May 2 (Bloomberg) -- Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon told investors he’s “deeply sorry” for distractions surrounding his personal finances as shares fell the most in three years.
“I’m deeply sorry for all of the distractions of the past two weeks,” McClendon, co-founder of Oklahoma City-based Chesapeake, said on a conference call to discuss first-quarter results today. McClendon said he will focus on cutting debt and expanding oil production for the second-largest U.S. natural-gas driller.
Chesapeake dropped 12 percent to $17.27 at 10:03 a.m. in New York, after falling as much as 13 percent, the biggest decline since March 2009. The shares have dropped 8.4 percent since the first reports that McClendon was borrowing money using his stake in the company’s wells as collateral. Chesapeake said yesterday it would strip McClendon of his role as chairman and appoint an independent person to that position.
Chesapeake reported an unexpected first-quarter loss yesterday, cut cash flow estimates, reduced its drilling budget and said it may run out of money next year under the weight of the lowest gas prices in a decade. Chesapeake’s board said it’s searching for a new chairman and will call an early halt to an incentive program that allowed McClendon to amass personal stakes in thousands of company-operated wells.
McClendon raised concern among some of his biggest investors, including Southeastern Asset Management, after news reports last month showed that he used his stakes in company wells as collateral to borrow hundreds of millions of dollars. Potential conflicts between his personal and professional duties overshadowed the CEO’s efforts to shave a net debt load that swelled to twice the size of Exxon Mobil Corp.’s at the end of 2011.
“The market has been catching up to the debt-laden, smoke- and-mirrors investment model they employ,” said Steve Shafer, chief investment officer for Covenant Global Investors, an Oklahoma City-based hedge fund that manages $320 million. “The fact remains that Chesapeake has a lot of debt and it needs a lot of debt going forward, and that sets up a potentially scary situation.” The fund doesn’t own Chesapeake shares.
Chesapeake has hired New York public-relations firm Sard Verbinnen & Co., which specializes in managing corporate crises, to help handle the controversy over its CEO, Michael Kehs, a company spokesman, said yesterday in an e-mailed statement.
Chesapeake reported a first-quarter loss of $71 million, or 11 cents a share, compared with a loss of $205 million, or 32 cents a year earlier, the Oklahoma City-based company said in a statement yesterday. Excluding one-time gains and losses, per- share earnings were 18 cents, compared to the 28-cent average of 34 analysts’ estimates compiled by Bloomberg.
The gas producer slashed its full-year 2012 and 2013 operating cash flow estimates by as much as 48 percent, and increased the amount of assets it plans to sell. Chesapeake said it may run short of cash next year after completing more than $20 billion in asset sales to close a funding gap and pay down debt.
McClendon visited potential investors in Asia and the Middle East during a 14-day tour in February that included Seoul, Tokyo, Beijing, Hong Kong, New Delhi and Abu Dhabi. He was courting overseas investors for the second time in two years to raise cash for drilling oil-rich prospects at a time when slumping gas prices made U.S. money-managers wary, he said in a March 6 interview in Oklahoma City.
McClendon agreed to a board request to terminate the so- called Founder Well Participation Program in June 2014, 18 months early, without additional compensation, Chesapeake said in a release yesterday. He’ll retain the CEO position and won’t relinquish any of the well stakes he acquired during the past 23 years, Kehs, the Chesapeake spokesman, said in a separate e- mailed statement.
‘The Right Decision’
“They need to keep this guy on a short leash and this is the right way to do it,” said Mark Hanson, an analyst at Morningstar Inc. in Chicago, said in a telephone interview yesterday.
Southeastern, Chesapeake’s biggest shareholder with a 17 percent stake as of Dec. 31, pushed for the separation of the chairman and CEO roles.
“We are pleased that the board listened to our input and believe it has made the right decision by ending the FWPP early and seeking an independent chairman,” O. Mason Hawkins, chairman and CEO of Memphis, Tennessee-based Southeastern, said in Chesapeake’s statement yesterday.
New York City Comptroller John C. Liu, whose office manages 1.57 million Chesapeake shares worth $28.4 million in pension funds, called the separation “a welcome step toward a more independent board,” in a statement yesterday.
$846 Million Owed
As of Dec. 31, McClendon, 52, had $846 million in loans financing his participation in the well-ownership program. The program, which allowed him to own up to 2.5 percent of almost every well the company drilled, required that he pay development costs proportionate to his stake.
As Chesapeake has grown over the past two decades, McClendon’s need for cash to cover his well costs expanded along with the company’s. McClendon’s personal cash crunch was exacerbated by the plunge in natural-gas prices that delayed the point when wells drilled in recent years began to turn a profit, Hanson said.
McClendon had $573 million in losses on his well stakes during the past three calendar years as lease and drilling expenses overwhelmed gas and oil revenue, the company said in a regulatory filing yesterday. During the first quarter, he piled on another $88 million in losses.
The Internal Revenue Service has been reviewing the well- investment program since March 2010 as part of ongoing audits of the company’s 2008 and 2009 tax returns, Kehs said yesterday in an e-mailed statement.
The nominating and corporate governance committee on Chesapeake’s board is considering chairman candidates with “no previous substantive relationship” with the company, according to the statement.
The committee’s members are former U.S. Senator Donald L. Nickles and Louis A. Simpson, a former stock-picker at Berkshire Hathaway Inc.’s Geico Corp., whom Warren Buffett called a “Hall of Fame” investor. McClendon will remain chairman until a replacement is named.
“I’d be looking for somebody who understands the industry with no business ties, no personal ties, no professional ties whatsoever to Aubrey or Chesapeake,” Philip Weiss, a New York- based analyst for Argus Research, who has called for McClendon and the entire board to be fired, said in an interview yesterday.