|A reversal (but maybe not for another three and a half years) from CHK: |
Energy Company to End Chief’s Compensation Plan By CLIFFORD KRAUSS
New York Times
April 26, 2012
HOUSTON — Chesapeake Energy Corporation announced on Thursday that it would not extend a compensation plan for its chief executive, Aubrey K. McClendon, that provided him with a contractual right to buy a 2.5 percent interest in all new oil and gas wells drilled by the company.
Criticism of the plan has mounted since Reuters reported last week that Mr. McClendon had used his stake in Chesapeake wells as collateral for up to $1.1 billion in personal loans, with much of the money used to pay his share of the drilling costs of wells in which he had invested.
Most of the loans came from EIG Global Energy Partners, which has invested in Chesapeake assets. Reuters reported that EIG and another private equity firm spread the loan risk by raising money from other investors, including state pension funds. Chesapeake would not be responsible for the loans if Mr. McClendon could not repay the debt.
Previously, the company had defended the plan, known as a Founder Well Participation Program, saying it “clearly aligns Mr. McClendon’s interest with the company’s,” according to its Web site.
It also had denied any conflicts of interest, noting, “there are numerous third-party participants in the company’s wells, including some of the largest energy companies in the world, that monitor the actions of the company through a number of processes, including well audits, reporting, governmental filings and hearings, participation in development plans and marketing of production.”
But in a statement on Thursday, Chesapeake said the program would not be extended beyond its present 10-year term ending Dec. 31, 2015. It also said the board of directors and Mr. McClendon “have committed to negotiate the early termination of the plan and the amendment to Mr. McClendon’s employment agreement necessary to effectuate the early termination.” The plan had been approved by shareholders for a 10-year term in 2005.
Chesapeake, the No. 2 natural gas producer in the nation behind Exxon Mobil, also said the board “is reviewing the financing arrangements between Mr. McClendon and any third party that has had or may have a relationship with the company in any capacity.”
The company, based in Oklahoma, disclosed late Friday that Mr. McClendon had to furnish $661 million over a three-year period to fund his share the Founder Well Participation Program.
Mr. McClendon had received $351 million in cash from his stakes in the wells, but he was obliged to contribute just over $1 billion in drilling costs. The amounts that Mr. McClendon has had to contribute have risen steadily as the price of natural gas has declined and drilling costs have risen.
Philip H. Weiss, an analyst with Argus, a securities research firm, said he was uncomfortable with that arrangement, although he did not think it was illegal. He speculated that in the event that Mr. McClendon had to choose between entering into a joint venture on undeveloped land or selling off properties already developed with oil wells, his personal rather than professional interests could tilt the decision.
“If he picks acreage where they have drilled a lot of wells, it’s potentially more lucrative for him,” Mr. Weiss said. “I can’t say for sure, but the thing that bugs me is that I even have to think that that’s a question.”
Ed Hirs, a business professor at the University of Houston, has a different view. He noted that the Founder Well Participation Program had been disclosed to shareholders and that many privately owned oil and gas companies have similar programs. “From what I see, it is just a tempest in a teapot, not Teapot Dome.”