Wednesday, April 18, 2012

Chesapeake Responds to Reuters Article

I believe that at $18 Chesapeake in the long run is going to turn out to be a very attractive investment.

Over the next 6 months, I am concerned that the price of natural gas is going to get very, very ugly.  So this is going to take some long term thinking.

Chesapeake responded to the Reuters article on the Founder Well Program:

Chesapeake Statement

The Founders Well Participation Program (FWPP) has been in place since the company's founding and was reapproved by shareholders by a wide margin in 2005. The terms and procedures for the program are clear and detailed in every proxy for all shareholders to see. Mr. McClendon's interests and Chesapeake's are completely aligned. In addition, there are numerous third-party participants in the company's wells, including some of the largest energy companies in the world, that monitor the actions of the company through a number of processes, including well audits, reporting, governmental filings and hearings, participation in development plans and marketing of production. The suggestion of any conflicts of interest is unfounded.

Board of Directors Statement

The Board of Directors is fully aware of the existence of Mr. McClendon's financing transactions and the fact that these occur is disclosed in the proxy. Additionally, the total amount of his cost obligations and revenue attributable to the FWPP for each year are detailed in the proxy. The Founders Well Participation Program fully aligns the interests of Mr. McClendon with the company and the Board of Directors supports this program as does the majority of its shareholders.
In answering the questions you submitted last week, we thought it was important to emphasize several points not included in your preliminary materials. First, the Founders Well Participation Program has been in place on materially the same terms for the 19 years since the company went public in 1993. Second, the shareholders reapproved the FWPP in 2005 by a wide margin after full disclosure in our proxy. Third, as part of the shareholder approval process, the terms and procedures for the FWPP were committed to writing and have been complied with during the term of the program. Fourth, an extensive disclosure is provided in each proxy for all of the shareholders. Fifth, Chesapeake and its affiliated companies did not participate in the negotiation of the loans you reference and are not a party to any of the loan documents. Accordingly, Chesapeake and its affiliated companies do not have any obligations with respect to the loans.
  •  Was Chesapeake aware that Mr. McClendon has pledged his stake in company wells in exchange for at least $1.1 billion in loans in the last three years?
  • Yes, like many owners of oil and gas working interests, Mr. McClendon has historically taken out loans to fund a portion of his share of drilling and completion costs and, in such cases, the lender typically requires collateral for the loan in the form of mortgages on the leases and production from the wells. Chesapeake also has similar, but unrelated, loans and hedging obligations that are secured by mortgages on its own working interests as detailed in company filings.
Link to the full Chesapeake response:

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