Aubrey McClendon (56) died in auto crash

COMMENTARY on Chesapeake Energy Corporation

From an Article by Andres Rueda, Seeking Alpha News, February 29, 2016

……. Summary

Chesapeake Energy’s management is engaged in muscular efforts to turn around the company, but the challenges ahead appear too great. The company announced $500 million in net asset sales and will slash capital expenditures 57% to conserve cash.

The recently released 4Q report was grim, as the company continues to bleed rivers of cash. Chesapeake Energy desperately needs the continuing good graces of its bankers, as its liquidity is ultimately dependent on a credit line.

To all appearances, gas and oil fracking giant Chesapeake Energy Corporation is a prime candidate for a bankruptcy restructuring. Its capital structure is wobbly, profoundly unsound. The losses are large and they flow with frustrating consistency each quarter. The cash pile keeps getting thinner. And yet, management appears determined to avoid a bankruptcy filing.

On February 8, 2016, the company’s common shares plunged approximately 40%, triggering a circuit breaker halt, on reports that the company had engaged a restructuring counsel. The company was forced to issue a clarifying press release that, while it had in fact engaged such counsel, it had no current plans to file for bankruptcy.

This in fact seems to be the case. Although a filing would be the easy way out, and bankruptcies are in fact often structured as insider-friendly affairs, the company’s management appears determined to avoid that outcome, even if the company has to cling from its fingernails through 2016 and into the next year. The management has a plan, which has been well-communicated to the market, and management has in fact had some success in its implementation.

Management insists that Chesapeake Energy has the liquidity to repay its near-term obligations, cut costs, sell off assets, dramatically decrease capital expenditures while more or less maintaining production, and thereby avoid a filing as the company rides out the downward cycle in the oil and gas extraction industry.

The common shareholders have taken up the faith. The market price of the common shares remains well above zero, closing at USD$2.70 per share on February 26, 2016. And yet, the challenges that the company faces are almost vertically steep. Absent a perfect execution, cooperation from its bankers and other creditors, and a long and uninterrupted streak of good luck, management may yet have to throw in the towel.

……. Conclusions

The management of Chesapeake Energy is engaged in a muscular effort to turn around the company in the context of a brutal industry environment. Its success in doing so largely depends on patience, considerable risk-taking, and other forms of cooperation from its creditors, and in particular the bank sponsoring its credit line, Wells Fargo.

The recently announced USD$500 million in net asset sales will give the company some breathing room. However, relief is likely to be brief. The company has a gigantic debt load balancing on a thin or nonexistent sliver of equity, and it is unfortunately not generating enough net operating cash to pay the bills. Under current conditions, and despite its hedge book, the company’s oil and gas fields are either uneconomical or marginally economical.

The company will be slashing capital expenditures. Even if production remains more or less the same despite this cut, net operating cash well into 2016 is likely to decrease as a result of relatively low realized prices. And so, the rivers of negative cashflow are likely to continue. Under the current environment, the company cannot turn to its business as a source of much needed cash. It will need to rely on asset sales and its USD$4 billion credit line.

Despite the recently announced divestiture, it remains to be seen whether management will be able to live up to its guidance of USD$500 million to USD$1 billion in additional deals for 2016. The company’s fields are currently uneconomical or marginally economical. If sold, they will be sold cheaply. This will hurt investors in the long run, if oil and gas prices recover. However, the company right now is in survival mode and this is unfortunately unavoidable.

Although the company likely will meet all major bond repayments due in 2016, unless oil and gas prices significantly improve over the year the company is likely to burn prodigious amounts of cash and eat well into its credit line, with seemingly no other realistic source of cash. It will then just be a matter of time before Wells Fargo and other creditors pull the plug on the company and push it into bankruptcy.

It should also be kept in mind that the company faces a borrowing base redetermination in April 2016. If Chesapeake Energy loses the support of Wells Fargo, management’s efforts will hit a brick wall and the company will simply have to file for bankruptcy.

