Should You Join Chesapeake's Circus?

Thank goodness for weekends. After all, it now seems to be only on Saturdays and Sundays that we're able to dodge the stream of new revelations of malfeasance (or potential malfeasance) that have rendered Chesapeake Energy (NYS: CHK) a veritable three-ring circus.

Most center directly or indirectly on the company's flamboyant CEO, Aubrey McClendon, and his array of shenanigans. You're aware of some of these. Relatively recently it's been disclosed that he's taken down personal loans totaling $1.33 billion from EIG Global Energy Partners, using his personal stakes in yet-to-be-drilled Chesapeake wells as collateral. The rub there -- once you get beyond the questionable nature of McClendon's now scheduled-for-cancellation grants of personal interests in Chesapeake's prospects -- is that EIG was simultaneously arranging financings for the company. Can you say "conflict of interest"?

But that's not all. It's also been disclosed that McClendon and Chesapeake's other co-founder, Tom Ward, now the CEO of SandRidge Energy (NYS: SD) , ran a $200 million hedge fund on the side between 2004 and 2008. Just in case the pair profited in that role from insider knowledge gleaned from their Chesapeake posts, why not take another stab -- this time with more conviction -- at "conflict of interest"?

When the circus first came to town
Those revelations follow an amazing 2008 circus act at the company in which McClendon, who had faced a $552 million margin call that had resulted in his sale of nearly all of his shares of the company's stock, received a $75 million "well cost and incentive award" from his compliant board of directors. At the same time, obviously based purely on their fascination for the geography of yesteryear, that same board coughed up another $12 million in exchange for McClendon's antique map collection. Oy vey.

And did you know that while it was guiding Chesapeake into the top spot among U.S. natural gas producers -- that supremacy has now been assumed by ExxonMobil (NYS: XOM) -- management operated a Chesapeake Land Development Co. subsidiary that amassed a $300 million real estate portfolio? That venture resulted in all manner of holdings in and around Oklahoma City, including retail establishments, a church, and a grocery store. Let's just say that those interests, while possibly not a legal conflict, probably caused management to take its eyes off the energy ball on occasion.

A company cast of coolies
But I'm not finished. McClendon allegedly also had on hand at Chesapeake a special unit dubbed "AKM Operations," to see to the needs of his personal and financial interests. The half-dozen members of the group apparently performed $3 million of McClendon-related chores at Chesapeake in each of the past couple of years.

It appears that the CEO reimbursed the company for the lion's share of that personal attention. At the same time, however, according to an investigation by a three-person team of Reuters reporters: "McClendon took $2.25 million worth of business flights in 2010, and often brought family members along. The extent to which Chesapeake was made whole for those aeronautical stunts is unclear. "

Aubrey's lawyering up
The outpouring of all these revelations -- along with moribund natural gas prices -- has resulted in a hammering of Chesapeake's share price this year, has unleashed the acquisition of a stake in the company by investor Carl Icahn, and, as you might expect, has unleashed attention from the Securities and Exchange Commission. The last-mentioned occurrence has had McClendon scrambling for legal representation. He's apparently found that help in none other than Marvin Pickholz, a partner in Duane Morris, a heavyweight Philadelphia law firm, and, more importantly, the former assistant director of the SEC's bureau of enforcement.

Meanwhile, Icahn's arrival on the scene with a $785 million acquisition of a 7.6% stake in Chesapeake, along with the company's board's apparently having favored sleepwalking over oversight, has surely played a major part in the decision to replace four of the company's board members. It is now planned that Icahn or someone of his choosing will fill one of the slots. Southeastern Asset Management, the holder of 13.6% of Chesapeake's shares, will have the right of imprimatur over the other three.

Beyond that, legendary Wall Street energy analyst Charles Maxwell has reached the mandatory retirement age of 80, giving Icahn and Southeast Asset Management control of five of the nine board seats. Among the five, one will be chosen specifically to become a nonexecutive board chairman, thereby replacing McClendon in that role.

Acres to go before I sleep
Concurrently, as at least a partial elixir for its usual overly inflated debt position and need to bolster its cash flow for its exploration and development activities, Chesapeake has hung a "for sale" sign on a portion of its assets. Included is Chesapeake Midstream Partners LP (NYS: CHKM) , its midstream unit, for which it expects to obtain about $4 billion, probably from Global Infrastructure Partners, which is also already a partner in the unit.

In addition, the company has 337,481 of its Utica-Point Pleasant acre on the block. The targeted tracts consist of drilling rights in up to 19 Ohio counties. Chesapeake has enjoyed past success in reeling in joint venture partners, including China's largest offshore producer, CNOOC (NYS: CEO) .

The Foolish bottom line
I could continue, but you get the picture: Chesapeake's headquarters probably teems with activity these days that is on a par with the rinks where the current National Hockey League Stanley Cup Final is being contested. But the real question becomes: With numerous decisions and perhaps more revelations yet to immerge from the company, how compelling are its shares today? Let's hope that one of those decisions includes a decision by the clearly self-serving Aubrey McClendon to forgo any continuing role in Chesapeake's management.

But, all things considered, with its changes already in the offing, and with the company's vast acreage positions in the nation's unconventional plays, I wouldn't discourage Fools who are not highly risk-averse from nibbling at positions in admittedly frustrating Chesapeake. At the very least, I urge all with a thirst for energy to add the company to their individualized versions of My Watchlist.

At the time thisarticle was published Fool contributorDavid Lee Smithdoesn't own shares in any of the companies named in the article above. The Motley Fool owns shares of Chesapeake Energy.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy. The Motley Fool has adisclosure policy. We Fools don't 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.