Is Chesapeake Backtracking on Incentive Borrowing Program?

Chesapeake Energy (NYSE:CHK) said it plans to terminate the contentious incentive program that allowed its chief executive to grab stakes in all the company’s wells. The program came under public scrutiny with news that Aubrey McClendon, Chesapeake’s co-founder and chief executive, had been securing loans against his oil well stakes.

The company said McClendon will negotiate with the board of directors about ending the program early. Chesapeake, the second-largest producer of natural gas in the U.S., had said in a statement last week that the board had been “fully aware” of McClendon’s actions. The company now says that instead it was “generally aware” that he had been borrowing against the stakes, but was not aware of specifics.

In a personal statement, McClendon said that at the end of 2011 he owed a total of $846 million for three loans secured against his stakes. He also raised $108.6 million last year by selling well stakes.

The company’s “founder well participation program,” which allowed McClendon a 2.5 percent stake in each of the company’s wells, was initiated in 1993. In 2005, shareholders approved it for another 10 years. However, news of McClendon’s borrowing against his stakes brought to light the possibility of potential conflicts of interest should he need to quickly access cash. McClendon borrowed the money to pay his share of the development costs of those wells, which has amounted to $661 million over the past three years.

Chesapeake said it plans to renegotiate McClendon’s employment contract to terminate the program before its scheduled expiration at the end of 2015. The board is examining McClendon’s borrowing activity and his connections with companies that have had or “may have a relationship with [Chesapeake] in any capacity.”