Chesapeake Energy

Chesapeake Energy Corporation

Type	Public company
Traded as	NYSE: CHK S&P 500 Component
Industry	Petroleum industry
Founded	1989
Founder	Aubrey McClendon and Tom L. Ward
Headquarters	Oklahoma City
Key people	Archie W. Dunham, Chairman Robert Douglas Lawler, CEO Douglas J. Jacobson, Vice President Domenic J. Dell'Osso, Jr., CFO Douglas Jacobson, Vice President[1]
Products	petroleum, natural gas
Production output	679 thousand barrels of oil equivalent (4,150,000 GJ) per day (2015)[1]
Revenue	US$12.764 billion (2015)[1]
Operating income	-US$18.919 billion (2015)[1]
Net income	-US$14.635 billion (2015)[1]
Total assets	US$17.357 billion (2015)[1]
Total equity	US$2.397 billion (2015)[1]
Number of employees	4,400[1]
Website	www.chk.com

The Pier 1 Imports Building in Fort Worth, Texas, where Chesapeake leases approximately 100,000 square feet of space.^[2]

Chesapeake Energy Corporation is a petroleum and natural gas exploration and production company headquartered in Oklahoma City, Oklahoma. The company was founded in 1989 by Aubrey McClendon and Tom L. Ward with only a $50,000 initial investment. McClendon named the company due to his love of the Chesapeake Bay region. ^[3] Ward later left the company to found SandRidge Energy.

Current Operations

The company's properties are divided into two operating segments: the Southern Division and the Northern Division.^[1]

The northern division, which accounted for 42% of total production volumes in 2015 and 39% of total proved reserves at December 31, 2015, includes the acreage in the following areas:

• Utica Shale in Ohio and Pennsylvania (18% of total proved reserves)^[1]
• Marcellus Shale in the northern Appalachian Basin in Pennsylvania (17% of total proved reserves)^[1]
• Niobrara Shale in the Powder River Basin in Wyoming^[1]

The southern division, which accounted for 58% of total production volumes in 2015 and 61% of total proved reserves at December 31, 2015, includes the acreage in the following areas:

• Eagle Ford Shale in South Texas (24% of total proved reserves)^[1]
• Anadarko Basin in northwestern Oklahoma and the Texas Panhandle^[1]
• Haynesville/Bossier Shales in northwestern Louisiana and East Texas^[1]
• Barnett Shale in the Fort Worth Basin in north-central Texas^[1]

In 2015, the company produced 679 thousand barrels of oil equivalent (4,150,000 GJ) per day, which was 72% natural gas, 17% petroleum, and 11% natural gas liquids.^[1]

As of December 31, 2015, the company had 1.504 billion barrels of oil equivalent (9.20×10⁹ GJ) of estimated proved reserves, of which 73% was natural gas and 27% was petroleum and natural gas liquids.^[1]

History

The company was founded in 1989 by Aubrey McClendon and Tom L. Ward with only a $50,000 initial investment. McClendon named the company due to his love of the Chesapeake Bay region. ^[3] Ward later left the company to found SandRidge Energy.

1990s

By the time the company went public via an initial public offering in 1993, it was valued at $25 million.^[4]

Focusing on a strategy of drilling horizontal natural gas wells in unconventional reservoirs, the company built a sizable position in the Golden Trend and Sholem Alechem fields of South-central Oklahoma and in the Giddings field of Southeast Texas.^[5]

In the mid-1990s, the company attempted to extend the Austin Chalk play into western and central Louisiana but struggled to do so.^[6]

In 1997, the company wrote down the value of its assets by over $200 million (approximately equal to shareholder's equity at the time) due to low commodity prices and implemented a turnaround plan.^[7]

2000s

The rise in natural gas prices in the early 2000s allowed the company to focus drilling in areas that were previously not economically feasible. The company focused on unconventional drilling in carbonates, tight sandstone, and shale particularly in the Barnett Shale, Fayetteville Shale, and Marcellus Shale.^[5]

