

Well, it probably won't. : )

[king183]

It's interesting that the board of directors that some are saying should resign is heavy with former Republican political figures.

http://newsok.com/chesapeake-board-o...rticle/3668262

By "heavy with" do you mean 2 of 9??? Or am I missing someone?

[king183]

More negative news from Reuters today.
http://www.reuters.com/article/2012/...83M16Y20120423

This story is more worrisome than the first one. I know two people who are close to him and both say he's a megalomaniac. I've never met the guy, so I have no idea if they're saying something everyone believes or if it's just them. But Aubrey seems to have a consistent pattern of causing financial controversy with himself and his company. Pressure is building rapidly for him to step down. If he truly is a megalomaniac, he won't do it. Or if he's completely normal and he believes he's doing nothing out of the ordinary, he won't do it. It'll be interesting to see what happens in the future. Hopefully, it's good for Chesapeake and OKC.

[kevinpate]

By "heavy with" do you mean 2 of 9??? Or am I missing someone?

I count minimum of three former OK politicos ... Nickles, Keating, Hargis. Don't know if any of the others were politicos here or elsewhere.

[ljbab728]

By "heavy with" do you mean 2 of 9??? Or am I missing someone?

Note that I didn't say majority. And, yes, I would call one third of the board heavy coming from one segment.

[Maynard]

Chesapeake to halt CEO's well ownership plan 04/26 07:49 AM

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NEW YORK, April 26 - Natural gas producer Chesapeake Energy Corp (CHK:$18.13,00$0.36,002.03%) said on Thursday it would halt a controversial program that gave company founder and chief executive Aubrey McClendon an ownership stake in its wells.

The company, the nation's second-largest natural gas producer behind Exxon Mobil Corp, said it would not extend the "Founder Well Participation Program" beyond 2015.

The move comes days after Reuters reported McClendon had borrowed as much as $1.1 billion against his 2.5 percent interest in wells received under that program.

The loans, taken out over the past three years, were previously undisclosed to shareholders, analysts and academics said, raising concerns that McClendon's personal financial deals could compromise his fiduciary duty to Chesapeake. The company's board is also reviewing financing arrangements between McClendon and third parties. "The board did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions," the company said.

Shares in the company fell 2.4 percent to $17.70 per share in premarket trading after the announcement.

[Maynard]

Fitch revises Chesapeake outlook -- Rating Outlook is revised to Stable from Positive, Affirms rtgs 04/26 08:55 AM

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(The following statement was released by the rating agency)
April 26 - Fitch Ratings has revised the Rating Outlook for Chesapeake
Energy Corporation's (CHK:$18.26,00$0.13,000.72%) long-term Issuer Default Rating (IDR)
to Stable from Positive and affirmed all of the company's ratings. A full list
of rating actions follows at the end of this release. Chesapeake has
approximately $13 billion of rated securities.

The Outlook revision results primarily from the near and intermediate term weak
outlook for natural gas prices in the U.S. coupled with Chesapeake's still
aggressive spending plans in 2012. The current weakness in natural gas prices
has accelerated since just a couple of months ago with the 12 month NYMEX strip
decreasing by nearly 20% to $2.63/Mcf over that timeframe. These price
expectations will reduce earnings and cash flow significantly from last year's
level. Current capex and leasehold spending are expected to total approximately
$8.5-$9 billion with spending in the company's other segments expected to be
$2.5-$3.5 billion. Current spending plans are expected to result in a funding
gap of $7-8.5 billion, which is to be funded with asset sales and monetizations
potentially totaling $10 billion. The asset sale/monetizations figure was
approximately 30% of total enterprise value as recently as a few weeks ago.

