Editor’s Note:
A previous version of this article incorrectly stated that Chesapeake CEO Aubrey McClendon borrowed funds from companies he controlled, rather than from third-party institutions, and mischaracterized the nature of personal work performed for Mr. McClendon. The Fool regrets the errors.
This year I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!
This week I want to highlight the CEO of Chesapeake Energy (NYSE: CHK ) , Aubrey McClendon.
The dunce cap
Great news, folks. If you find yourself in a pinch for money, just give Chesapeake's CEO a call, he might be able to help you out.
"How is this possible?" you might be wondering. It appears that simple loophole logic has allowed Mr. McClendon to borrow $1.1 billion (with a "b") by mortgaging his interest in the company's gas wells as collateral. What's absolutely horrifying about this whole situation is that the loan itself is just the beginning of questionable practices at the company.
To start, these loans were made by three third-party institutions, $500 million of which came from EIG Global Energy Partners who is a large financier for Chesapeake Energy. McClendon is intermingling his personal and business connections, setting himself up for intense scrutiny as well as leaving investors on edge.
Where's the Securities and Exchange Commission throughout all of this? Sitting on their hands, because they can't do a thing about it. You see, Mr. McClendon backed his loans with the wells instead of personal stock, which is beyond the legal jurisprudence of the SEC. We've got enough loopholes here to start a hula-hoop factory.
To the corner, Mr. McClendon
But wait -- there's more!
What compounds this enormously unwise loan and using his stake in Chesapeake's wells as collateral is the fact that Mr. McClendon seems to have the money-managing skills of Alicia Silverstone's character in Clueless.
According to Forbes, in 2008, Mr. McClendon was forced to sell nearly his entire stake in Chesapeake Energy to cover -- get this -- a $552 million margin call! As if selling millions of shares wasn't enough punishment for shareholders, Mr. McClendon got the company's directors to purchase his antique map collection for $12.1 million.
For those of you skimming this article, allow me to repeat this because I think this is one of the most egregious wastes of money I have seen yet. Chesapeake's board authorized the use of $12.1 million in corporate cash to buy a collection of vintage maps from its CEO, who needed the money to cover a margin call. Somehow an open-jawed smiley-face here wouldn't quite do me justice.
But that wasn't even the end of it. The company awarded Mr. McClendon nearly $100 million in incentives, of which $75 million was part of "well cost incentive" -- the same incentive he appears to have collateralized to obtain his $1.1 billion loan. In addition, the company's board lowered the required stake its CEO was to have in Chesapeake's stock in response to Mr. McClendon having to sell his shares to cover his margin call.
Chesapeake Energy is already suffering from the lowest natural gas prices since 2001 and recently cut back dry-gas capital expenditures by $2.2 billion from 2011. Although some of the largest names in the industry have curtailed production, including Canada's EnCana (NYSE: ECA ) and Ultra Petroleum (NYSE: UPL ) , it's Chesapeake, which supplies 8.3% of the United States' natural gas, that's feeling the biggest pinch as natural-gas prices head lower. When you add in this week's PR circus, you have a recipe for disaster.
Mr. McClendon, you're a shame to the rest of us Bastille Day babies!
Do you have a CEO you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may wind up seeing your nominee in the spotlight.
If you'd like a surefire way to avoid investing in companies with questionable leadership practices, I invite you to download a copy of our latest special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." This report contains a wide array of companies and sectors that are likely to keep your best interests in mind, regardless of whether the market is up or down. Best of all, it's completely free for a limited time, so don't miss out!
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Report this Comment On April 20, 2012, at 2:43 PM, trin6810 wrote:
why would anyone invest in this company - only real fools
Report this Comment On April 20, 2012, at 2:44 PM, rv1977 wrote:
You can get away with these things when your board puppets make you one of the highest paid CEO in the market.Do not forget this board will buy his map collection for 12 million. Just think how much they would give him for some of his OKC Thunder collection?
Report this Comment On April 20, 2012, at 2:59 PM, rv1977 wrote:
where are you Carl Icahn?
Report this Comment On April 20, 2012, at 3:06 PM, rlevy1 wrote:
OK, agreed, this is appauling, but what about the company's P&L under his rule? Those of us invested already in this company need to know how these egregious acts affect the company's bottom line before we decide to sell.
