Aubrey McClendon’s Failure to Disclose Rocks Chesapeake Energy’s Foundation

May 15, 2012

Aubrey McClendon co-founded Chesapeake Energy with a $50,000 investment and managed to make himself a billionaire by building the company into the country’s second largest producer of natural gas.  However, several recent developments have shaken the foundation of that once stable company.  Reporters are questioning the company’s accounting, the SEC has launched an investigation into its practices, and at least one senator is calling on the Justice Department to investigate allegations of fraud and price-fixing.

How much of an impact will these negative revelations have on the company?

Chesapeake employs 10,000 workers and owns massive tracts of land all over the country.  Last year’s profits topped $11 billion.  However, since these allegations have come out, the value of Chesapeake Energy shares has plummeted.

One of the major sources of instability is the company’s aggressive acquisition of new property.  In just the last five years, the company has leased over 9 million acres of land.  Some experts estimate that it would take the company more than 30 years to even tap into that land, let alone make a profit from any of the natural resources under it.  This has added over $10 billion in long term debt onto the company’s ledgers.  So why are they holding onto such overhead when they don’t even know if the investment will pay off?

McClendon and his close allies argue that the investment is essential to capitalize on current low prices on what it calls “good acreage.”

However, critics, including Jeff Goodell of Rolling Stone, have called the strategy a Ponzi scheme and say they’re “overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling.”

Far more troubling are the personal allegations leveled against McClendon himself, current chairman of the board for Chesapeake.

A special report by Reuters (published April 18) uncovered over $1 billion in personal loans acquired by McClendon.  These loans were secured by his stake in Chesapeake’s wells alone.  Many of these individual loans originated with investment firms that were in business with Chesapeake.  None of this was disclosed publically.

When the Reuters report hit the newswire, Chesapeake’s share immediately dropped and the SEC opened an investigation into the FWPP.  This, in turn, prompted Chesapeake to promise forthcoming disclosure of the program.

The Reuters report also uncovered a hedge fund that McClendon ran between 2004 and 2008.  The hedge fund was responsible for over $200 million and traded in oil and natural gas.  Though Reuters could not confirm that McClendon used inside knowledge from Chesapeake to make hedge fund trades,the market had a strong reaction to this revelation, and the stock price fell another 14%.

This public relations fiasco and accompanying financial fallout prompted Chesapeake to announce that it would remove McClendon from his role as chairman.

Depending on the outcome of the SEC investigation and the outcome of any Justice Department action, Chesapeake and/or McClendon may be facing fines or even criminal charges.  This shocking erosion of the foundation of what was once one of the country’s most profitable energy company’s has many investors wondering about the stability of their investments and looking into potential securities fraud lawsuits of their own.