Liquidity is provided by the company's $4 billion senior secured revolver due
2015. Additionally, Chesapeake Midstream Operating, LLC has a $600 million
senior secured revolver due 2016 that it can utilize, and Chesapeake Oilfield
Operating, LLC has a $500 million senior secured facility that it can utilize.
However, these latter two borrowing capacities are limited by certain
restrictive provisions. Nearer-term maturities for Chesapeake are $464 million
in 2013 and $1.6 billion in 2015. Key covenants are primarily associated with
the senior secured credit facility and include maximum debt-to-book
capitalization (70% covenant threshold) and maximum total debt-to-EBITDA (4.0x
covenant level).

Balance sheet debt totaled approximately $10.6 billion at the yearend 2011. In
addition, the company has in the past sold approximately $6 billion of reserves
into Volumetric Production Payments (VPPs) that Fitch considers to have
debt-like characteristics and factors into its analysis for adjusted leverage.
In addition, Chesapeake also has convertible preferreds and non-controlling
interests in its capital structure totaling approximately $4 billion as of
yearend 2011.

The recent news regarding the personal borrowings by the company's CEO from the
same group that has invested in preferred interests in two of Chesapeake's
non-guarantor subsidiaries has raised issues regarding the potential for a
conflict of interest and lack of transparency among some stakeholders. The
borrowings and the lack of prior disclosure has focused a spotlight on the
company's Board of Directors and its oversight of the company. Given this recent
news, Fitch believes stakeholders will have a higher level of expectations for
disclosure and transparency going forward.

Given the reduction in near-term price expectations for natural gas, there
exists a potential shortfall or delay in some of the expected proceeds from the
remaining planned asset sales and monetizations this year. As such, a
significant reduction in capital spending may be warranted for the Outlook to
remain Stable. That said, Chesapeake has already completed or will complete soon
approximately 25% of this year's $10 billion in planned assets
sales/monetizations and has a proven track record of successfully monetizing
assets in the past.

Fitch has affirmed the ratings for Chesapeake as follows:

--IDR at 'BB';
--Senior unsecured debt at 'BB';
--Senior secured revolving credit facility at 'BBB-';
--Convertible preferred stock at 'B+'.

The Rating Outlook is revised to Stable from Positive.

[onthestrip]

Ouch. The hits keep on coming. Formal SEC investigation.
http://t.co/CzVUwm8M

[OKCTalker]

The Founder Well Participation Program is being ended, but not for another 3-1/2 years?

Is it assumed that the $1.1 billion in personal borrowings went to pay for Aubrey's cost to participate in this program? If so, then isn't this a program that he can't afford to continue?

[Maynard]

Ouch. The hits keep on coming. Formal SEC investigation.
http://t.co/CzVUwm8M

Informal SEC investigation (which means CHK cannot be forced to produce documents).

[Maynard]

Fitch revises Chesapeake outlook -- Rating Outlook is revised to Stable from Positive, Affirms rtgs 04/26 08:55 AM

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The following statement was released by the S&P rating agency - 04/26 01:43 PM

Overview
-- U.S. natural gas producer Chesapeake Energy Corp. (CHK:$17.5801,$-0.5499,-3.03%) has announced
that it is negotiating an early termination of the Founder Well Participation
Program (FWPP) after revelations about the CEO's personal transactions
revealed shortcomings in the company's existing corporate governance
practices. The board is currently reviewing financing agreements between the
CEO and third parties.
-- Turmoil resulting from these developments could hamper Chesapeake's
ability to meet the massive external funding requirements stemming from its
currently weak operating cash flow and continuing aggressive capital spending.
-- We are lowering our corporate credit and senior unsecured debt issue
ratings on Chesapeake to 'BB' from 'BB+', and lowering the ratings on two
affiliates--Chesapeake Oilfield Operating LLC and Chesapeake Midstream
Partners L.P.
-- We are placing all these ratings on CreditWatch with negative
implications.


