Jan 30 Aubrey McClendon will no longer be
running Chesapeake Energy Corp come April 1. But he is
likely to remain deeply entangled with the company he founded 24
America's second-largest natural-gas producer said on
Tuesday that McClendon is stepping down as chief executive and a
board member. He is leaving behind legal predicaments and
intertwined personal and corporate interests that analysts say
could linger for years.
Among the trickiest to unwind is his signature perk.
McClendon controls interests of up to 2.5 percent in thousands
of Chesapeake wells, according to an analysis of Chesapeake
filings with the Securities and Exchange Commission. The company
owns interests in 45,700 producing oil and gas wells, according
to its most recent annual report.
McClendon's stakes are part of a controversial benefit,
known as the Founder Well Participation Plan, which awarded him
a stake in every well Chesapeake drilled since 1993, provided
that he pay an equivalent share of the costs. He has
participated in the plan every year since, with the exception of
five quarters in 1999 and 2000, the SEC filings show.
McClendon began losing his grip on the company after Reuters
reported last year that he had borrowed more than $1 billion
against his well stakes from a firm that also invested in
Chesapeake itself. That and other Reuters reports of potential
conflicts of interest, coupled with a cash crunch amid weak gas
prices and bloated spending, sparked an investor revolt and a
board shakeup. Analysts said that while the unusual arrangements
were part of his undoing, they will not be easy to unwind.
"I see his continued involvement as a negative. These things
that he created, you can argue that they hurt the stock price,"
said Phil Weiss, oil and gas analyst at Argus Research in New
York. "And they are not going away just because he is. That part
of his legacy remains."
Chesapeake referred questions about the well plan to a
personal spokesman for McClendon, who declined to comment.
The company said it has retained headhunter firm Heidrick &
Struggles to find his replacement. News of McClendon's departure
has sent the company's stock up more than 6 percent.
Three people familiar with the situation said board members
decided to seek a successor in the past several weeks and called
in Heidrick to help. New board directors tapped last year by
Chesapeake's two biggest shareholders, O. Mason Hawkins'
Southeastern Asset Management and Carl Icahn, had been pushing
for a change in leadership in tandem with new board chairman
Archie Dunham, these people said. The new directors grew
convinced the company's shares would not rebound as long as
McClendon remained at the helm, they said.
McClendon sent an email to top Chesapeake managers after the
board's announcement in which he suggested he was not aware of
the board's thinking during a dinner he held with his vice
presidents just a week ago.
"This move was not in contemplation by me at that time," he
wrote in the email, whose contents were read to Reuters.
Icahn, reached by telephone Wednesday, declined to comment
on McClendon's exit beyond what he said in a news release on
Tuesday night in which he praised the founder's vision for the
natural gas business. Hawkins could not be reached for comment.
Dunham declined to comment.
The announcement followed a frenzied year in which a severe
financial crunch and a governance crisis hammered Chesapeake.
The Reuters stories triggered official probes and sparked
shareholder lawsuits. The SEC, the U.S. Justice Department and
the board are investigating whether McClendon blurred the line
between his personal and corporate dealings, and into possible
antitrust violations. The board said its review was not the
trigger for McClendon's departure.
In June, Reuters reported that Chesapeake discussed with
Encana Corp, one of its top competitors, a plan to
suppress land prices in Michigan. That matter is under
investigation by the state of Michigan and the Department of
Justice. Two weeks ago, Encana CEO Randy Eresman said he was
stepping down. Earlier, Reuters reported that McClendon had
arranged to personally borrow more than $1.3 billion from EIG
Global Energy Partners, an investment-management firm that also
is a big investor in Chesapeake. EIG has said the transactions
Chesapeake's announcement signaled the company expects his
presence will be felt for quite a while.
McClendon "will continue to be an important partner with the
company given his stock ownership, as well as his interests in
certain of the company's wells," it said in a statement.
He will also receive his "full compensation and other
benefits" under his employment agreement.
A person familiar with the terms of the separation said it
was being treated as "termination without cause," entitling the
CEO to some of the most generous benefits laid out in his
McClendon is entitled to total compensation of about $47
million. That includes $11.7 million in total cash compensation,
based on McClendon's salary and bonus, to be paid out over four
It also includes restricted stock awards already given to
McClendon that have a value of $33.5 million, the person
familiar with the compensation package said.
He will also be entitled to CEO-style perks, including
personal use of corporate jets that could be worth up to $1
million over four years, the person said.