The market however remains cautiously optimistic on Chesapeake Energy. Management appears committed to avoiding bankruptcy, and has not cut a separate deal to the detriment of the company’s much besieged common shareholders. This institutional support is all-important in the present context.

The challenges faced are however in my opinion too large. I do not believe that in the end management will pull its carefully orchestrated ballet. Too many things could go wrong. My target price for the common shares is consistent with their current book value: USD$0.

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Federal grand jury indicts former Chesapeake Energy CEO

From an Article by Robert Mclean, CNN-Money News, March 2, 2016

A federal grand jury has indicted the former CEO of Chesapeake Energy for allegedly conspiring to rig the price of oil and natural gas leases in Oklahoma. The Department of Justice believes that Aubrey McClendon, who served as Chesapeake’s CEO for nearly 25 years, orchestrated a conspiracy between two large oil and gas companies between December 2007 and March 2012.

McClendon said that the charges against him are “wrong and unprecedented.”

“I have been singled out as the only person in the oil and gas industry in over 110 years since the Sherman Act became law to have been accused of this crime in relation to joint bidding on leasehold,” he said in a statement. “Anyone who knows me, my business record and the industry in which I have worked for 35 years knows that I could not be guilty of violating any antitrust laws.”

The indictment alleges that two large energy firms would decide ahead of time who would be the top bidder on leases in northwest Oklahoma. The winner would then allocate an interest in the lease to the other company.

The Justice Department said McClendon “instructed his subordinates to execute the conspiratorial agreement,” which kept prices low and “put company profits ahead of the interests of leaseholders.”

Chesapeake spokesman Gordon Pennoyer said the company “has been actively cooperating for some time” with the Justice Department and “does not expect to face criminal prosecution or fines relating to this matter.”

McClendon left Chesapeake in 2013 after Reuters reported that he had taken out more than $1 billion in loans against his personal stakes in the company’s wells. Chesapeake subsequently revealed that it was the subject of an inquiry from the Securities and Exchange Commission, and announced that the program through which McClendon acquired his stakes would be terminated.

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Energy pioneer McClendon dies in Oklahoma car crash a day after indictment

From an Article by Heidi Brandes, Reuters News Service, March 3, 2016

Aubrey McClendon, a brash risk-taker who led Chesapeake Energy Corp to become one of the world’s biggest natural gas producers, died in a single-car crash on Wednesday, a day after being charged with breaking federal antitrust laws, police said. He was 56.

The U.S. Department of Justice on Tuesday announced that McClendon had been indicted for allegedly colluding to rig bids for oil and gas acreage while he was at Chesapeake, a central player in the U.S. fracking revolution of the past decade. He denied the charges.

Police said they were investigating the cause of the crash, which occurred when McClendon was driving his 2013 Chevy Tahoe on a sparsely populated, two-lane road. The crash occurred about 8 miles (13 km) from American Energy Partners, which McClendon had founded and where he was the chairman and chief executive. He was not wearing a seat belt.

McClendon, who was revered in oil and gas circles as a visionary, resigned from Chesapeake in 2013 after a corporate governance crisis and investor concerns over his heavy spending. After leaving Chesapeake, McClendon went on to start American Energy Partners and, with the help of private equity funds, made billions of dollars in bets on vast tracts of oil and gas land around the United States and Australia.

Tuesday’s indictment followed a nearly four-year federal antitrust probe that began after a 2012 Reuters investigation found that Chesapeake had discussed with a rival how to suppress land lease prices in Michigan during a shale-drilling boom. Although the Michigan case was subsequently closed, investigators uncovered evidence of alleged bid-rigging in Oklahoma. (reut.rs/1TPxUVy)

A native of Oklahoma, McClendon attended Duke University before starting Chesapeake with his friend Tom Ward, who went on to lead SandRidge Energy Inc for a time.

“Aubrey’s tremendous leadership, vision and passion for the energy industry had an impact on the community, the country and the world,” American Energy Partners said in a statement.