Rating Action
On April 26, 2012, Standard & Poor's Ratings Services lowered its ratings on
Oklahoma City-based Chesapeake Energy Corp. (CHK:$17.5801,$-0.5499,-3.03%) , including the corporate credit
rating to 'BB' from 'BB+', and lowered ratings on two related
entities--Chesapeake Oilfield Operating LLC and Chesapeake Midstream Partners
L.P. At the same time, we placed all these ratings on CreditWatch with
negative implications.

Rationale
The downgrade and CreditWatch placement reflect our view that recent
revelations about personal transactions undertaken by Chesapeake's CEO
relating to the company's unusual FWPP underscore shortcomings in Chesapeake
Energy Corp.'s (CHK:$17.5801,$-0.5499,-3.03%) corporate governance practices. Under the FWPP, Chesapeake's
CEO, Aubrey McClendon can, before the beginning of each year, elect to take a
small (up to 2.5%, subject to certain restrictions) working interest in all of
the wells Chesapeake drills during that year. Recent press reports have
revealed that Mr. McClendon has obtained loans to fund his investments under
the FWPP from third parties (such as EIG Global Energy Partners LLC) who, at
the same time, were also significant participants in financing transactions
with Chesapeake. Mr. McClendon has also at times sold his interests in certain
fields, in conjunction with asset sales by Chesapeake. We believe these
transactions heighten the potential for unmanaged and unmonitored conflicts of
interest, or the perception thereof. Under the terms of the FWPP, there has
been no effective mechanism to protect against conflicts of interest, in our
view. Indeed, Chesapeake has previously stated that the company does not
review or approve financings of Mr. McClendon's personal assets, including his
FWPP interests. It is our understanding that Mr. McClendon has also been under
no obligation to disclose his dealings with third parties which also have
lending, investment, or advisory relationships with the company.

Chesapeake today has announced that its board and Mr. McClendon have committed
to negotiate the early termination of the FWPP, which otherwise would have
expired at the end of 2015. The company also announced that the Board is
reviewing financing arrangements between Mr. McClendon (and the entities
through which he participates in the FWPP) and any third party that has had a
relationship with the company in any capacity. The board has also confirmed
that it did not previously review, approve, or have knowledge of the specific
transactions engaged in by Mr. McClendon or the terms of those transactions.
In our view this represents a significant governance deficiency.

Turmoil resulting from these developments--and from potential revelations
resulting from the board investigation--could hamper Chesapeake's ability to
meet the massive external funding requirements stemming from its currently
weak operating cash flow and aggressive capital spending. Chesapeake's
production is heavily skewed toward natural gas, and natural gas prices are
severely depressed at this time. Although hedge-related gains had been an
important support to Chesapeake's earnings and cash flow in recent years, the
company terminated its natural-gas related hedge positions in late 2011.
Chesapeake is in the midst of an extensive repositioning of its business mix,
placing more emphasis on production of crude oil and natural gas liquids
(collectively, liquids). The company's excellent drilling record and large
acreage positions in the most promising North American liquids-rich basins
afford confidence about its ability to make this transition.

However, Chesapeake faces very large external funding requirements to sustain
the aggressive planned investment needed to effect its strategic shift. In its
investor presentation dated April 17, 2012, Chesapeake gave guidance of total
investment of $10.9 billion to $12.4 billion in 2012, and $10.5 billion to
$12.3 billion in 2013. This guidance encompasses well costs on proved and
unproved properties, acquisition of unproved properties, and investment in
oilfield services and midstream assets. Based on our estimates and price deck
assumptions (including natural gas price of $2.00/btu in 2012, $2.75 in 2013,
and $3.50 thereafter), we expect Chesapeake's funds from operations to total
only $3.4 billion to $3.8 billion in 2012 and $5.4 billion to $5.8 billion in
2013, implying massive internal funding shortfalls.

