Chesapeake: Still a gusher…

April 24, 2012

Some footnoted frequent fliers are gifts that keep on giving, and probably none more so than Chesapeake Energy (CHK). Chesapeake and its chief executive, Aubrey K. McClendon, won our 2009 Footnote of the Year contest (no great honor, trust us) with the disclosure that the company had bought the executive’s antique map collection for $12.1 million. Most recently, of course, Reuters’ Anna Driver and Brian Grow published an excellent piece on the massive loans McClendon has taken out, including from at least one company lender.

That piece, published on April 18, has (rightfully) gotten a lot of attention, sending Chesapeake’s shares down, drawing the ire of analysts and the professional ire of plaintiffs’ attorneys, and prompting some good follow-up stories as well. Into all of this comes, like a gift from above, Chesapeake’s preliminary proxy filing, chock full of tidbits about all the cash the company does disclose sloshing about among its directors and executives. (The filing also provides a little detail — more than ever before, anyway — about the loans Reuters detailed.)

For one thing, the folks who are supposed to be minding the store — the directors — get compensated whoppingly well for part-timers: On average, they made $533,163 in 2011, and half of them made more than $565,000; none made less than $345,000. That’s close to the upper range of the director pay scale, from what we’ve been seeing this proxy season (though a few lucky directors get still more). The biggest single component is stock, but most of the pay isn’t — and as much as $200,000 of it for each director consists of perks like personal use of the company’s fractional jet. (The board, for what it’s worth, met four times in person last year, and held eight conference calls.)

McClendon likes his jet-rides as well. A quick glance at the filing’s summary compensation table suggests that he racked up $500,000 in personal use of the aircraft — a remarkably round number. Sure enough, closer inspection reveals this disclosure:

“For safety, security and efficiency, Mr. McClendon is required by his employment agreement to use aircraft owned or leased by the Company for business and personal use. Mr. McClendon is not contractually required to reimburse the Company for any costs related to such use; however, the Compensation Committee may permit Mr. McClendon to reimburse the Company for any such costs. After consultation between Mr. McClendon and the Compensation Commmittee, it was agreed that Mr. McClendon would reimburse the Company approximately $650,000 related to his personal use of the Company aircraft in 2011. “

In other words, he actually took personal trips on the company plane to the tune of $1.15 million in 2011 — excluding a bunch of fixed costs that the company picks up — it’s just that he reimbursed the company for a little over half the total. Hey, who wouldn’t take a 43% discount on private-plane flights if they could get it? (Paging Groupon.)

Everything else aside, it seems to be a heck of a lot of personal jet-setting for a busy executive who presumably has plenty of work to do.

Then there are the other perks: $121,570 in personal security; sporting-event tickets (and other unspecified benefits) with an undisclosed value; and $250,000 in “personal accounting support” provided by Chesapeake employees. (How’d you like to have to keep your boss’s books?). That accounting-support figure (elsewhere described as “accounting and engineering support services”), incidentally, is also “net of reimbursement,” meaning balancing McClendon’s checkbook, or whatever, is really consuming still more of the company’s time, though we don’t know how much.

It all makes for a classic example of executive entitlement: McClendon may own the equivalent of 1.8 million shares (less than 1% of the company), but he and his directors act like the company belongs to them — and not in the good way that corporate-governance experts tend to like. That’s bad news for shareholders, any way you cut it. Small wonder, then the company lost 13% last year, trailing the S&P 500 and also trailing the oil and gas exploration and production industry for the last two years running?

In short, we think Chesapeake’s decision to sweep McClendon’s massive and conflict-ridden borrowing under the rug for all these years was a bad idea. But any investor who missed all the red flags in the company’s disclosures — or this blog — over the years would have gotten a badly needed wake-up call from this preliminary proxy. And Reuters’ reporting underscores just how much deeper the problems really go.

Image source: Vintage photo of oil well via Shutterstock.com

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