McClendon was known for his high tolerance for risk and debt and for his lavish lifestyle, which included the purchase of high-end homes, antique boats and an extensive wine cellar. (reut.rs/1QUfnHp) On his watch, Chesapeake leased a fleet of planes that shuttled executives to oil and gas fields – and the McClendon family to far-off holiday destinations.

Closer to home, McClendon pursued other passions, including the Oklahoma City Thunder, the National Basketball Association franchise in which he had a minority stake. “I think in situations like this the best thing you can do is just pray, pray for the family and pray for the people involved,” Thunder coach Billy Donovan told reporters at a game on Wednesday in Los Angeles.

McClendon was one of the foremost leaders of a U.S. energy boom that lifted output to the highest levels in years, reduced reliance on foreign oil and mobilized new pools of investment capital for wildcat drillers.

“I’ve known Aubrey McClendon for nearly 25 years. He was a major player in leading the stunning energy renaissance in America,” Texas energy investor T. Boone Pickens said in a statement. “He was charismatic and a true American entrepreneur,” he said.

Chesapeake, which had recently sued McClendon’s AEP on accusations of stealing trade secrets, offered condolences. “Chesapeake is deeply saddened by the news that we have heard today and our thoughts and prayers are with the McClendon family,” the company said in a statement. McClendon is survived by his wife, Katie, and their three children, Jack, Callie and Will.

There are plenty of legally sound business practices that are morally questionable.  One example is creating a shell company– a company that only exists on paper and doesn’t actually hold any assets.  A corporation could create a shell company for several reasons (e.g. dodge taxes*, hide risks from share holders, protect reputation, etc).  In the case of a giant energy company, like Chesapeake, a good reason for creating a shell company is to grab land without drawing attention from competitors.  The tactic could also allow them to lease land for cheaper.

Fraud, however, is not legal; and this has 115 Michigan land owners suing Chesapeake Energy Corporation.  More than 800 frustrated land owners signed a lease, which was later rejected, and never received a dime.  A Reuters investigation went into detail about the affair.  In all, 97% of the leases signed with Chesapeake’s shell company, Northern Michigan Exploration, were rejected.  Actually, Northern Michigan Exploration is a shell company of a shell company of Chesapeake’s, which makes the matter even more complicated.

According to the article, lawyers for the land owners contend that Chesapeake voided the leases after a Michigan well came up dry, suggesting that the company may have never intended to honor their agreements.  Chesapeake denies that it conducted business in Michigan, even though Aubrey McClendon was CEO of Northern Michigan Exploration.

Read the full article “Energy giant hid behind shells in ‘land grab’”…

*If you were wondering, Chesapeake Energy “had a 3-year effective tax rate of -2.1 percent between 2008 and 2010,” meaning they were paid a $173 million rebate on their $8.3 billion profit according to the Institute for Taxation and Economic Policy (ITEP) and Citizens for Tax Justice.  The rebate is at least partially due to tax breaks on infrastructure and equipment investments– investments they may have made, anyway, without the tax break.

It must be karma of some kind.  West Virginia and billionaire wildcatter Aubrey McClendon, CEO of Chesapeake Energy Corporation, have been involved in a dance that has been fraught with tensions since they met.   This history bodes poorly for the chances of a cooperative and respectful partnership going forward, and recent events reinforce this pessimistic conjecture.  Despite smooth rhetoric from company spokepersons regarding jobs and economic prosperity, and the denial of certain environmental risks, McClendon has an axe to grind with West Virginia.

Chesapeake, the biggest shale player in West Virginia, owns  275 producing Marcellus wells which yielded more than 42.6 billion cubic feet of natural gas and 111,160 barrels (a barrel is 40 gallons) of oil according to the Fort Worth based Star Telegram. This is based upon WVDEP’s production records from 2005 to 2010.