In 2006, Chesapeake was added to the S&P 500, replacing Dana Holding Corporation.^[8]

In 2008, Chesapeake announced its discovery of the Haynesville Shale in East Texas and northwestern Louisiana.^[9]

The company celebrated its 20th anniversary in 2009 by partnering with Orange County Choppers to create the world’s first chopper powered by compressed natural gas.^[10]

2010s

In June 2012, the company appointed Archie W. Dunham as chairman, replacing Aubrey McClendon, who retained his position as CEO. Dunham, who retired as chairman of ConocoPhillips in 2004, was appointed in response to shareholder concerns about corporate governance issues under McClendon's watch.^[11]

In December 2012, the company sold midstream assets for $2.16 billion.^[12]

On April 1, 2013, Aubrey McClendon was forced to leave the company when revelations that McClendon had taken a personal stake in Chesapeake wells and then used those investments as collateral for up to $1.1 billion in loans from banks that also financed the company. ^{[13] [14]}

In May 2013, Robert Douglas Lawler was named as McClendon's successor. At the time of the announcement, Lawler was the senior vice president of international and deepwater operations at Anadarko Petroleum. Steven Dixon, Chesapeake's chief operating officer, acted as interim CEO during the replacement search period and, at the time of his appointment in late March, a three-person office of the chairman, consisting of Dixon, Chairmen Archie Dunham and Chief Financial Officer Domenic Dell'Osso, was formed.^[15]

In 2013, Chesapeake sold 55,000 net acres in the Northern Eagle Ford Shale and 9,600 net acres in the Haynesville Shale to EXCO for aggregate proceeds of $1 billion.^[16]

In 2014, Chesapeake sold a large portion of its oil and gas assets in the Marcellus Shale and Utica Shale to Southwestern Energy for net proceeds of $4.975 billion. The transaction included approximately 413,000 net acres and 1,500 wells in northern West Virginia and southern Pennsylvania. Net production of the sold assets was 57,000 barrels of oil equivalent per day in December 2014.^[17]

In 2014, the company also sold additional midstream assets for $520 million.^[18]

In September 2015, the company announced layoffs of hundreds of people in Oklahoma City.^[19]

On March 2, 2016, former CEO and co-founder Aubrey McClendon died in a single-occupant single-vehicle crash when he drove his vehicle straight into a concrete bridge embankment in Oklahoma City.^[20][21] It occurred the day after a Justice Department federal grand jury had indicted McClendon for violating antitrust laws during his leadership at Chesapeake.^[20]

Controversies

Antitrust allegations

Alleged collusion and fraud charges in Michigan

In mid-2012, the U.S. Department of Justice began an investigation into whether Encana, Canada's largest natural gas company, "illegally colluded with Chesapeake Energy Corp to lower the price of Michigan exploration lands during a public land auction in May 2010." Encana's internal investigation determined in 2012 that it did not collude with Chesapeake.^[22]

The investigation ended in 2014 without any charges being filed.^[23]

On June 5, 2014, the state of Michigan filed felony fraud and racketeering charges against Chesapeake Energy, alleging that the company canceled hundreds of land leases on false pretenses after it sought to obtain oil and gas rights.^[24] Michigan attorney general Bill Schuette claimed that the company "obtained uncompensated land options from these landowners by false pretenses, and prevented competitors from leasing the land." Chesapeake Energy disputed all charges.^[25]

In 2015, the company settled related lawsuits by agreeing to pay $25 million as compensation to landowners with leases.^[14]

Underpayment of royalties to landowners

The company faces thousands of lawsuits in Texas regarding the alleged under-payment of royalties due to individuals that rented land to the company.^[26]

