"Keep pulling the sweater ... Eventually the thing will unravel."
That odd quote from Ben Stiller's classic comedy has been stuck in my head ever since I published a story on the compensation for Chesapeake Energy's
I got plenty of good feedback on the story, and a number of folks who shared the view of McClendon as the consummate big-spending gambler. I also heard a couple of times that the extent to which McClendon gets rich from Chesapeake only begins with the compensation package that I focused on previously.
So I guess I'll keep pulling ...
The latter may be entirely true. As part of the company's "related party transactions" discussion in its proxy is an overview of the Founder Well Participation Program. This provides McClendon the opportunity to buy into -- by paying applicable capital expenses and operating costs -- the wells that the company drills, up to a 2.5% interest.
The amount McClendon pumps into this program is no small matter -- in 2010 the net expenses for him were well over $100 million -- but neither are the rewards. In the first quarter of this year alone, the revenue from his interests was $40 million. In 2009, the future net revenue of McClendon's interests, discounted at 10% per year, was valued at $108 million. In 2010, that value had grown to $308 million.
And don't forget the windfalls that McClendon stands to collect when Chesapeake sells assets. In February, for example, the company sold its Fayetteville shale gas assets to BHP Billiton
When you consider these kinds of numbers, it's as if McClendon is running his own little (or not so little!) oil and gas company, except that this smaller "company" gets the benefit of the resources, size, and reach of the massive Chesapeake. The arrangement also sheds light on why the company would be providing McClendon with $250,000 worth of personal accounting services. A small-company CFO might take home a salary that looks a lot like that.
Don't worry! We'll pick up the tab
Shareholders may look at this arrangement and brush it off because it seems pretty fair. McClendon pays well costs out of pocket and he gets a share of the spoils.
But I think it's silly to assume that McClendon is simply tapping his piggy bank to pay these costs. Between 2005 and 2010, Chesapeake's total debt more than doubled, from $5.5 billion to $12.5 billion. Combine that with McClendon's stock-margin debacle, and it's clear that the man is not afraid of a little debt.
As I noted above, it's as if McClendon has his own little company here, and it's quite possible he's using a lot of borrowed money to stock that company with pieces of Chesapeake assets.
Of course it's even better than that because we've seen that Chesapeake's board of directors has no problem at all with picking up the tab for McClendon's costs when he runs into a rough patch. In 2008 -- the year of the margin debacle -- McClendon was handed the now-infamous $75 million bonus by the board. And where did that bonus go? To the FWPP as a credit against future costs owed by McClendon.
So the big 2008 bonus wasn't simply a matter of McClendon wanting to make up for his well-deserved stock losses. Instead, he may have suddenly found himself in a position that would have prevented him from continuing to snatch up his piece of Chesapeake's jewels.
That's when it really helps to have a board that makes more than $600,000 (on average) and wants to keep you happy.
What's good for the goose ...
This is all done under the party line that McClendon brings "unique skills and energy to the organization" and that the company needs to "retain and motivate" him.
Combining my prior discussion with the plum deal he gets with the FWPP, shareholders really need to ask themselves where the line is between McClendon needing to be "motivated" and him simply being a run-of-the-mill greedy CEO using a company to line his pockets.
Even over at SandRidge
The bottom line is that Chesapeake's board makes a joke out of the word "governance," and while Aubrey McClendon may be good at what he does, there's no justifying the way he grows his personal balance sheet at the expense of Chesapeake shareholders. Until there's some drastic change in the way Chesapeake conducts itself, there's no way that I'd touch the stock.
That said, the stock market is, as ever, a market for stocks, and there are some quality investors that can't seem to get enough of Chesapeake stock. Our own Motley Fool Alpha has recommended the shares multiple times, and well-regarded value managers Mason Hawkins and Staley Cates at Longleaf Partners own the single largest stake in Chesapeake, currently valued at nearly $2.5 billion.
But if you're looking for an energy stock whose compensation practices won't make you gag, check out the stock that my fellow Fools identified as "the only energy stock you'll ever need."