Hey Chesapeake Board! Your Company's Publicly Held!

Those were simpler times. Five years ago, in order to show off its spanking-new Barnett Shale play in North Texas, Chesapeake Energy (NYS: CHK) conducted its 2007 annual meeting in the Dallas-Fort Worth Metroplex.

In those days, Oklahoma City-based Chesapeake was the master of the midway, and founder and CEO Aubrey McClendon was the star of the show. As McClendon and crew led the industry from one newly hot shale play to another, investors appeared to hang on his every word. While it would be a bit much to maintain that a growing cadre of investors is now calling for another sort of hanging, it's nevertheless clear that much of McClendon's star power has evaporated.

Unless you've been vacationing, perhaps in Bangladesh, during the past couple of weeks, you know of the events that have transpired at Chesapeake, the second- or third-largest (depending upon who's counting) U.S. gas producer behind the leader, ExxonMobil (NYS: XOM) . As everyone who follows the industry closely has known for some time, as part of McClendon's compensation, he's been granted a 2.5% interest in Chesapeake's wells in what's been labeled a Founder Well Participation Program (FWPP). The unusual perk at times has been controversial.

A dicey discovery
A new element was added two weeks ago when, in response to attention from the IRS and the Securities and Exchange Commission, the company was forced to file an SEC statement admitting that during the past three years McClendon had taken about $1.1 billion in personal loans against his FWPP interests. Those borrowings hadn't previously been disclosed to shareholders. To add to the potential conflict of interest, as my Foolish colleague Sean Williams told readers shortly after the loans' disclosure, they had been made by three companies that McClendon controls.

But that wasn't all. Following the discovery of the more recent loans, Reuters reported that McClendon had received loans from Fredrick Whittemore, a now-retired Wall Street executive who served on the Chesapeake board from 1993 until last year. The discovery of the Whittemore loans has been made more questionable by the lender's service on the compensation committee -- which determined McClendon's compensation -- during the entirety of his presence on the board.

A new backbone for the board
On Tuesday, with little choice but to finally act decisively, the Chesapeake board announced that the FWPP would be discontinued 18 months prior to its expected conclusion, in June 2014. In addition, while he will remain as the company's CEO, McClendon will be replaced as the company's board chairman by an independent, nonexecutive addition.

Can we all now chalk up these events to "minor indiscretions" and return to genuflecting toward McClendon and Chesapeake? Since this isn't the first episode of shenanigans by the CEO and his compliant board, my response is "heck no." As Sean noted in his article, back in 2008, with his company's share price tumbling, McClendon was forced to meet a $552 million margin call, thereby wiping out most of his equity holdings in the company.

Well mapped-out perks
As if that weren't dicey enough, in order to help him over his resulting financial hurdle, the board agreed to fork over $12.1 million to acquire McClendon's collection of antique maps. Having previously been employed in the energy industry, I'm hard-pressed to understand the need for such a collection in a gas and oil company. But in case I missed that memo, I suggest the board pile into a bus and head for New Orleans' St. Louis Street. There they'll joyfully come upon an establishment where I acquired old maps for just a few dollars a copy.

The earlier saga didn't even end there. Soon thereafter the board granted McClendon a $75 million bonus to aid him in coping with his financial miseries.

No saving grace in the quarter
With all this intrigue, the company's operating and financial results for the quarter seem almost anticlimactic. Nevertheless, you need to know that Chesapeake's adjusted earnings per share of $0.18 fell well short of analysts' expectations that coalesced around $0.28. As McClendon noted during his Wednesday post-release call, "That was our first significant earnings miss in many years and hopefully our last."

Given his company's weighting toward natural gas -- concerted efforts to increase its liquids production have dropped dry gas to 81% of total production -- the moribund state of domestic gas prices renders such a miss perhaps understandable. In fact, the low-gas-price phenomenon earlier affected the earnings of Exxon, and more recently reduced the earnings ofDevon Energy (NYS: DVN) , Chesapeake's Oklahoma City neighbor. However, companies such as Royal Dutch Shell (NYS: RDS.B) that have produced the lion's share of their gas internationally, where prices are higher, have fared better.

Chesapeake was the first company to announce that, in response to moribund U.S. gas prices, it would reduce the share of its drilling being directed toward gas. It's since been followed by the likes of ConocoPhillips (NYS: COP) .

Chesapeake is in the enviable position of topping all other companies in leasehold acreage positions in fully 11 of the top 15 unconventional liquids-rich plays in the U.S. Nevertheless, the company intends to materially ramp up the monetizations of its assets to an expected $9 billion to $12 billion this year to offset the results of low gas prices.

The Foolish bottom line
How then should we approach Chesapeake? On the one hand, it's difficult to discard a company with such massive acreage positions and historic leadership role in discovering and developing unconventional plays in the U.S. But on the other, it may be tougher to hang in there with a public company whose CEO and board have for too long acted as if they were running a private fiefdom.

On the latter basis, I'm inclined to agree with another of my Foolish colleagues, Jim Mueller, who last week stated emphatically that you couldn't pay him to buy Chesapeake. But while I sit on the sidelines, I intend to monitor the still-intriguing company. I suggest that you do the same, first by adding it to your version of The Motley Fool's My Watchlist.

At the time thisarticle was published Fool contributorDavid Lee Smithdoesn't own shares in any of the companies named in this article. The Motley Fool owns shares of Devon Energy.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy, Devon, and ExxonMobil. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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