Chesapeake faces enduring entanglements with departing CEO

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 years ago.

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 were proper.


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 employment contract.

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 years.

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.


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 January 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 McClendon departs.

"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 matter.

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," said Topp.

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 Miami Heat.

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 opportunity."

(Additional reporting by Jennifer Ablan, Matthew Goldstein, Carrick Mollenkamp, Jeanine Prezioso, David Sheppard and John Shiffman.; Edited by Michael Williams and Andre Grenon)