Chesapeake Board Called on to Fire CEO McClendon
Associate Editor, CNBC
A leading fund manager called on the board of Chesapeake Energy to fire its chief executive on Monday, after revelations he had taken $1.1 billion in personal loans against his stakes in the energy company.
In an open letter to the board of directors, Pedro de Noronha, managing partner and portfolio manager at Noster Capital, said Aubrey McClendon should be fired with immediate effect and that other CEOs would have been removed for “far lesser infraction[s].”
Noster Capital is long shares of Chesapeake.
In April, Chesapeake's board stripped McClendon of his chairmanship of the board after Reuters reported that he had taken $1.1 billion in personal loans against his stakes in Chesapeake wells over a three-year period.
The loans, which came mostly from an investment-management company that also did business with Chesapeake, were not disclosed to shareholders.
The U.S. Securities and Exchange Commission and the Internal Revenue Service have since launched inquiries.
Chesapeake Energy was not immediately available for comment.
Initially the board said it had given McClendon permission to trade commodities for himself, after he already had begun to do so.
Eight days later it issued a statement saying: “The board of directors did not review, approve of, [or] have knowledge of the specific transactions engaged in by Mr. McClendon, or the terms of those transactions.”
Oil and gas producers typically prohibit executives from trading in commodities because of the potential for conflicts of interest.
In the letter to the Chesapeake board, de Noronha said when Noster Capital had first considered buying shares in the energy company it discovered what it considered to be a significant "red flag," in that McClendon had in the past invested in Chesapeake Energy shares using margin debt and that in 2008, after the stock market collapse, he was forced to liquidate more than 90 percent of his shares to meet margin calls. However, the red flag did not stop Noster from investing in Chesapeake.
The same year, McClendon received a pay package which included: $75 million to buy interests in Chesapeake Energy wells; a $20 million stock grant; $12 million to buy a map collection — one that later became the subject of a lawsuit the company lost and which led to McClendon having to repurchase the collection from the company; $648,000 for the use of a private jet; and $577,000 for accounting services.
The pay package received by McClendon over the last five years — amounting to $303.6 million — made him the second highest paid CEO in the U.S. during a period in which the energy company's share price had fallen 23 percent, de Noronha said.
Chesapeake also agreed to sponsor National Basketball Association team the Oklahoma City Thunder during the 2008/2009 season; McClendon holds a 19.2 percent stake in the team.
De Noronha called on Chesapeake to act in the interests of shareholders: “We urge that all acquisitions of proved and unproved properties are curtailed at once (unless they are being executed for the purposes of improving the value of resources which are earmarked for immediate sale) and that well completion capital expenditures are reduced to a bare minimum.”
He further warned: “Failure to take significant action quickly will bring Chesapeake Energy closer to being either a forced seller of assets, or to be acquired by another corporate entity at a price which does not reflect the underlying economic value of the company’s assets.”
Separately, The Wall Street Journal reported online that Chesapeake is expecting activist investor Carl Icahn to disclose soon that he has taken a significant stake in the embattled natural-gas company, citing people familiar with the matter. Icahn hinted at such a move in a recent interview on CNBC.
Such a move could ratchet up pressure on Chesapeake, which faces a cash crunch and corporate-governance controversies that have pushed its stock to the lowest level since 2009, the Journal reported.
Icahn has said previously that investors want the company to reduce its leverage. But he is also known to buy stocks he thinks have become bargains, and shares often rise as other investors mimic him.
The Journal added a spokeswoman for Icahn declined to comment on Sunday.