Alleged collusion in Oklahoma

On March 1, 2016, a US Justice Department federal grand jury indicted Aubrey McClendon, co-founder and ex-CEO of the company for allegedly rigging the bidding process for land leases while CEO of the company from December 2007 through March 2012.^[14] The indictment says McClendon orchestrated a conspiracy in which two oil and gas companies, not named in the indictment, colluded not to bid against each other for the purchase of land in northwestern Oklahoma.^[20] According to the indictment, the companies would decide ahead of time who would win bids, with the winner then allocating an interest in the leases to the other company, eliminating open competitive bidding.^[27] The Justice Department said this was the first case resulting from a continuing federal antitrust investigation into price fixing, bid rigging, and other anti-competitive conduct in the petroleum industry.William J. Baer, assistant attorney general for the Justice Department's antitrust division, said "His actions put company profits ahead of the interests of leaseholders entitled to competitive bids for oil and gas rights on their land. Executives who abuse their positions as leaders of major corporations to organize criminal activity must be held accountable for their actions.”^[14]

McClendon died the next day, on March 2, 2016, in a single-occupant single-vehicle crash when he drove his vehicle straight into a concrete bridge embankment.^[20] Later that day, the Oklahoma City Police said it was too early to say if the collision was intentional. The charges were dropped by the Justice Department as a result of the death. ^[28]

Possible conflicts of interest by Ex-CEO Aubrey McClendon

• McClendon nominated several of his friends, including long time childhood friends, to the board of the company and made them the highest-paid directors in the petroleum industry. In return, the board made McClendon the highest paid CEO of any S&P 500 company, awarding him a salary of $112 million. ^[29]

• McClendon had the company develop a shopping center near the company's headquarters and lease space to restaurants part-owned by McClendon. The company used these restaurants for millions of dollars worth of catering business.^[29]

• McClendon and his family frequently used private jets owned by the company for personal reasons. McClendon has stated that this was allowed per his employment agreement.^[29]

• When McClendon needed money, he convinced the board to have the company purchase his collection of rare maps hanging in the company's offices for $12 million.^[29]

• An entire department at the company, known as "AKM Operations" was dedicated to working on personal projects of McClendon, including having his house fixed after a hail storm.^[30]

• The company signed an agreement to pay $3 million per year for the naming and branding rights to the Chesapeake Energy Arena, where the Oklahoma City Thunder play. The company also committed to buy $3 million worth of tickets per year. McClendon owned a 19% interest in the team.^[30]

• Since McClendon was a history major and loved history, he hired a company historian, who made over $100,000 per year.^[30] He also hired the World's Strongest Man, who also made over $100,000 per year, to promote exercise among company staff.^[30]

• McClendon borrowed as much as US$1.1 billion against his 2.5% stake in thousands of company wells from banks that were also lenders to the company. Through the Founders Well Participation Program, McClendon was able to purchase a 2.5% interest in every well the company drills. ^[31] After this potential conflict was made public, the company terminated the Founders Well Participation Program.^[32] The U.S. Securities and Exchange Commission opened an informal inquiry of McClendon's borrowing practices.^[33] but no enforcement action was taken.^[34]

Lobbying

In 2004, then CEO Aubrey McClendon contributed $450,000 to the campaign of Tom Corbett for attorney general of Pennsylvania. These funds were credited as giving Corbett a narrow win in the election. When Corbett eventually became governor of Pennsylvania, he was very supportive of Chesapeake's fracking activity in Pennsylvania, and Pennsylvania was the only state without a severance tax on drillers, despite the fact that the budget for education was being reduced. ^[35]

In 2008, then CEO Aubrey McClendon formed American Clean Skies Foundation, a non-profit foundation focused on selling the virtues of natural gas. The foundation was funded by the company and by McClendon. The foundation was criticized for doing nothing but pushing Congress to pass policies that benefited the company and McClendon's business interests. ^[36]

Environmental damage

Discharges of fill material

In 2013, the Environmental Protection Agency levied a fine of $3.2 million on a subsidiary of the company and forced it to spend $6.5 million "to restore 27 sites damaged by unauthorized discharges of fill material into streams and wetlands".^[37]

