AKM Operations is an informal operation within Chesapeake Energy. Its function is to manage Aubrey K. McClendon’s personal business. AKM Operations include accountants, engineers and supervisors and handled around $3,000,000 of McClendon’s personal interests in 2010.
Special Report: The lavish and leveraged life of Aubrey McClendon, Reuters | By John Shiffman, Anna Driver and Brian Grow | June 7, 2012
Excerpt (emphasis added): Among other tasks, the unit’s controller once helped coordinate the repair of a McClendon house that was damaged by hailstones.
Fourteen miles south, at Will Rogers World Airport, Chesapeake leases a fleet of planes that shuttle executives to oil and gas fields — and the McClendon family to holiday destinations. On one trip, the clan took flights to Amsterdam and Paris that cost $108,000; McClendon counted the trip as a business expense. In another case, Chesapeake logs show, nine female friends of McClendon’s wife flew to Bermuda in 2010 without any McClendons aboard. The cost: $23,000.
Closer to home, McClendon pursues another of his passions: the Oklahoma City Thunder, the NBA franchise in which he owns a 19 percent stake. As with other assets, McClendon has melded his Thunder interest with Chesapeake business. The energy company signed a $36 million sponsorship deal, and it pays up to $4 million annually to brand the stadium Chesapeake Energy Arena.
What hasn’t been previously disclosed is that McClendon mortgaged his future proceeds from the team to secure two bank loans.
Between 2004 and 2008, McClendon ran a private hedge fund.
According to Reuters: “McClendon also ran a lucrative business on the side: a $200 million hedge fund that traded in the same commodities Chesapeake produces.”
In October 2008 when Wall Street crashed, McClendon ran into financial difficulties.
Per Bloomberg BusinessWeek (4/29/2009): (Emphasis added)
He had borrowed money to buy Chesapeake’s once high-flying stock and had become the company’s largest individual shareholder. With Chesapeake’s shares tumbling along with commodity prices, McClendon received margin calls and was forced to sell nearly all of his shares over three days. A stake that was worth $1.9 billion just a few months earlier vanished almost overnight, and McClendon said in an Oct. 10 press release that he was “very disappointed” by having to sell. But McClendon’s board supported him and in December offered him a new pay package. According to public filings, the company designed his new plan to keep McClendon from leaving and to reward him for four large deals he negotiated last year. Chesapeake sold interests in four of its fields to BP (BP), StatoilHydro ASA (STO), and Plains Exploration and Production (PXP)* in transactions that raised $10.3 billion
Chesapeake Energy also purchased vintage antique maps from McClendon for $12.1 million. When shareholders learned of the map purchase, they sued. Shareholders considered it to be an irresponsibly generous compensation package which also included:
- $110 million pay package that included $75 million to buy interests in Chesapeake wells
- $20 million stock grant
- $600,000 for the private use of the corporate jets,
- $600,000 for accounting services
- $131,000 for personal “engineering support.”
- $4.6 million to sponsor the NBA’s Oklahoma City Thunder, of which McClendon owns one-fifth.
Shareholders only sued over the maps purchase. Late 2011 the lawsuit was settled. McClendon agreed to buy back the maps for $12million, plus 2.28% interest.
In December 2011, Reuters began reporting on Chesapeake Energy and Aubrey McClendon’s activities. My friends and I have referred to the Reuter reports as “shoe drops”.
Reuters shoe drops began with “Special Report: Energy giant hid behind shells in “land grab“. The report details how Chesapeake hid behind a shell company, Northern Michigan Exploration LLC.
Landowners had expected thousands of dollars in signing bonuses for leasing their land for gas/oil drilling. When bonuses did not appear in the mail, landowners were angry, but didn’t know who to go after.
Excerpt: (Emphasis added) That’s because the company rejecting their leases hadn’t signed them to begin with. In fact, the company issuing the rejections wasn’t much of a business at all. It was a shell company – a paper-only firm with no real operations – called Northern Michigan Exploration LLC.
One jilted land owner, Eric Boyer-Lashuay, called to complain to the broker who had handled his lease. Northern, he recalls saying, is “a shell company … a blank door with no one behind it.”
Today, he puts it this way: “It was all a fake, all a scam.”
Northern has voided hundreds of land deals, and was indeed a facade – a shell company created so that one of America’s largest energy companies could conceal its role in the leasing spree, a Reuters investigation has found. Oklahoma-based Chesapeake Energy Corp., the nation’s second-largest gas driller, was behind the entire operation.