The Tawney Case

Chesapeake Energy acquired Columbia Natural Resources in fall of 2005 which expanded Chesapeake’s assets from it’s western domain into the northeast shale states.  Things went sour between Chesapeake and West Virginia shortly thereafter.   In May 2006, the West Virginia Supreme Court ruled in favor of 8,000 plaintiffs in the class action Tawney vs. Columbia lawsuit. The mineral rights owners claimed that they had received insufficient royalty payments as Columbia had attempted to deduct post-wellhead production costs in the calculation of the royalty. The WV SOROS website has a very good review of this case and all the gory details.

In 2008, the West Virginia Supreme Court voted to refuse to hear the appeal of a $404 million Roane County jury verdict in the Tawney case which included a punitive damages award of $270 million. Per a Steptoe and Johnson newsletter, this was the third largest verdict in the US in 2007.   The defendants were NiSource Inc., Columbia Energy Group, and Chesapeake Appalachia LLC.  Columbia was a subsidiary of NiSource until 2003.  It became Chesapeake Appalachia LLC, a subsidiary of Chesapeake Energy after the 2005 acquisition.

The defendants filed for appeal of the case to the US Supreme Court, but the case was dropped when a settlement was reached of $380 million.  The  punitive damages were eliminated in the settlement.  NiSource assumed liabililty for $340 million and Chesapeake was then responsible for the remaining $40 million.  (See October 2008 The Record story.)

Slashing 215 Jobs in Charleston

Retribution came swiftly.  The Record reports that “Earlier this year, Chesapeake Energy announced that it would not build a $35 million state-of-the-art headquarters for its Eastern operations in Charleston, citing the state Supreme Court’s refusal to hear the appeal.” A February 2009 Chesapeake news release stated that the reorganization which downsized the Charleston office from a regional corporate headquarters to a regional field office involved 215 of the 255 employees.  Those positions were either eliminated or relocated to Oklahoma City, the home of Chesapeake and it’s CEO.

Pipeline Plans Chill Prospects for an Ethane Cracker Plant

I want to use this handy segue to stay on point about jobs in West Virginia.  An ethane cracker plant has been held out as a glittering economic engine.  A plant costs $2-4 billion to build and could provide 500 full-time high paying jobs and 10,00 construction jobs per Keith Burdette, state Commerce Secretary.  The Marcellus Drilling News blog says, “Building a cracker plant in the region would attract thousands of jobs and billions of initial investment, and billions in revenue from associated plastics industries that would sprout up around the plant. It’s like winning the biggest imaginable lottery jackpot when it comes to jobs, money and tax revenue.”

But chances of attracting an ethane cracker plant anytime soon dimmed when the pipeline deal between Chesapeake and  Enterprise Producrs Patners was annnounced a few weeks ago. WV state officials working to bring an ethane cracker plant to West Virginia were surprised and frustrated to learn of the deal Chesapeake had struck with Enterprise to pipe ethane to the Gulf.  (See Charleston Gazette story, Nov. 5)  Whether or not this deal negatively impacts the chances for a cracker plant in WV has been hotly debated. “They’re shipping out a cracker’s worth of ethane to the Gulf Coast,” (Burdette) said. “They’re shipping out gas that could support investment here.”

The Gazette story continued with this telling information.  “Burdette said Chesapeake executive Scott Rotruck, who sits on Gov.-elect Earl Ray Tomblin’s Marcellus to Manufacturing Task Force, didn’t notify state officials about Chesapeake’s plans to ship the ethane out of West Virginia and neighboring states….”The fact they didn’t tell us about this was very disheartening,” Burdette said. “It doesn’t send a very good message that this is a two-way partnership. They knew how important we feel recruitment of a cracker is to West Virginia.”

McClendon giveth and McClendon taketh away.  We observed  punitive behavior when Chesapeake withdrew its donation of $30,000 from the Wellsburg Middle school band, then restored it after the city council voted to repeal a ban on fracking in the city and a mile beyond.  In September 2011, Chesapeake withdrew from discussions regarding a pledge of $25,000 to support the pavilion project planned for the Morgantown Farmers Market.  “When the Morgantown City Council approved their ban on drilling and fracking for one mile outside the city limits, we had to decline further consideration,” said Stacy Brodak, Chesapeake spokeperson. “It is important we dedicate our company’s resources where our industry is supported.” (Story here.)  Chesapeake previously donated $15,000 to support the Farmer’s Market project.

