WHEELING - Via firms such as Jamestown Resources and Larchmont Resources, Chesapeake Energy Chief Executive Officer Aubrey McClendon took a 2.5 percent personal stake in Marshall and Ohio County drilling operations.
Chesapeake is a publicly owned company traded on the New York Stock Exchange. Conversely, Jamestown and Larchmont are privately held by McClendon, published reports state.
A financial adviser is questioning these actions, noting the practice of allowing a CEO to gain a personal stake in every well is "just not done." Now, the U.S. Securities and Exchange Commission is opening an "informal inquiry" into the investment activities that McClendon and Chesapeake practiced for several years.
Photo by Casey Junkins
Shovels, backhoes and bulldozers move rocks and dirt at Fox Commerce Park, just west of St. Clairsville, preparing the site where Chesapeake Energy will construct three office buildings.
Chesapeake officials said Thursday they plan to eventually abandon the program that allows him to purchase up to a 2.5 percent interest in every well Chesapeake drills for his own investment portfolio. The system, formally known as the "Founder Well Participation Program," is now slated to end on Dec. 31, 2015.
Property records in Ohio and Marshall counties show this program has been operating in West Virginia's Northern Panhandle. Documents show Jamestown Resources gained a 2.5 percent interest in thousands of acres of Chesapeake leases signed by local mineral owners.
Marshall County records also show Larchmont Resources took a 2.5 percent working interest in Chesapeake leases for wells drilled on property in the name of McDowell.
Peter Holloway, senior vice president of the Wheeling-based investment firm Hazlett, Burt & Watson, said the deals McClendon has been making are, at least, unusual.
"It is an extraordinary thing to be doing in this day and age," Holloway said of the actions. "The fact that he is getting 2.5 percent of every well - that's just not done."
Last week, an investor sued the company and McClendon in an effort to disclose all information relating to his loan-making deals. Now the SEC is launching its informal inquiry. This follows reports that McClendon borrowed more than $1 billion from a private firm that has made hundreds of millions of dollars in deals with Chesapeake over the last year.
Shares of Chesapeake stock tumbled 5.5 percent on April 18 to as low as $17.17 per share, amid published reports of McClendon's dealings.
This drop led to an estimated $500 million loss of company value in a single day.
The stock has since recovered some losses, ending at $17.56 Thursday on the NYSE.
However, these losses reflect a trend in the history of Chesapeake, as NYSE records show the company's stock has dropped from $34.39 per share on July 18 to the $17.56 figure Thursday. In May 2008, Chesapeake's stock price per share was $54.77, but collapsed to $15.81 just eight months later, records show.
Also Thursday, Chesapeake announced a clarification to last week's statement from General Counsel Henry J. Hood that "the board of directors is fully aware of the existence of Mr. McClendon's financing transactions."
Thursday, Chesapeake officials said this statement meant that board members are "generally aware that Mr. McClendon used interests acquired through his participation in the (Founder Well Participation Program) as security in personal financing transactions."
"The board of directors did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions," the company stated Thursday.
This is significant to Holloway, who said board members could potentially be liable for some investor losses if they had this specific knowledge.