Chesapeake had created one shell company that set up another, Northern Michigan Exploration. Next, Northern hired brokers who signed leases with residents such as Boyer-Lashuay. And those brokers were under strict orders not to divulge Chesapeake’s role, records reviewed by Reuters show.
In fact, the effort in Michigan was directed from the very top – by Chesapeake’s CEO, Aubrey McClendon. In corporate filings that Chesapeake made public earlier this year – nine months after McClendon’s agents began signing Michigan land leases – McClendon is named as the chief executive officer of Northern, the shell company that voided hundreds of those leases.
Reuters reviewed some emails between Encana and Chesapeake in regards to deals with Michigan landowners.
Exclusive: Encana tipped off Chesapeake to land plans in Michigan – Emails, Reuters | By Brian Grow and Joshua Schneyer | Jul 11, 2012
Excerpt: (Emphasis added) The emails show the competitors traded information about whether Encana was halting new land leasing in Michigan in 2010, and the information prompted Chesapeake to dramatically change its leasing strategy in subsequent weeks and helped send Michigan land prices tumbling from record highs.
In the days after learning that Encana was paring back, Chesapeake CEO Aubrey McClendon ordered Chesapeake to renegotiate or delay closing on at least 10 deals that his company was negotiating with major land lease holders in Michigan, documents reviewed by Reuters show.
Antitrust experts said such discussions could add fodder to probes by the Justice Department and Michigan authorities, who are exploring whether the two companies violated state or federal laws by discussing how to suppress land prices in the state.
They said the emails raise collusion concerns, given that two direct competitors appear to have exchanged critical data. “Information exchange” is not explicitly illegal under U.S. antitrust law, unlike bid-rigging and price-fixing. But it has been found by courts to be anti-competitive when the sharing is done privately, doesn’t promote efficiency and involves information of value to customers – in this case, Michigan land owners.
Chesapeake Energy acknowledges it is now (August 2012) the subject of an investigation by the Justice Department’s Midwest field office. A subpoena has been issued which requires Chesapeake Energy to produce documents before a grand jury.
The Justice Department is “moving criminally,” said Darren Bush, a former antitrust attorney for the Department of Justice and a professor of antitrust law at the University of Houston. “They are working their way through the grand jury process to potentially serve up indictments.”
Shoe Clunks McClendon
One of the benefits of being CEO of Chesapeake is the Founder Well Participation Program (FWPP). The FWPP allows McClendon to buy a 2.5% stake in each of the company’s thousands of wells. This is a sweet deal if the wells are profitable as the 2.5% stake also means McClendon is responsible for 2.5% of the associated production costs.
McClendon set up a few personal corporations. These include:
- Arcadia Resources, LLC
- Jamestown Resources, LLC
- Larchmont Resources, LLC
- Pelican Energy, LLC
McClendon borrowed heavily against his 2.5% stake.
Exclusive: Chesapeake CEO arranged new $450 million loan from company financier, Reuters | By Jennifer Ablan | May 8, 2012
Excerpt: (Emphasis added) All told, McClendon has taken out loans worth $1.55 billion since 2009 from EIG and other lenders to fund his participation in Chesapeake’s Founders Well Participation Program. That perk enables him to receive a stake of up to 2.5 percent in all the wells Chesapeake drills in return for shouldering the same percentage of the wells’ costs.
The latest McClendon loan was arranged in late March through a McClendon-controlled company called Pelican Energy LLC, which was formed on March 6.
The deal was initially intended to be significantly larger, up to $750 million, said the person familiar with the transaction. It was scaled back last week after the Chesapeake board announced the early end to the well-stake perk, which is now slated to conclude in June 2014.
The newest financing for McClendon closed shortly before EIG joined with other investment firms and hedge funds, such as TPG Capital and Magnetar Capital, in purchasing preferred shares in a newly formed Chesapeake subsidiary that has an interest in some of the company’s wells. EIG invested $100 million in that deal, called CHK Cleveland Tonkawa, which raised $1.25 billion for Chesapeake.
Excerpt: (Emphasis added) In the letter, Thomas discussed two earlier loan deals that EIG had done with McClendon, involving McClendon-controlled entities called Larchmont Resources LLC and Jamestown Resources LLC. There was no mention in the letter of the financing deal completed in March to Pelican Energy.
The person familiar with the deal said Pelican was not mentioned in the letter because EIG clients “already knew about Pelican” and the loan hasn’t been disbursed yet.
This person added that when Pelican was launched, EIG sent a letter and “information packet” to clients advising them of the new financing and opening the loan vehicle up to investor participation.
