Exclusive: Chesapeake CEO McClendon cashes in on well deals

HOUSTON Mon Aug 15, 2011 10:55pm IST

Aubrey McClendon, chairman and CEO of Chesapeake Energy Corporation, speaks at the Wharton Economic Summit in New York February 1, 2006. REUTERS/Chip East

Aubrey McClendon, chairman and CEO of Chesapeake Energy Corporation, speaks at the Wharton Economic Summit in New York February 1, 2006.

Credit: Reuters/Chip East

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HOUSTON (Reuters) - Chesapeake Energy Corp Chief Executive Aubrey McClendon is legendary on Wall Street for his dealmaking prowess, but investors may not realize the deals put money directly into his pocket.

McClendon is allowed to take a 2.5 percent stake in every well the natural gas producer drills through a program that has drawn criticism from analysts and corporate governance experts. McClendon has participated in the so-called Founders Well Participation Plan since 1993, when the company went public.

The CEO pays a share of the expenses for drilling a well, and has the option of sharing in proceeds if the well is sold, according to the company's filings with the Securities and Exchange Commission.

The link between asset sales and the FWPP received scant mention -- or none -- in the U.S. oil and gas company's proxy filings until this year.

Chesapeake declines to disclose how much McClendon has received from various deals, saying the well stakes are his own and are separate from the company's interest.

"The working interests acquired by Mr. McClendon under the FWPP are his personal assets and Chesapeake has no ownership or ability to control the working interests once they are acquired," Michael Kehs, a Chesapeake spokesman, said in an email.

The company maintains that the FWPP aligns McClendon's interests with those of shareholders by putting his own capital at risk alongside the company's capital.

The CEO also shares in production revenue from Chesapeake wells.

The company has more than more than 45,000 producing wells and is the country's most active driller of new wells. McClendon owns a 2.5 percent interest in most of those wells.

Paul Hodgson, senior research associate and an expert in executive compensation at GMI Ratings, a corporate governance research and ratings firm, expressed skepticism about the FWPP.

Chesapeake's behavior and governance raise concerns that over the long term "significant shareholder loss" may occur, he said.

While McClendon does risk his own capital, in 2008 the board of directors awarded a $75 million bonus to the CEO to be used to pay for his participation in the FWPP.

LARCHMONT, JAMESTOWN

This year, Chesapeake sold its assets in the Fayetteville Shale in Arkansas to BHP Billiton for $4.75 billion. In a filing with the SEC, it said McClendon and entities he controlled -- Larchmont Resources LLC, Jamestown Resources LLC and Chesapeake Investments -- were "parties to the purchase agreement."

The filing did not say how much McClendon received from BHP for his interest in the wells, only that he and his affiliates received the same deal terms as Chesapeake.

The BHP deal is mentioned again in the company's 2011 proxy statement, which notes that McClendon reimbursed the company for transaction costs related to the deal.

"It is value that's going to him that could be retained by the shareholders," said Phil Weiss, an oil analyst at Argus Research. "It's a form of compensation, but we don't really know what that value is. I can't imagine that he wouldn't participate in this program if he weren't benefiting from it."

There are other sales.

In July 2008, Chesapeake sold acreage in and producing gas wells in Oklahoma to BP Plc for $1.75 billion. Nowhere in the company's SEC filings does it disclose that McClendon, through the FWPP, may have gained from the deal.

"Because the BP Arkoma transaction in 2008 was smaller relative to Chesapeake's enterprise value at the time, it did not trigger a requirement to file a Form 8-K and was not required to be disclosed in the proxy," Kehs, the Chesapeake spokesman, said in the email.

Even so, Chesapeake is a frequent filer of 8-Ks, required to disclose material events. In January, for example, it filed a copy of a press release announcing it had been named by Fortune magazine as one of the 100 best companies to work for.

In 2010, McClendon's total compensation was valued at $21 million. In a proxy filing, he valued the potential revenue from his well interests at $308 million, although filings say his cumulative expenditures have exceeded cumulative monthly production revenue.

The company's annual regulatory filings show asset sales of various sizes over the years, but there is no indication if McClendon sold any of his interests alongside the company. Chesapeake says McClendon "generally sells alongside the company but is not required to do so."

"Having more disclosure than not is always very helpful," Manuj Nikhanj, head of energy research at ITG Investment Research, said. "Within the filings about the well plan, there is limited information.

Still, Nikhanj said allowing McClendon to participate in wells drilled by the company aligns his interests with those of shareholders and requires the executive to pay his fair share of costs.

DEAL MACHINE

Chesapeake's business model is unique among U.S. oil and gas companies in its heavy reliance on constant deal-making around its massive acreage holdings in shale basins around the country.

The constant churn of properties usually generates profits for Chesapeake, but it keeps investors hungry to see more and more transactions to help finance its voracious cash needs.

In a presentation for investors in July, Chesapeake said it has brought in nearly $14 billion from joint ventures and asset sales. It has also brought in $5.6 billion from transactions called volumetric production payments, or sales of future production for an upfront price.

McClendon or his entities have not received any proceeds from joint ventures, Chesapeake said.

The deal machine is still running at full throttle. In the company's second-quarter earnings call with analysts, McClendon told investors about two more planned deals.

A joint venture is planned for the first half of 2012 for Chesapeake's 1 million acres in the Mississippi Lime field in Oklahoma, where the company has drilled 56 horizontal wells, McClendon said.

Also, the company is also researching ways to "monetize" its 1.25 million acres in the Utica Shale in eastern Ohio, which Chesapeake values at up to $20 billion.

(Additional reporting by Matt Daily in New York; editing by John Wallace)

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