Chesapeake Energy Corporation (NYSE:CHK), the second largest natural gas producer in the United States, and its founder Aubrey McClendon, suffered several setbacks in 2012. Chesapeake Energy Corporation (NYSE:CHK) board stripped McClendon from the post of chairman after scandals. McClendon’s net worth slumped more than half. And Chesapeake stocks have slumped more than 30 percent this year. That’s not the bad part. A number of federal, state and corporate probes related to Chesapeake and its founder is still in the process, so 2013 seems gloomier for the company.
Amid a cash crunch, the company relied on the money generated by leasing land in Wyoming, North Dakota and Colorado. However, the natural gas giant told investors in November that the deals were soured at a cost of over a billion dollars to the company. Following the steps of Texas and Michigan-based property owners, land owners in North Dakota have sued the natural gas producer for failing to fulfill the leasing agreements.
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Aubrey McClendon is so strained financially that he had to place his renowned wine collection as collateral to borrow money from George Kaiser, an Oklahoma financier, in October, according to documents filed in Oklahoma County court. Additionally, George Kaiser Family Foundation and Goldman Sachs Group, Inc. (NYSE:GS) invested $421 million in Chesapeake Energy Corporation (NYSE:CHK) in December 2008. According to an SEC filing, Chesapeake received that cash by promising future oil and gas production from its wells in Arkansas and Oklahoma.
In the summer of 2012, McClendon raised $1.5 billion in personal loans from a major investor in Chesapeake Energy Corporation (NYSE:CHK). That raised questions about conflict of interest between Chesapeake and McClendon. Finally, the company’s board had to remove him as chairman. Chesapeake directors and the SEC continue to investigate the financial relationship between the company and its founder.
Subsequently, Chesapeake secretly worked with EnCana Corporation (NYSE:ECA) (TSE:ECA) to avoid bidding against each other for Michigan land. This helped them acquire the land at a much cheaper price. The Michigan Attorney General and the Department of Justice are probing whether Chesapeake violated anti-trust laws.
“Because of the potential conflicts of interest that have existed prior and still exist at Chesapeake, any dealings that the company has with firms that are also dealing with Aubrey, I think investors have the right to know that,” said JPMorgan Chase & Co. (NYSE:JPM) oil and gas analyst Joseph Allman. McClendon and Chesapeake Energy Corporation (NYSE:CHK) have both declined to discuss any loans several times.
With rising financial woes, Chesapeake even failed to pay its bills to Otis Eastern, a contractor that laid northern Pennsylvania’s pipelines for Chesapeake, according to Otis lawsuit filed on October 9. The amount has now reached above $15 million. The company is still facing a cash shortage, so it is delaying payments to preserve cash. According to SEC filings, Chesapeake’s cash reserves fell from $1 billion in June to just $142 million in September 2012.
Chesapeake has been selling assets aggressively to meet the budget shortage and generate some cash flow. Through October 12, 2012, the company had raised $11.6 billion by selling a number of assets.
A Gloomier 2013?
The biggest trouble for Chesapeake Energy Corporation (NYSE:CHK) is the investigation by the Anti-trust Division of the Department of Justice. The probe is related to Chesapeake’s involvement, along with EnCana Corporation (NYSE:ECA) (TSE:ECA), in suppressing land prices in Michigan. Reuters had exposed several e-mail conversations between the top executives of two companies as proof. Both companies have acknowledged holding talks over the possibility of a joint-venture in Michigan. Due to the ongoing probes, Chesapeake has been prohibited from selling its Michigan acreage.
The federal and corporate probes, hundreds of lawsuits by the land owners, and a huge $18 billion balance sheet deficit are what will haunt Chesapeake Energy Corporation (NYSE:CHK) in 2013. Investors haven’t expressed any faith in its future.
McClendon’s personal fortune was $1.1 billion in 2011, according to Forbes. When it was exposed that he had borrowed over $1 billion in personal loans, Forbes immediately removed him from its list of 400 wealthiest Americans.