Chesapeake CEO Aubrey McClendon Channels George Costanza

Remember the Seinfeld episode when George Costanza gets chastised (and then fired) by his boss for having had sex with his cleaning lady on his desk?   The classic clip is a must watch, especially when George replies:

“Was that wrong?  Should I not have done that? I tell ya, I gotta plead ignorance on this thing because if anyone had said anything to me at all when I first started here that that sort of thing was frowned upon.. Cause I’ve worked in a lot of offices, and I tell ya, people do that all the time.”

Anyway, the story of the day is another one featuring Chesapeake Energy ($CHK – no positions) CEO Aubrey McClendon.   Reuters dives into the details of McClendon’s billion dollars in loans which he used to participate in Cheseapeake’s founders well participation program – aka the FWPP.   The FWPP, as Reuters explains,

“grants Chesapeake’s billionaire co-founder a 2.5 percent stake in the profits – and makes him pay 2.5 percent of the costs – of every well drilled during each year he decides to participate.”

Now, before getting to today’s Reuters article, I want to go back to an October, 2011 Forbes piece where author Christopher Helman interviewed McClendon in the wake of some hullabaloo over what many viewed as past egregious behavior.  Long story short – McClendon leveraged himself to buy stock in his own company and had to puke out of more than half a billion dollars worth of CHK stock in October,2008 when he faced margin calls.

Regarding the FWPP, though, here’s the relevant part of the Forbes interview:


Because of your founders well participations program, you have the right to buy in to every well Chesapeake drills. Makes sense, as it aligns your interests with shareholders. Yet as a result, over the years you’ve built up what is in effect your own E&P company within Chesapeake. How does your personal stakes in these wells influence the strategic decisions that you make in regards to selling acreage or partnering?

McClendon’s answer, emphasis mine:

“I don’t really look at it as having my own E&P company inside of Chesapeake because I make no independent decisions with regard to the selection of the wells I participate in, I don’t operate or do the other things and E&P companies do.  I am required by the FWPP to participate in all wells that Chesapeake drills in the course of the year (except for those where my interest would take the company’s interest below a certain working interest percentage) and so the program is completely mechanical, without any discretion on my part.  Running an E&P company inside of CHK would mean that I would select projects, sell down interests, operate and make a large number of well level decisions.  With the FWPP, I have no such control.  Also because I do not participate in any of the company’s joint ventures, VPPs or royalty trusts, so there is no conflict between my interests and the shareholders’ interests. In fact, you could say that I’m the only CEO in America who truly participates alongside his company in the day to day business activity on the same basis as the company.  If the company drills bad wells or the price of oil and gas collapses, then I am impacted just like the company and our shareholders would be.  I cannot think of another company where that would be the case. One more thing to think about is this: would we would have had the financial collapse in 2008 if every CEO of a bank, of a mortgage company or a securities firm had been forced by his board to participate personally in some proportionate part of every loan made, every mortgage-backed security sold or every real estate deal financed by those firms?  I’m quite confident we would not be where we are today if those CEOs would have had to participate in their businesses the way that I do in the company’s wells.  Also, I’d like to make it clear that I pay for my share of the company’s wells just like the company does for its interest in the wells – these are not free interests or overrides, as I have seen some journalists mischaracterize the program.

Which brings us back to today’s Reuter’s post:

“In fall 2008, Mr. McClendon didn’t have liquidity to participate in the (well) program in 2009, at which point EIG entered into discussions with him and ultimately “formed a special purpose vehicle called Larchmont Resources,” Wade said.

Through Larchmont, EIG acquired the rights to all of McClendon’s well stakes for 2009 and 2010. EIG then set up a new special purpose vehicle –  Jamestown Resources – to control McClendon’s well shares in 2011, with rights to 2012, Wade said.

EIG’s investments have been extremely profitable. “EIG sweeps 100 percent of the cash flow generated by those projects until EIG has gotten all of its money back plus a 13 percent realized return,” Wade told New Mexico investors. EIG also gets a 42 percent cut of McClendon’s share of the well profits “in perpetuity,” he said.

EIG declined comment.”

In case the point isn’t clear yet, I’ll spell it out for you.  Just at McClendon himself did in the Forbes interview, CHK spokesman Michael Kels, in the Reuters article, tried to use the old “skin in the game” argument, explaining that McClendon has to “eat his own cooking” since he’s participating in the FMPP program – that he’ll share in the gains or losses.  But Reuters is showing that’s not really the case – it’s all OPM – other people’s money – borrowed money.    As the article continues:

““If he hasn’t had to put up any of his own money, how is that alignment” of McClendon and Chesapeake’s interests, asked Mark Hanson, an analyst with Morningstar in Chicago.”

McClendon and Kels each tried the “it’s my own money on the line” defense, but Reuters shows that doesn’t seem to be true at all.     As for McClendon’s comparison to the bank CEOs in the financial crisis, hmmm.   Let’s see: taking huge risks with other people’s money… layered complex SPVs (special purpose vehicles)…  that sounds kinda EXACTLY like what people hated about the financial crisis – and it sounds an awful lot like what is going on at Chesapeake Resources as well.   Maybe, Mr. McClendon, just maybe, that’s exactly why there’s so much outrage!

Forbes:  “In His Own Words – Chesapeake’s Aubrew McClendon Answers Our 25 Questions

Reuters: “The Energy Billionaire’s Shrouded Loans” (pdf)

HTML version of the Reuters article (missing a sidebar piece which I quoted from)

EDIT:  Chesapeake Responds to Reuters Article on FWPP



Kid Dynamite is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to If you click on my links and buy anything, even something other than the product advertised, I earn a small commission, yet you don't pay any extra. Thank you for your support.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus
Kiddynamitesworld Blog