Chesapeake Energy Flares Out -- Just Ask CEO Mclendon

The Company: Chesapeake Energy Corporation, the largest producer of natural gas in the United States.
The Filing: SEC Form 4 filings for Aubrey K. McClendon.
The Finding: From September 2002 thorough April 2008, Aubrey K. McClendon, the billionaire chief executive of Chesapeake Energy Corp purchased more than 11 million shares of his company's common stock at a total cost of approximately $319 million. Tragically, however, failing to remember that like all commodities -- the price of natural gas is cyclical -- McClendon recently went on a stock buying binge from April - June, purchasing an additional 2.45 million shares at an approximate cost of $108.4 million in open market transactions. Now comes word that McClendon has sold "substantially all" of his stock over the past three days in order to meet margin loan calls in the natural gas company he co-founded, the Company said late Friday.

The Upshot: It is common practice to reward Named Executives with a majority of their compensation in the form of long-term equity incentives -- to better "directly align their personal wealth with all shareholder interests." For example, in 2007, McClendon received a salary of $975,000, $1.8 million in cash bonuses, and restricted stock awards valued on the award date at $25.1 million, according to the April 2008 Proxy Statement.

For better or worse, herein lies the story on one chief executive whose personal wealth is truly aligned with that of all shareholders!

In response to lower natural gas prices, Chesapeake also said it intended to further reduce its capital expenditures budget by approximately $1.5 billion in 2009 and 2010 through a combination of reduced drilling and lower leasehold expenditures.

The company affirmed, too, its previously announced production growth outlook of 18 percent for 2008 and 16 percent for 2009 and 2010. Chesapeake is currently using 145 operated drilling rigs, and anticipates operating approximately 135-140 rigs by year-end 2008 and expects to keep its rig count flat to down in 2009 and 2010.

Meanwhile, natural gas for November delivery lost 29 cents, or 4 percent, on Friday to $6.825 per 1,000 cubic feet. Prices had traded above $10 in July.

The Question: Given the aforementioned leadership distractions and fundamental weakness' befallen the natural gas industry, does anyone seriously expect Chesapeake Energy to hit previously announced production capacity targets?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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