Investors are Pissed About McClendon’s HUGE Risk
Could former CEO Aubrey McClendon’s “wildcatter” propensity for risk have taken a toll on Chesapeake Energy’s (NYSE:CHK) fortunes?
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Chesapeake shares have lost almost half their value over the past year. Worse, the country’s second largest energy producer finds itself in the eye of an unsavory scandal involving its founder and CEO Aubrey McClendon for alleged improprieties relating to a $1 billion loan he took against collateral in oil well stakes granted him by Chesapeake.
More skeletons fell out of the closet when media reports revealed that McClendon secretly sponsored and ran a $200 million hedge fund that transacted in the same commodities that Chesapeake produced. This raised serious issues of conflict of interest, though there is no proof yet that McClendon benefited through the mechanism.
Christopher Helman of Forbes recently drew up a profile of McClendon, portraying the man as the quintessential risk-taker, a maverick “wildcatter” who broke away from his powerful oil family to make it big on his own.
Typical of his flair for making big risky moves, McClendon led Chesapeake to acquire massive drilling acreage, an investment that is now threatened by the relentless fall in natural gas prices spurred by the production glut resulting from new “fracking” technology.
Phil Weiss, an analyst at Argus research, has also called into question Chesapeake’s hedging policies. Large oil producers typically resort to hedging to mitigate risk to the core business from fluctuations in the market prices of their products. However, according to Weiss, Chesapeake “views hedging as a way to make money and not just a way to protect the company.”
The glut of gas on the market has compelled many oil majors like Exxon (NYSE:XOM) to cut back on production, but not so with Chesapeake, which has actually increased increased production 18 percent over last year.
The swirling clouds of poor publicity have raised doubts about the company’s operations. Weiss said, “There are a lot of other things that I’m worried about — financial engineering, leverage that goes beyond normal limits, an accounting method that does not show a true picture of what’s going on with the company.”
More skeletons to follow?
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