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Investors Could Have Heeded Chesapeake's Governance Risks

May 02, 2012 | About:

GMI has rated Chesapeake a D since June 2009, and an F since initial reporting of the controversial loans to CEO Aubrey McClendon. However, those who have heeded the long-term governance risks back in June 2009 would have avoided holding shares that are now worth less in price than they were back then. The company’s financial statements have reflected that its AGR has been aggressive since June 2011, indicating higher accounting and governance risk than 76% of comparable companies. Selling shares at this juncture would have yielded an 80% differential in return if the resulting funds had been simply parked the benchmark S&P 500.

Investors, who thought they could buy Chesapeake shares on the cheap last week, are seeing even better bargain prices today. Reuters reported on Wednesday that Aubrey McClendon secretly ran a $200 million hedge fund that traded in the same commodities that Chesapeake produces. In reaction to the news, Chesapeake’s stock price plunged an additional 14.6% to $16.74 per share near closing time on Wednesday, according to Yahoo.


Chesapeake Energy Corp. has taken a few steps recently to address some of the questions raised in the media about CEO Aubrey McClendon's controversial business practices. But the oil and gas company still has work left to do.

Around two weeks ago Reuters said McClendon borrowed as much as $1.1 billion in unreported loans against his stakes in Chesapeake oil and gas wells. Chesapeake has been reviewing that well participation program and announced a plan Tuesday to terminate it 18 months early. Also, McClendon will "relinquish" his position as its chairman.

"We believe separation of the Chairman and CEO roles will improve Chesapeake's corporate governance and the early termination of the (well participation program) will eliminate a source of controversy, both of which should send a positive signal to the market and improve shareholder value," Pete Miller Jr., Chesapeake's lead independent director, said in a statement.

Indeed, corporate governance advocates including GMI Ratings have long approved of separating the chairman and CEO roles. This can make it easier for the board to evaluate the company's performance objectively. That said, stripping McClendon of his role as chairman addresses only one of the red flags about Chesapeake's business practices that have been on the radar.

Another long-existing warning sign is that senior managers at Chesapeake remain highly compensated. McClendon earned more than $21 million in 2010, for example. And some of his perks have been unusual: Chesapeake bought some historical maps of the American Southwest from him for $12.1 million in December 2008.

GMI Ratings continues to give Chesapeake an F on its corporate governance, which still makes the shares a risky buy. A Chesapeake spokesman did not respond to a request for comment within press time.

Region: North America

Sector: Energy

Industry: Oil / Gas Exploration / Production

Market Cap: $13,216.9mm (Large Cap)

ESG Rating: F

AGR: Aggressive (24)

Rating: 2.8/5 (8 votes)


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