Chesapeake Co-Founder Ward Also Took Loans On Well Stakes
April 20 2012 - 5:44PM
Dow Jones News
Tom L. Ward, co-founder and former chief operating officer of
Chesapeake Energy Corp. (CHK), said Friday he took out personal
loans against stakes in the Chesapeake natural-gas wells using the
same program that has landed the natural-gas giant's current CEO in
turmoil.
Ward said in an interview he used Chesapeake's Founders Well
Participation Program to acquire stakes in wells that he then used
as collateral for personal loans. He said he didn't use the well
stakes to receive financing from private-equity firms doing
business with Chesapeake, Ward said.
Chesapeake Chief Executive Aubrey McClendon has become the
center of controversy at the company after it was revealed he used
Chesapeake's program to finance up to $1.4 billion in personal
loans, some from private-equity firms such as EIG Global Energy
Partners, which did business with the natural-gas giant. The
Founders Well Participation Program, approved by Chesapeake's
board, allowed the co-founders to acquire personal stakes of up to
2.5% of every well Chesapeake drilled.
Investors and analysts have said the CEO's use of personal
stakes in Chesapeake wells to win loans from EIG and others have
set up McClendon for possible conflicts of interest and have called
for a shake-up of Chesapeake's management and board. At least one
investor, Deborah G. Mallow IRA SEP Investment Plan, filed a
lawsuit against the company asking for independent oversight of the
program. The existence of the loans was first reported last month
by the Pittsburgh Post-Gazette and then on Wednesday by
Reuters.
The loan revelations have caused Chesapeake's stock price to
tumble 8.3% since Tuesday's close, costing the company $1 billion
in market value. Chesapeake shares traded at $17.49 late
Friday.
Ward, now the chief executive of SandRidge Energy Inc. (SD),
said during his time at Chesapeake he opted to buy stakes in
Chesapeake's wells every year between 1989 and 2006, a period he
said during which the company drilled "tens of thousands" of wells.
He used the stakes in the wells as collateral on personal loans, he
said, but went through banks that had no business dealing with
Chesapeake. Ward declined to give the amount of the loans.
"I had personal loans against a part of the investments," Ward
told Dow Jones. "It was just traditional bank debt."
Ward said he sold his stakes in Chesapeake wells to
third-parties in 2008 as natural-gas prices fell by more than half
after reaching a peak of $13 a million British thermal units. Ward
declined to say how much money he received from the sale or name
the buyers.
"I sold the wells for more than what was owed," Ward said.
Ward and McClendon co-founded Chesapeake in 1989 and together
grew the company. Today, Chesapeake is the second largest U.S.
natural-gas producer after Exxon Mobil Corp. (XOM). Ward left
Chesapeake to take over SandRidge in June 2006.
At SandRidge, Ward was allowed to take a 3% stake in every well
the company drilled under a program similar to Chesapeake's.
SandRidge gave the same reasons for the benefit that Chesapeake now
cites: to align executives' interest with that of shareholders.
In October 2008, SandRidge ended the program and bought out
Ward's interests for $67.3 million, according to a proxy statement
the company filed in 2009.
Ward said he exited the SandRidge wells at the same time he sold
off his interest in the Chesapeake wells -- and for the same
reasons: falling natural gas prices.
SandRidge said it ended the program "to retain a greater working
interest in future wells, thus increasing proved undeveloped
reserves" according to the proxy.
-By Ben Lefebvre, Dow Jones Newswires; 713-547-9201;
ben.lefebvre@dowjones.com
--Daniel Gilbert contributed to this story