Clearly donations by Chesapeake are not altruistically motivated.  Donations are a tool used to manipulate public policy.  Play nice with Chesapeake and riches will be showered upon you.  But a wrathful McClendon is met if his will is defied.

Verbal Slurs

This post would be incomplete if I did not remind the reader that in January 2011, McClendon slurred West Virginians by stating that 30% of those applying for employment were drug users.   He also thinks West Virginians are illiterate hillbillies. West Virginia Environmental Council lobbyist Don Garvin observed that when asked about hiring West Virginia workers, McClendon replied, “You don’t know if you have a literacy issue or what?”

“There was a day I liked West Virginia…before I had an encounter with your court system,”  stated McClendon at the January  industry conference.   Read Don Garvin’s reaction to McClendon’s attitude here (Unwanted House Guests).

The Wetzel Experience

Wetzel County is Ground Zero for Marcellus shale drilling /fracking in WV.  While restaurants and motels are doing a gangbuster business in Wetzel County, the rest of the populace isn’t faring quite as well.  Unemployment in Wetzel County was 11.9% in September, the highest of all the 55 counties in WV.  Property values have suffered due to the proximity of industrial activity on once rural ridges.  Blake Run, once a pristine headwater stream with a seasonal waterfall, was converted into a roadway for the Chesapeake truck traffic.  The stream became nothing but a muddy trough devoid of life.  The EPA finally was called in and Chesapeake was fined and ordered to make restoration efforts.

The Audacious Aubrey Compensation Package

Just to give you a bit more flavor about Aubrey McClendon, be aware that there is some  interesting biographical information about McClendon at SourceWatch.org complete with references to source documents. The blog notes that McClendon lost just shy of $2 billion when gas prices collapsed in 2008 and McClendon was forced to sell shares of Chesapeake stock that he had purchased on margin.

McClendon’s 2008 compensation package was “one of the largest for any corporate executive last year,” including “a one-time $75 million bonus, a $975,000 base salary, and $32.7 million in stock” — “even as the company’s stock price tumbled,” noted the Wall Street Journal. One investor called the Chesapeake financial document describing McClendon’s 2008 compensation a “shameful document” and “a near perfect illustration of the complete collapse of appropriate corporate governance.” One Chesapeake shareholder, the Louisiana Police Employee Retirement System, “asked an Oklahoma state court last month to force Chesapeake to turn over records of its internal deliberations about Mr. McClendon’s compensation,” as “a first step toward a possible lawsuit accusing Chesapeake’s board of breaching its fiduciary responsibility.”

As part of the contentious 2008 compensation package, Chesapeake Energy bought Mcclendon’e antique map collection. A court case later forced McClendon to buy back the art. A Forbes article states: “Most critically, he also got $75 million, over five years, toward an unusual perk that allows McClendon to invest his own capital (or in this case, the capital that the company gave him for this purpose) alongside Chesapeake for a 2.5% stake in every well the company drills.

CONCLUSION

Aubrey McClendon is a man who uses money and power to achieve his goals.  He does not necessarily play by the rules and has been involved in ethical controversy.  Forbes described him as “the most reckless, the alpha wildcatter with an off-the-charts risk tolerance.”

MCClendon simply doesn’t like West Virginia and we can assume that the WV policies of Chesapeake  will be shaped by the ill will that it’s CEO holds for the state.

Now the people and the industry are locked in a power struggle.  The governor has been asked to call a special session of the Legislature to review the draft Marcellus bill produced by the Select Committee.   Will industry be successful this year and in 2012 in capturing the loyalty of our elected representatives through campaign contributions?   Will any Marcellus legislation be stymied?  Or will the Legislature be responsive to the outcries of the people demanding protection from rapacious corporate practices?   Stay tuned.