Aubrey McClendon, the self-proclaimed "World’s biggest fracker," has been booted as Chairman of Chesapeake Energy, the company he co-founded in 1989. Not exactly a surprise, given the depth of the shithole he’d dug for himself recently, but it’s still remarkable when a corporate three card Monte player like McClendon bows to pressure from outsiders – even his own stockholders.
Details are still sketchy, but it looks like McClendon was forced to step down by shareholders who were pissed off about the revelation of a shady billion dollar personal loan from Chesapeake. (You can read about the details of the loan deal here.) They also halted a program that allowed McClendon to siphon off a portion of the revenue from thousands of company-operated wells. The facts of the loan itself were bad enough, but the way the Chesapeake’s PR dweebs handled it – at first they said the board was "fully aware" of the loan and approved it, then the next day reversed themselves – just made the whole deal more rancid. Chesapeake is a publicly-held company, with a market cap of about $12 billion. Isn’t someone supposed to be paying attention to how much money the Chairman and CEO is pulling out on his ATM card?
And oh, what grief this news brought upon Chesapeake shareholders. The company’s stock tanked by 10 percent or so, vaporizing more than a billion dollars of shareholder value. The Internal Revenue Service is investigating the loan, as is the Security and Exchange Commission. No less than three shareholders filed lawsuits. You just know Chesapeake’s lawyers are going to be dealing with fallout from this for years. And who knows what other sweet nuggets of impropriety investigators might unearth along the way?
If I were a Chesapeake shareholder – I’m not – I’d be very afraid. McClendon’s shady loan hit a nerve because it fits into the broader pattern of financial chicanery that has long been a hallmark of McClendon’s tenure at Chesapeake. As I learned a few months ago while reporting for Rolling Stone, the Chesapeake is really a land-acquisition company disguised as a natural gas producer, and one that is leveraged up the wazoo. The company’s books are awash in acronyms: VPPs and JVs and FWPPs, all of which are used to shift numbers around on the balance sheet, and which make it hard to get a true picture of the company’s financial condition. Even Wall Street analysts who have spent years following the company have no clear idea what's going on. For Chesapeake shareholders, this is even spookier at a time when natural gas prices are near an all-time low and the company is facing a $7 billion shortfall in revenues this year (that's in addition to the $10 billion or so debt Chesapeake is carrying).
If I were a Chesapeake shareholder, I’d have lots of questions – like, if the company is playing games with financial disclosure, what kind of foolery are they up to with disclosure about, say, the chemicals they are pumping underground during fracking operations, or what they are doing with the hundreds of millions of gallons of toxic flowback water they dispose of every year? I’d wonder about this not because I’m a do-gooder environmentalist, but because the financial risk – from both lawsuits and loss of revenue if fracking becomes the next Great American Toxic Nightmare – is so huge.
Finally, let’s ask what Chesapeake’s shady dealings suggest about the long-term sustainability of the so-called shale gas boom. After all, the natural gas industry likes to sell itself as a clean, abundant, All-American fossil fuel, the natural successor to the reign of coal and oil. But if McClendon’s troubles have demonstrated anything, it’s that big frackers are best at figuring out innovative and patriotic-sounding ways to siphon money out of the ground – Enron with drilling rigs.
In any case, it's not like McClendon has been exiled. He’s still CEO of the company, and he still has the board of directors in his back pocket. Perhaps the appointment of a new chairman will change that dynamic, but I wouldn’t count on it. Chesapeake is very much a cult of Aubrey, a company very much in thrall to its charismatic (and slippery) leader. But the rest of us – well, now we know better.
UPDATE (5/2/2012): McClendon's unraveling continues at a stunning pace. This morning, Reuters reported that McClendon was running a $200 million private hedge fund between 2004 and 2008 at the same time as he was Chairman and CEO of Chesapeake Energy. Not only that, but the fund, Heritage Management Company LLC, traded in oil and gas commodities – i.e., the same commodities that Chesapeake produces. A veteran trader who helped run the fund said McClendon was engaged in "near daily" communications and "exhaustive" calls to help direct its trading (the fund even shared a mailing address with Chesapeake).
You don't need a Ph.D in finance to understand this brings up serious questions about conflict of interest, as well as insider trading. After all, as CEO of the second largest natural gas producer in the country, McClendon would have all kinds of insider info that would affect natural gas prices well before that knowledge becomes public. This is exactly the kind of double-dealing that lands greedy billionaires in the slammer. But even if it doesn't (insider trading isn’t illegal in commodity markets unless price manipulation can be demonstrated), these new revelations are sure to cause a massive revolt among the company’s shareholders.
As Reuters points out:
Advance knowledge of Chesapeake's activities could be perceived as having insight into the movement of commodities prices, which certainly raises conflict-of-interest issues as well as ethical issues about the ability to enrich himself on non-public information," said Tim Rezvan, oil and gas industry analyst at Sterne Agee in New York. "If correct," Rezvan said, "these disclosures would be even more alarming than the personal loans."
This morning, thanks to news about McClendon's double-dealings as well as weak quarterly earnings, Chesapeake's stock price is down more than 13%, costing shareholders more than $1 billion in value. The wolves are circling.