Chesapeake Foundering

AS GAS PRICES AROUND A 10-YEAR LOW THREATEN THE COMPANY, THE CEO’S PERSONAL FINANCES ADD TO THE TURMOIL — AGAIN.

JOE CAROLL AND JIM POLSON

PHOTO ILLUSTRATION: SOURCE: L TO R: LANDOV; RUSS WIDSTRAND/GETTY IMAGES; STEVE MCALISTER/GETTY IMAGES

CHESAPEAKE Energy Corp. has had an aggressive program to develop U.S. natural gas prospects, funded with a heap of debt, and the price of the commodity is near a 10-year low. And now the chief executive officer’s personal financial activities are adding to the woes.

Shares of Chesapeake fell 38 percent from the beginning of April through May 15, the worst decline of any energy company in the Standard & Poor’s 500 Index, as the company struggled with questions about the Founders Well Participation Program. Under the program, Aubrey McClendon, Chesapeake’s co-founder, CEO and outgoing chairman (the board was searching for a new, nonexecutive chairman as of mid-May), had the right to make his own parallel investments in every project Chesapeake drilled. McClendon borrowed hundreds of millions of dollars against his stakes of up to 2.5 percent in Chesapeake wells, angering shareholders.

The CEO’s finances have hurt the company’s stock price before. In October 2008, McClendon was forced to sell Chesapeake shares to meet margin calls. Securities and Exchange Commission data show he sold 31 million shares, valued at more than $500 million. The timing was terrible. Credit markets had seized, stocks were plunging and Chesapeake lost half of its value in 10 days.

McClendon began a conference call on May 2 with an apology for the recent episode, although he also said the program properly aligned his interests with those of Chesapeake’s shareholders. The SEC has begun an informal inquiry, and Chesapeake is ending the well investment program.

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