Chesapeake's Spring

The proper, Oklahoma City way to address a media F5 tornado appears to be to provide the facts, stick to your business and let it evaporate—if only it will. At press time, Chesapeake Energy Corp. cofounder, chairman and chief executive Aubrey McClendon completed an investor call about a $3-billion, short-term loan the company had announced before the May 12-13 weekend. In just a couple of hours before trading closed on May 11, the stock price had fallen to $14.81 from a previous-day $16.39, as e-news writers misunderstood a 10Q filing and reported that Chesapeake would not complete planned asset sales this year.

The media melee dated back to the morning of April 18 and a Reuters story just an hour before McClendon addressed a near-capacity crowd at the IPAA's OGIS New York symposium. Attendees sought his view of gas supply and demand, and how Chesapeake would fare this gas-price storm. He opened with a copy of the new issue of Fortune magazine, pointing out its cover story, "The United States of Natural Gas".

Afterwards, analysts, investors and some fellow oil and gas producers gathered for a standing-room-only Q&A session. Many sat on the floor, as the full 40 minutes allotted would be more than consumed. Questions mostly focused on natural gas—production and demand.

At about 10 a.m., McClendon and two team members walked east along 53rd Street toward Sixth Avenue. Outside, an overnight cool front had brought the temperature down to 49 degrees from an unusual mid-April high of more than 80 the day before. It was of little help: The May-contract natural gas price was peeking below $2, beaten down by the mild U.S. winter. After 17 consecutive weeks of net draws from U.S. gas in storage that brought the total to 2.37 trillion cubic feet in mid-March, the number was already four weeks into a rebound, reaching 2.55 trillion by OGIS New York week.

The original news story questioned the company's well-known Founders Well Participation Program (FWPP) and McClendon's personal loans in funding his part. OGIS attendees questioned why a real-time stock-price display showed Chesapeake's shares losing more than 5% so far for the day. But they shrugged off the Reuters story; the FWPP had been noted in Chesapeake's SEC filings since its IPO in 1993.

What began as a dust devil, however, gained momentum. By day's end, other media published stories headlined "CEO Loan Scandal", "Burned by Chesapeake" and "Complex Web of Loans". By 2:30 p.m., a law firm announced it was investigating the potential for claims. By 7:17 p.m., five more law firms did the same. The next morning, a fund manager filed a lawsuit in federal court.

In the following four weeks, Chesapeake shares lost as much as 25% off their pre-maelstrom price—from $19.12 on April 17 to $14.11 on May 11. More news articles questioned McClendon's personal hedge fund and the accounting of Chesapeake's volumetric production payments (VPPs). Some reached into the basement with old notes about Mc-Clendon's antique map and personal wine collections.

Meanwhile, the analyst community stuck to publishing their ratings on the stock based on the company's fiscal profile. One firm, Bernstein Research, issued an Outperform on the stock, after nervous trading had pushed it below $17. Fitch Ratings changed its outlook for the company from Positive to Stable, based, again, on its fiscal profile.

In the May 14 conference call, McClendon explained the rationale behind the new, $3-billion, short-term loan, which is to pay off the company's $4-billion credit facility that would become upside down when Chesapeake completes its planned asset sales. "It's painful", he said. "We wouldn't be having this conversation today if we hadn't had the warmest winter in 100 years. Gas prices would be $4 today and we would be making this transition with a lot more elegance and with a lot less noise than what we have right now. But we are where we are. We understand it. We've got $2 gas…, the lowest gas prices in 10 years.

"…We would have loved to do it without all the noise of the past month, but we've taken that on in stride, we'll take on whatever noise comes our way in the future and we'll get this (transition) executed…. "

After the call, the stock price improved more than 5% in trading. Storms are unreasonable and non-negotiable. It remains to be seen if this media event will blow over.