Wednesday, April 29, 2009

Aubrey's Wild Ride

The past twelve months for Chesapeake Energy CEO Aubrey McClendon have seen highs and lows of meteoric proportions.
  • First, Chesapeake broke the news of the Haynesville Shale last spring. Aubrey gets a big feature article in Fortune Magazine. Chesapeake gets lots of attention. But the company and its competitors suddenly find themselves having to shell out huge lease bonuses to suddenly over-informed property owners, a situation that haunts these companies as natural gas prices have dropped, challenging the economics of these new wells.

  • Hooray! Over the summer, the price of natural gas shot up to around $13.50! Chesapeake looks brilliant tying up lots of new leases and beginning to drill aggressively. But Chesapeake had done such a good job of hedging natural gas prices as they rose that the company has to show huge accounting losses when reporting earnings to reflect the market value of the positions. Ouch, stung by their own foresight and success.

  • Oh no! The price of natural gas falls off the cliff and everyone in the industry gets hammered, but remember those hedges - they help keep Chesapeake out of the trench. Also, the company enters into joint venture and sale arrangements with big fish like Plains Exploration, StatoilHydro and BP to monetize most of its shale positions. Chesapeake is the envy of every company in the field.

  • But the company's stock price still gets hammered, which leads to enormous margin calls for CEO McClendon, who had used the value of his Chesapeake shares to borrow money, presumably to buy more shares, among other things. The margin calls in October require him to sell 31.5 million shares, or 94% of his holdings, at depressed prices (there was no "up" here, just "down").

  • In December he signs a huge contract with a one-time $75 million bonus and receives a grant of $32.7 million of stock. The company also agrees to buy Aubrey's collection of maps and artwork for $12.1 million (!!!). In all, the package is worth $112 million. It's so good to have friends on the board's compensation committee.

All in all, it's been a wild ride for Aubrey. No more Forbes 400 or the Billionaire's List, but he's working his way back there. Unfortunately for him and Chesapeake, the compensation is suddenly getting lots of attention. It was ranked as one of the five dumbest things on Wall Street this week by

I wasn't going to mention any of this until I opened the Wall Street Journal and saw a big article on the front page of the "Marketplace" section focused on shareholder outrage regarding the pay package. It got me thinking about my ups and downs, my good days and bad days. My own life, even on its most hectic day can't compare to Aubrey's. I can't wait to see the next act in the Aubrey McClendon Show.

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