Bradford County, Pennsylvania well blowout

On April 19, 2011, due to a failed seal assembly in a wellhead, the company lost control of a natural gas well in the Marcellus shale that was being fracture stimulated, causing a large spill of salt water and hazardous chemicals, such as 2-butoxyethanol and methanol, into the surrounding countryside. ^{[38][39][40] [41]} By April 22, 2011, the leak had been stemmed.^[42]

The state of Maryland announced its intention to sue the company for violation of the Resource Conservation and Recovery Act and the Clean Water Act since fracking fluids from the well blowout wound up in the Chesapeake Bay.^[43]

Landslide

In 2015, the company was fined $1.4 million in Pennsylvania for a landslide caused by the company in 2011 that resulted in clogged waterways.^[44]

Awards and recognition

In 2014, the company was ranked #51 on Fortune Magazine’s 100 Best Companies to Work For List.^[45]

In 2009, at the annual Platts Global Energy Awards, the company was named the 2009 Energy Producer at the Year and received the Industry Leadership Award. The company was also a finalist in the Deal of the Year, CEO of the Year, and Community Development Program of the Year categories.^[46] In 2012, the company received an Award of Excellence. ^[47]

In 2007, the company was named the “Best Managed Oil-and-Gas Company” by Forbes Magazine^[48]

Sponsorships

In 2011, Chesapeake Energy agreed to a 12-year naming rights partnership with the Oklahoma City Thunder for naming and branding rights of the Chesapeake Energy Arena at a cost of $3 million per year, with annual increases of 3%.^[49]

