Chesapeake Woes Could Reflect On KKR

A controversy over insider dealings at Chesapeake Energy Corp. could cast a pall over the natural gas driller’s ties to Kohlberg Kravis Roberts & Co., sister publication Buyouts reported.

The New York buyout firm announced in March that it had formed a partnership with Chesapeake to invest in oil and gas projects around the United States. Under the deal, KKR and Chesapeake would make an initial combined $250 million commitment to the partnership. Chesapeake Energy was to contribute 10 percent of the total commitment and receive a promoted ownership in the partnership, as KKR’s announcement described it.

The outlook could be cast into doubt, however, as sister news service Reuters reported on April 18 that Chesapeake Energy CEO Aubrey K. McClendon had taken out undisclosed loans of as much as $1.1 billion over the last three years against his personal stake in thousands of company wells.

Reuters further reported that McClendon sold his share of two large energy plays at the same time the company divested its interest, raising the possibility that the transactions could have been timed and structured to suit his personal interests, rather than those of the company he runs. The deals generated $6.5 billion in proceeds for McClendon, Reuters reported.

The issue arose because Chesapeake Energy allowed McClendon to take a personal interest of up to up to 2.5 percent in wells that Chesapeake Energy drilled through an arrangement known as the “Founder Well Participation Program.”

In the wake of those reports, Chesapeake Energy said Thursday that its board had been unaware of McClendon’s actions, would review them and would negotiate a termination of the founder program, which had been scheduled to continue through 2015.

The Securities and Exchange Commission has opened an informal inquiry into the program, Reuters reported Thursday.

Standard & Poor’s Ratings Services cut its rating on Chesapeake Energy on the news, to ’BB’ from ’BB+’, and put the company’s debt on credit watch with negative implications. S&P defines ‘BB+’as the highest speculative grade and ‘BB’as less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.

In its quarterly earnings call before this news broke, Chesapeake Energy had told investors it expected to spend up to $12.4 billion in 2012 and $12.3 billion in 2013. But in light of weak natural gas prices, S&P said in its announcement, “we expect Chesapeake’s funds from operations to total only $3.4 billion to $3.8 billion in 2012 and $5.4 billion to $5.8 billion in 2013, implying massive internal funding shortfalls.”

But it does seem clear that whatever Chesapeake Energy’s board did not know about McLendon’s activities, KKR also did not know. “We have long admired Aubrey and the Chesapeake team and we look forward to broadening our relationship over the years ahead,” Marc Lipschultz, the head of KKR’s Global Energy & Infrastructure business, said in the press release announcing the partnership.

Neither Chesapeake Energy nor McLendon were mentioned during KKR’s earnings call on Friday.

The firm did not respond by deadline to a request for comment.

Steve Bills is a senior editor at Buyouts Magazine. Any opinions expressed here are entirely his own. Follow him on Twitter @Steve_Bills. Follow Buyouts tweets @Buyouts. For information on how to subscribe, contact Greg Winterton at greg.winterton@thomsonreuters.com.

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