EIG, which spun out of the Los Angeles-based bond shop TCW in 2011, has $13 billion of assets under management.
In the latest $450 million financing, EIG secured as collateral all the assets of Pelican Energy LLC. These include McClendon’s interests in wells Chesapeake might drill in 2013 and the first half of 2014. The EIG financing to Pelican will be used to enable McClendon to continue in the Chesapeake well program through June 2014.
Chesapeake Energy announced the removal of McClendon as Chairman of the Board, but would remain as an independent director. The FWPP would be terminated in June 2014, which still leaves about 2 years for McClendon to acquire 2.5% stake in wells.
Chesapeake CEO McClendon to Lose Chairman Post, Bloomberg | By Joe Carroll | May 1, 2012
Chesapeake Energy Corp. (CHK) will name an independent chairman to replace Aubrey McClendon and halt an incentive program that allowed the chief executive officer to amass personal stakes in thousands of company-operated wells.
McClendon agreed to a board request to terminate the so- called Founder Well Participation Program in June 2014, 18 months early, without additional compensation, according to a release today. McClendon will retain the CEO position and won’t relinquish any of the well stakes he acquired during the past 23 years, Michael Kehs, a Chesapeake spokesman, said today in an e- mailed statement.
The Securities Exchange Commission (SEC) opened an informal investigation into the FWPP in May 2012. The SEC has two categories of non-public investigations. The first and generally less serious type is the informal investigation, sometimes referred to as a “Matter Under Inquiry” or “MUI.” The second, and generally more serious is the formal investigation.
Landowners who have leased in the Marcellus Shale are in for a surprise. Many landowners are just discovering their leases are no longer with Chesapeake Energy, but rather with one of McClendon’s private corporations (Jamestown, Larchmont, Arcadia, etc).
Additionally, the expected huge royalty checks are much smaller than promised, and in some instances instead of a check, landowners are receiving a bill.
Checks from drilling may dry up amid low gas prices, Pittsburgh Post-Gazette | By Erich Schwartzel | May 23, 2012
Excerpt: (Emphasis added) Complicating the value of royalty checks is whether a company can deduct post-production costs from a royalty payment before cutting the check to the landowner — a detail often negotiated during a lease signing. Post-production costs can include everything from the cost to compress and process the gas to the cost of the pipelines needed to transport it.
Some companies will even take marketing costs out of the post-production expenses, using the funds to pay for billboards or commercials, but the extent of post-production fees allowed to be deducted varies from lease to lease.
The industry has a precedent for turning to royalty checks to help trim costs.
When the price of gas started to drop in August 2011, Chesapeake Energy saved money by deducting post-production costs from the royalty checks of about 20,000 royalty owners in the Barnett Shale in Texas. The deductions, which affected landowners who didn’t have provisions guarding against the practice, slashed royalty checks by about 25 percent.
At the time, the Oklahoma company that is now a big player in the Marcellus Shale said post-production costs can range from 70 cents to $1 per Mcf.
Some leases even include a “shut-in” clause that allows the company to cap a well for an indefinite amount of time if it decides it can’t turn a profit right away.
“More recently, some of the gas companies are starting to push back on the shut-in clause,” said Mr. Pettit. “They want the ability to play the market” and resume drilling when prices rebound, he said.
Bradford County Commissioners Doug McLinko and Daryl Miller said at the end of their regular meeting on Aug. 2 that they have been fielding concerns from county residents, who have leases with natural gas companies, that mounting post-production costs are eroding their royalties. This, paired with the low market price of natural gas right now, has dropped some monthly payments by landowners by as much as 90 percent.
Another surprise is about Natural Gas Liquids (NGL). Gas drilling in the northeast counties of Pennsylvania is slowing down. This area of the Marcellus Shale comprises of mainly “dry gas”, meaning it is near 100% methane. In Western Pennsylvania and Ohio, the gas is wet and contains NGLs such as propane, butane, pentane, hexane and heptane. Chesapeake Energy and others are moving their rigs to the western areas of the Marcellus to go after NGLs and oil.
Where does this leave the landowner in terms of royalties for NGLs? Many leases either refer to NGLs as “waste” or is not even mentioned which means no royalties on NGLs for the landowner. It may also mean recovery or disposal of NGLs becomes part of the production costs deducted from royalty checks.
The cement pond may have to wait another year or two.
*Side Note: Plains Exploration and Production (PXP) may seem familiar. Charles “Chip” Groat, University of Texas, oversaw the study which concluded there has been no groundwater contamination from fracking. Groat did not disclose he also serves on PXP Board of Directors and received more than $400,000 from PXP