Chesapeake Energy – Timeline of Controversies

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Chesapeake Energy - Timeline of Controversies

Chesapeake Energy Corporation (NYSE:CHK), the second largest natural gas producer in the United States has been bombarded by controversial reports for the last four months.

On April 18, 2012, Reuters published an exclusive report about the $1.1 billion unreported loans taken by Aubrey McClendon then serving as Chairman and CEO of Chesapeake Energy Corporation (NYSE:CHK) for the past three years. According to the report, these loans were used by McClendon to make a 2.5% investment for each wells drilled by Chesapeake and to fund its operations. Documents show that McClendon used his 2.5 % stakes as collateral to secure the same loans. Lawyers believe that the loans pose a potential conflict of interest prompting the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS) to investigate the issue.

Pressured by the negative report, disappointed shareholders and government inquiries, Aubrey McClendon resigned as chairman of the company in May. He also terminated the Founder Well Participation Program (FWPP) 18 months. The FWPP is a benefit provided by the company allowing him to buy 2.5% of the wells drilled by Chesapeake. He remained CEO of the company.

On June 7, Reuters published a special report detailing the extravagant lifestyle of McClendon and the way he mixed his personal financial interests with the interest of the company. David Dreman, chairman of Dreman Value Management LLP and owner of 1 million Chesapeake shares commented that McClendon has a “pattern of disregarding shareholders best interest” and he recommended his departure from the company.

Last June 25, Chesapeake was again shaken by an investigative report written by Reuters showing the company’s scheme with Encana Corp. to avoid bidding against each other in order to the land prices in public land auction in Michigan in 2010. According to anti-trust lawyers, the e-mail exchanges between Chesapeake and Encana maybe used as evidences to prove that both companies violated the Sherman Anti-Trust Act. In response to the report, Jim Gipson, Spokesman for Chesapeake admitted that the company was discussing the a “joint venture” with Encana but there was no finalized agreement. Encana expressed the same reason and stated that it is looking into the matter.

Following the report, the Department of Justice launched a probe against the two companies to find if they violated any Anti-trust regulations. The Anti-trust division of the office of Michigan’s Attorney General Bill Schuette and the Department of Natural Resources in Michigan also conducted their own investigations.

Most recently, a Bloomberg report revealed that Chesapeake accumulated $5.5 billion in pre-tax profits for the past 23 years, and that the company only paid 1% or $53 million in cumulative pretax profits during the entire period. Bloomberg cited that the company’s tax payment is less than one-half of McClendon’s salary in 2008. According to the report, a 1916 regulation provided independent oil and gas companies with the biggest tax breaks. Michael Kehs, a Chesapeake spokesperson on the issue explained that the company paid $ 5 billion in taxes for the past 12 years. According to him, the amount includes all other taxes aside from income taxes.  In addition, he said that the law on drilling costs that provide large tax breaks for independent oil and gas companies “puts money back into the economy and helps drive innovation.”

On the other hand, President Barack Obama is not in-favor of the drilling-cost and he is strongly campaigning to change the law. If the law will be repealed, according to the Whitehouse it would add $ 13.9 billion to the budget of the federal government within the next ten years.

With all the controversies and investigations surrounding Chesapeake Energy Corporation (NYSE:CHK) and its CEO, the company is expected to remain at the center of media reports. For the past year, the company’s market value declined by $7 billion and it is experiencing a cash shortage of approximately $18.6 billion until 2013.

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