Why Chesapeake Energy Sank

Editor's note: A previous version of this article incorrectly stated that Chesapeake CEO Aubrey McClendon borrowed funds from the company, rather than from third-party financial institutions. The Fool regrets the error.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chesapeake Energy (NYSE: CHK  ) sank today by as much as 10% before recovering to close out the day with a 6% loss on concerns raised from a Reuters report that CEO Aubrey McClendon has used his stake in company wells as collateral for loans that he has taken out over the past three years.

So what: McClendon borrowed upwards of $1.1 billion from third-party financial institutions to help finance his participation in the company's Founders Well Participation Program, or FWPP, which has been around since the company was founded. Many analysts believe the potential exists for the arrangement to create a conflict of interest.

Now what: McClendon and Chesapeake maintain that there is no conflict of interest, and that McClendon's interests are appropriately aligned with shareholders. The company has no obligations to the transactions in any way. Chesapeake has issued a formal response to the report as well as provided additional information on its FWPP here.

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Fool contributor Evan Niu holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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10/26/2016 4:00 PM
CHK $6.00 Down -0.11 -1.80%
Chesapeake Energy CAPS Rating: ***