If there are still compelling arguments to stay invested (i.e. price of gas will eventually rise through the roof, P/E ratio, market dynamics, beta when the market tanks, etc.), then those may override these corrupt tricks.
(Not to condone anything he did, but taking a magnifying glass to almost any company is like watching sausage being made...)
Report this Comment On April 20, 2012, at 5:00 PM, marco555 wrote:
Still 5 stars in CAPS rating .
Report this Comment On April 20, 2012, at 5:33 PM, GETRICHSLOW2 wrote:
McClendon is a joke! If he wanted to use the company as his personal bank account he should have never went public. The shareholders should not tolerate this and the entire board should be fired.
Report this Comment On April 20, 2012, at 5:50 PM, chaz572 wrote:
I owned some CHK several years ago. The first time I got an annual report and proxy notice, I was horrified at how much they paid this clown, and how much the board paid themselves. I voted withhold for every member of the compensation committee, against the advisory executive pay vote, and for the shareholder motion to set an advisory say-on-board-pay vote. I watched all of those decisions go the other way. Then, over the next year, Idiot McClendon had his massive margin call, and sold the company his maps. Next annual meeting, I voted withhold for every single member of the board, against the executive pay advisory, and for another shareholder motion to establish a say-on-board-pay vote. After watching all of those decisions go the other way again, I sold my shares in disgust.
@rlevy1, The CEO and board pay at CHK is absolutely outrageous. The moral vacuum in that boardroom is in a league of its own. Why on earth would you want to own a company that's run like that? Why would you trust your money to such a bunch of pillaging sociopaths?
@marco555, I don't care if CHK is rated 18 stars in CAPS, the company is utterly unbuyable until every single current board member and every single current C-level executive is sacked and publicly embarrassed such that they'll never hold another board or C-level position again.
Report this Comment On April 20, 2012, at 5:53 PM, rojostyle wrote:
No doubt this guy is a douche. But, telling everyone to sell based solely on this fact is weak weak minded. CHK's recent performaces; Have beat wall street estimates 10 of last 11 quarters. CHK's future performance is tied to Natural gas prices. If you think natural gas is going up from its current 10 year low. Than investing in the biggest natural gas producer is not a horrible idea. Why put faith in this douch? Got a news flash for you. Most CEO's are douches. Why not bash everyone of them that has an unnecessary private jet?
Report this Comment On April 20, 2012, at 8:30 PM, lution wrote:
Sounds like another Enron in the making...
Report this Comment On April 21, 2012, at 6:11 AM, steveat wrote:
"Chief Executive Aubrey McClendon said he will not step down even as investors and market analysts are putting pressure on the natural gas heavyweight to rein in or replace him in the wake of revelations detailing $1.1 billion in personal loans he took using his stakes in the company's wells as collateral."
Aubrey and his board are obviously old school friends or fraternity brothers or something, so I am gonna wait till the company starts to tank so much that they will have to do something about it. In the end,money is going to be a major factor in this and they might be doing this on purpose so they can buyback t make even more money.
I think when the air clears, this stock will hover in the 8-9 dollar range and that's the time to buy into CHK..easiest two bagger.
Report this Comment On April 24, 2012, at 2:19 PM, ALGOURDJI wrote:
THE BOARD OF CHEASAPEAKE HAS A FORMER US SENATOR AND A FORMER GOVERNOR OF OKHAHOMA.
LETTERS WERE WRITTEN TO THEM 2 YEARS AGO ABOUT THE CONFLICT OF INTERESTS IN THE COMPANY. THEY CHOSE NOT TO RESPOND.
Report this Comment On October 06, 2012, at 8:12 PM, Kafue wrote:
"The Fool regrets the errors."
That must be a full-time occupation.
Report this Comment On October 06, 2012, at 10:29 PM, drdonrs wrote:
Why is it necessary to rehash old and out of date information? The article shows what a fool can look like when re-posting after the fact.
Report this Comment On October 06, 2012, at 10:53 PM, RumRunnerBand wrote:
I am not sure the author is qualified to express opinions on the E&P sector. He states "as gas prices head lower". Anyone with even a slight knowlegde of the industry knows that natural gas prices are heading higher. From nearly a buck to well over 3 bucks. This is quite a large "Gaffe" of the day to me.
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