Internal 2010 flight logs show the CEO took 155 business
charters at a cost of $2.25 million and 75 personal flights
worth an estimated $850,000, Reuters reported last year. These
included family vacations to Europe and the Bahamas.
The contract also calls for McClendon to continue using
Chesapeake accounting services. Reuters last year disclosed that
a Chesapeake unit handling such services for McClendon had six
company employees, occupying a building on the edge of the
campus. Known as "AKM Operations," after his initials, it served
as the hub for managing McClendon's personal interests in
Chesapeake wells, from assessing their value to filing court
paperwork documenting his ownership.
"NOT FOR SALE"
The board recently cut McClendon's pay package and gave him
no bonus for 2012. McClendon owns 2.9 million Chesapeake shares,
or less than 1 percent of the company, according to a Jan. 7
filing with the SEC.
His enduring well interests could crimp Chesapeake's room
for maneuver. Chairman Dunham told employees in an email on
Tuesday that the company "is not for sale." Wall Street analysts
have said Chesapeake is a top candidate for an acquisition,
however, given its impressive assets. It is the largest driller
of new wells in the United States and controls oil-and-gas
drilling rights on more than 15 million acres stretching from
New York to Texas.
The well stakes could make it harder to structure a deal,
some analysts said.
"I don't know that somebody wants to step into those shoes,"
said Argus analyst Weiss. "I can see companies being interested
in certain assets, but it's hard for me to imagine anyone
wanting to take it all on."
Since 2009, McClendon has pledged his Chesapeake well
interests as collateral for more than $1.3 billion in financing
from EIG, according to a Reuters review of loan agreements filed
in five states. The loan proceeds have been used to pay
McClendon's costs associated with his stakes in the wells.
The loan agreements provide EIG a claim on McClendon's
interests in the Chesapeake wells should he default. Last March,
McClendon arranged a new $450 million loan from EIG through a
company called Pelican Energy to finance well interests that
Chesapeake is obligated to transfer to him through June 30, 2014
- 15 months after he steps down as CEO.
EIG will retain rights to the well stakes even after
"It was not dependent upon him being an employee of the
company," said a person familiar with the matter.
Chesapeake also must deal with the investigations and
lawsuits McClendon that is leaving behind.
Over the last nine months, the SEC, U.S. Justice Department
and Michigan Attorney General have demanded thousands of
documents from Chesapeake. EIG, which is not under investigation
in the SEC probe, has given the agency emails related to
Chesapeake and McClendon, said a person familiar with the
Civil litigation also continues. More than a dozen
Chesapeake shareholders have sued the company over alleged
breaches of fiduciary duty related to McClendon's loans. Those
lawsuits, some of which have been consolidated into class
actions, are playing out in Oklahoma courts.
Separately, more than 100 landowners have filed suit in
Michigan since 2010, alleging that Chesapeake breached contracts
when it canceled leases in the state. Some of the cases,
reviewed by Reuters, allege McClendon was the architect of a
plan to cancel the agreements and thus deprived landowners of
lease bonus payments.
Michigan attorney Susan Topp has filed more than 120 suits
since 2010 against Chesapeake or its Michigan land brokers for
allegedly backing out on land deals there. Most of the cases
have been settled. But Topp said she is in the process of filing
around 50 new ones.
"As far as I'm concerned, his departure won't change things.
He may be out of the boardroom, but not out of the crosshairs,"
A Chesapeake spokesman declined to comment on the pending
investigations. The findings of the board's probe into
McClendon's personal transactions will be released next month,
but Chesapeake said in a statement on Tuesday that the review
has "to date found no improper conduct."
The mingling of McClendon's personal and corporate worlds
extends to the basketball court.
Through a firm called the Professional Basketball Club,
McClendon owns a 19.2 percent interest in the NBA's Oklahoma
City Thunder basketball team. According to SEC filings,
Chesapeake has committed to pay at least $60 million over the
next decade for naming rights at the Thunder's home stadium, the
Chesapeake Energy Arena, and to sponsor the team.
A 10-year naming rights deal, signed in 2011, will cost
Chesapeake between $3 million and $4 million annually. The
company also agreed to pay an average of $3 million a year in
Thunder sponsorship fees until 2023. The Thunder, valued by
Forbes at $475 million, lost in the NBA finals last year to the
According to a person familiar with the situation, there is
no change in the company's relationship with the Thunder.
McClendon appeared to hint on Wednesday that his exit was
unlikely to mark the end of his career. In his daily
inspirational quote-of-the-day message to employees, he cited
Albert Einstein: "In the middle of every difficulty comes