Chesapeake Energy down after CEO loans come to light

Poor optics.

Chesapeake Energy was deep in the red on Wednesday after a Reuters article indicated CEO Aubrey McClendon borrowed as much as $1.1 billion from three financial entities against a longstanding agreement that allows him to participate with a 2.5% interest in every well Chesapeake drills in a given calendar year. The aforementioned loans are secured by first lien priority on the CEO's 2.5% interest in the wells.

Canaccord Genuity Energy Analyst John Gerdes notes this participation agreement is “all-or-nothing,” in which the CEO elects to participate in all or none of the wells drilled in the subsequent year. Given the magnitude of these private financial dealings, Gerdes says it seems reasonable Chesapeake would disclose them, though there does not appear to be any SEC requirement. Importantly, he notes, Chesapeake does not have any obligation as to the repayment of the loans.

That said, the perception of a conflict is understandable especially given the lenders to McClendon include material investors in two recently completed preferred share placements in Chesapeake-owned subsidiaries. This financing revelation has increased the 5-10% discount Gerdes attributes to corporate governance concerns in addition to a capitalization instability discount of ~30%. Notably, Mr. McClendon owns ~1.7 million Chesapeake shares, less than one day of daily trading volume and less than 1% of shares outstanding.

 Chesapeake Energy (CHK : NYSE : US$18.06), Net Change: -1.06, % Change: -5.54%, Volume: 93,379,388

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Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is

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