References

1. Chesapeake Energy 2015 Form 10-K Annual Report
2. Hines Properties: Pier 1 Imports Building
3. "The Rise and Fall of Wildcatter Aubrey McClendon". Roughneck City. March 2, 2016.
4. Goodell, Jeff (1 March 2012). "The Big Fracking Bubble: The Scam Behind the Gas Boom". Rolling Stone. Retrieved 5 March 2012.
5. "Oil: A Cultural and Geographic Encyclopedia of Black Gold, Volume 1".
6. "Chesapeake presses Louisiana Austin chalk pace". Oil & Gas Journal. August 12, 1996.
7. "Chesapeake Energy Corporation Announces Fiscal 1997 Results". PRNewswire. August 28, 1997.
8. Wilmoth, Adam (March 1, 2006). "Chesapeake joining S&P 500". News OK.
9. Spencer, Starr (March 22, 2013). "On its fifth anniversary, the Haynesville Shale is still alive but natural gas output is sputtering". Platts.
10. Zizzo, David (June 17, 2009). "Chesapeake CNG Chopper born to be wildly efficient". NewsOK.
11. Joe Carroll (21 June 2012). "Chesapeake Appoints Dunham Chairman, Stripping McClendon". Bloomberg Business Week. Bloomberg L.P. Retrieved 21 May 2013.
12. "Chesapeake in $2 billion midstream deal". Reuters. December 11, 2012.
13. "Chesapeake Energy Corporation Announces CEO Succession Plan". Reuters. January 29, 2013.
14. Clifford Krauss (March 1, 2016). "Aubrey McClendon, Ex-Head of Chesapeake Energy, Is Charged With Conspiracy". New York Times.
15. Anna Driver (20 May 2013). "Chesapeake Energy hires Anadarko executive as CEO". Reuters. Retrieved 21 May 2013.
16. "Chesapeake Energy Corporation Announces Sale of Northern Eagle Ford and Haynesville Shale Assets for Aggregate Proceeds of $1 Billion". Business Wire. July 3, 2013.
17. "Chesapeake Energy Corporation Closes Southern Marcellus and Utica Shale Sale; Announes $1 billion Common Stock Repurchase Authorization". Business Wire. December 22, 2014.
18. "Chesapeake to sell midstream assets". Business Journals. February 28, 2014.
19. "Chesapeake Energy lays off hundreds of employees". September 29, 2015.
20. "Energy titan Aubrey McClendon dies in single-car crash a day after being indicted". Los Angeles Times. March 2, 2016.
21. "One Day After Indictment, Former Chesapeake Energy CEO Dies In Car Crash". NPR. March 2, 2016.
22. Brian Grow; Joshua Schneyer; Janet Roberts (June 25, 2012). "Special Report: Chesapeake and rival plotted to suppress land prices". Gaylord, Michigan: Reuters.
23. "Justice Department ends antitrust probe of Chesapeake deals". Reuters. April 30, 2014.
24. Harris, Andrew (June 5, 2014). "Chesapeake Energy Faces New Charges Over Michigan Leases". Bloomberg News. Retrieved June 7, 2014.
25. Grow, Brian; Schneyer, Joshua (June 5, 2014). "Michigan AG charges Chesapeake with racketeering and fraud". Reuters. Retrieved June 7, 2014.
26. "http://www.star-telegram.com/news/business/article60506611.html". Star-Telegram. February 15, 2016. External link in |title= (help)
27. Harder, Amy; Kendall, Brent (March 2, 2016). "Aubrey McClendon, former Chesapeake Energy CEO, indicted". Marketwatch.com – via The Wall Street Journal.
28. "Federal Authorities Seek to Dismiss McClendon Indictment". ABC. March 3, 2016.
29. "The Greek tragedy of the billionaire who fracked up Pa.". Philly.com. March 3, 2016.
30. "The lavish and leveraged life of Aubrey McClendon". Reuters. June 7, 2012.
31. Lustgarten, Abrahm (March 13, 2014). "Chesapeake Energy’s $5 Billion Shuffle". ProPublica.
32. "Chesapeake Energy Corporation’s Board and CEO Aubrey K. McClendon Agree to Negotiate Early Termination of Founder Well Participation Program". Business Wire. 26 April 2012.
33. "Trouble With the Top Man". New York Times. 26 April 2012. Retrieved 21 May 2013.
34. "SEC ends probe of Chesapeake, ex-CEO McClendon; no action planned". Reuters. May 7, 2014.
35. "How a natural-gas tycoon tapped into Corbett". Philly.com. June 29, 2011.
36. "Aubrey McClendon's energy 'education' campaign". E&E Publishing. April 24, 2008.
37. "Energy Company to Pay $3.2 Million Penalty to Resolve Clean Water Violations in West Virginia / Chesapeake Appalachia LLC to spend estimated $6.5 million to restore areas damaged by natural gas extraction activities". Environmental Protection Agency. December 19, 2013.
38. Soraghan, Mike (May 4, 2011). "Pa. Well Blowout Tests Natural Gas Industry on Voluntary Fracking Disclosure". The New York Times.
39. Nicholas Kusnetz (26 April 2011). "Response to Pa. Gas Well Accident Took 13 Hours Despite State Plan for Quick Action". Pro Publica. Pro Publica Inc. Retrieved 21 May 2013.
40. "OSHA List of Hazardous Chemicals". Argonne National Laboratory. UChicago Argonne LLC. 2013. Retrieved 21 May 2013.
41. SAIC. "ATGAS Initial Site Characterization Report" (PDF). Incident Report. Retrieved 12 December 2011.
42. McAllister, Edward (April 22, 2011). "Chesapeake stems flow from blown Pennsylvania gas well". Reuters. Retrieved October 26, 2011.
43. Warner, Dave (May 4, 2011). "Maryland prepares lawsuit over PA gas drilling effect on water". Reuters. Retrieved October 26, 2011.
44. "Chesapeake unit to pay $1.4 million fine in Pennsylvania". NewsOk.com. November 24, 2015.
45. Best Companies to Work For 2014
46. "Congratulations 2009 Winners". Platts Global Energy Awards. Platts, McGraw Hill Financial. 2010. Retrieved 21 May 2013.
47. 2012 Platts Global Energy Awards Winners
48. "Chesapeake Energy Corporation Named Forbes’ Best Managed Oil and Gas Company". Business Wire. January 17, 2007.
49. "Thunder's home now known as Chesapeake Energy Arena". NBA.com. NBA Media Ventures, LLC. July 22, 2011. Retrieved May 21, 2013.

External links

• Chesapeake Energy Website