To help fund its planned investment, Chesapeake has stated that it is
targeting sales of proved and unproved properties, and monetization of
oilfield services, midstream, and other assets, totaling $10 billion to $12
billion in 2012, and $4.0 billion to $6.5 billion in 2013. Chesapeake is asset
rich, and it has been adept at structuring varied and innovative transactions
to generate funds, including outright asset sales, formation of joint ventures
(JVs), issuance of securities by a royalty trust and by newly formed
subsidiaries, and issuances of volumetric production payment (VPP)
obligations. However, Chesapeake's ability to continue executing such
transactions on favorable terms depends largely on capital market receptivity.
From our analytical perspective, some of the company's actions to raise funds
dilute the benefit of debt reduction, which it is also pursuing. Based on our
price deck, we anticipate that coverage metrics over the next two years will
be weak even for the revised rating--with debt to EBITDA higher than 5x and
EBITDA of less than $4 billion in 2012 and less than $5 billion in
2013--before Chesapeake's liquids production increases sufficiently to offset
the effect of persisting depressed natural gas prices.

CreditWatch
As part of our CreditWatch review, Standard & Poor's will take account of the
conclusions of the board's investigation; the terms under which the FWPP is
terminated; Chesapeake's ongoing capital-raising initiatives; and potential
changes to its growth strategy, financial policies, and governance structure.
At this time, we cannot rule out further ratings downgrades of more than one
notch; for example, if we believe that asset monetization actions will fall
short of plans and that offsetting actions won't be taken to preserve
liquidity and limit the increase in financial leverage.

The ratings on Chesapeake Oilfield Operating LLC and Chesapeake Midstream
Partners L.P. are constrained by our ratings on Chesapeake, given the extent
of Chesapeake's ownership control over these entities, and the close business
ties between Chesapeake and these entities.

Over time, we could elevate Chesapeake Midstream Partners L.P. ratings above
those of Chesapeake Energy (CHK:$17.5801,$-0.5499,-3.03%) if it achieves greater customer diversity and
remains committed to conservative financial policies. However, given the large
list of future drop-down candidates from Chesapeake, we do not anticipate any
ratings separation.

[Boomer3791]

I was introduced to an attorney at an event last weekend who is part of the team representing a group of over 500 individual CHK shareholders who are in the midst of filing a lawsuit against AKM and the CHK Board. He told me flatly that Aubrey would be gone "in less than two weeks." At the time I thought he was crazy, but I'm beginning to think he may have been right.

Have a look at this video from CNBC and listed to their investment analyist saying that Chesapeake is now in a "death spiral" and predicting that their stock will go below $10/share. http://www.cnbc.com/id/47192199

Scary stuff indeed.

[Maynard]

I was introduced to an attorney at an event last weekend who is part of the team representing a group of over 500 individual CHK shareholders who are in the midst of filing a lawsuit against AKM and the CHK Board. He told me flatly that Aubrey would be gone "in less than two weeks." At the time I thought he was crazy, but I'm beginning to think he may have been right.

Have a look at this video from CNBC and listed to their investment analyist saying that Chesapeake is now in a "death spiral" and predicting that their stock will go below $10/share. http://www.cnbc.com/id/47192199

Scary stuff indeed.

Their tradable convertible preferred stock, CHKPRD, is down -8.55% today setting a new 52-week low @ 73.25. Par value is $100.

[soonerguru]

I'm doubting Aubrey will survive this. It's funny to me that those spineless jellyfish on the board of directors first stated they "approved" the loan guarantees, and are now saying they didn't. How credible is this? They must know the **** is hitting the fan and they don't want to be in front of the blades. What else is Chesapeake hiding?

What's worse is that AKM seems to think his investors' money is his money -- very reckless attitude (and altogether much too common among the 1% atop corporate America).

[soonerguru]

Can anyone who is more sophisticated in the world of corporate finance comment on whether this makes CHK more vulnerable to a takeover attempt? Obviously, the ramifications for OKC would be huge.

[WilliamTell]

burn baby burn....o wait, i mean drill baby drill...i get confused sometimes.