Chesapeake Energy

  • 12 Mar 2013 at 2:06 PM

Chesapeake Forgot To Call Some Bonds

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Chesapeake Energy has had lots of scandals over the last year or so, but now they’re embroiled in a new one that is perhaps their most damaging yet. No, I’m kidding, it’s totally trivial, but in my capital-markets-dork mind it’s kind of funny, so now I’m going to talk about it and you’re not going to listen, probably, if you know what’s good for you.

Basically: Chesapeake has some bonds that they wanted to call, and they forgot to call them, and now it’s probably but not certainly too late, and they’re suing to make sure. This is a difficulty of corporate personhood: when I do something dumb, I just get real quiet and hope no one notices, but when a company does something dumb, the particular human who did the dumb thing gets fired or yelled at or whatever, while other particular humans go around demanding a do-over.

The bonds are Chesapeake’s $1.3 billion of 6.775% notes due 2019, issued in February 2012. According to the prospectus, the bonds are:

  • Not callable from February 2012 to November 2012, then
  • callable at par from November 15, 2012 to March 15, 2013, then
  • callable at a make-whole price from March 15, 2013 until maturity on March 15, 2019.

The make-whole price is the present value of future payments discounted at T+50bps, so the call price goes sort of like this:1 Read more »

  • 02 Jul 2012 at 4:56 PM

Chesapeake Is Making It Uncomfortable For Other Oil Companies To Pay Low Taxes Just Because They Take In Negative Money

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If you were at, say, Range Resources, wouldn’t you be SO PISSED at Chesapeake? Uniquely in modern memory, every media report during Chesapeake’s meltdown has had immediate and dire results. Aubrey’s a bit of a scoundrel? Strip him of his chairmanship. His founder participation program creates conflicts of interest? Terminate it. There was maybe a bit of collusion in bidding on some mineral leases? Why hello DOJ antitrust probe.

Bloomberg dug up another mini outrage today with its discovery that Chesapeake doesn’t pay taxes much, mostly because it spends much much more money than it takes in:

Chesapeake Energy Corp. (CHK) made $5.5 billion in pretax profits since its founding more than two decades ago. So far, the second-largest U.S. natural-gas producer has paid income taxes on almost none of it.

Chesapeake paid $53 million over its 23-year history, or about 1 percent of the cumulative pretax profits during that period, data compiled by Bloomberg show. … The biggest tax break, for Chesapeake and other independent U.S. oil and gas companies, is a rule that’s been around since at least 1916 that allows some producers to expense “intangible drilling costs.” Companies can count most of the cost of boring a new well against their taxes at the time the money’s spent, rather than recognizing it over several years. That allows them to effectively put off tax payments, even during years when they turn a profit.

This is a story about the mismatch between tax and GAAP accounting, which is a story that is as old as time; one question you could ask is, which is right? Read more »

  • 08 Jun 2012 at 4:46 PM

Chesapeake Will Get Rid Of Voted-Out Directors When It’s Good And Ready

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Shareholder democracy is for the most part a very training-wheels sort of democracy. If you don’t like the directors of your company, you can vote against them, but you can’t vote for anyone else: if you want to nominate someone new, you generally have to run an expensive and time-consuming proxy contest, which for the most part is only a good idea if you’re somebody who’s in the business of running proxy contests. Absent that, voting against a director has the effect more of a tantrum than of an actual vote, since the general rule is that the candidate who gets the most votes wins, and if there’s only one candidate and there’s one vote for him and one hundred million against, he wins.

Richard Davidson and V. Burns Hargis must feel like winners today, since they got more votes than the next guy at the Chesapeake Energy annual meeting and so were re-elected as directors. Sadly, their celebration will be short-lived, because (1) Chesapeake also adopted a “majority voting bylaw” that provides that directors who get more votes against than for have to submit their resignations to the rest of the board, (2) three-quarters of shares that voted, voted against them, and (3) the board “will review their resignations in due course” but seems inclined to accept them in the coming “weeks, not months.”

Actually, for a full taste of democracy in action, here’s a rundown of the votes today: Read more »

  • 20 Apr 2012 at 4:24 PM

Chesapeake’s CEO Doesn’t See Why He Should Have Told A Bunch Of Pesky Shareholders About Borrowing A Billion Dollars Against Company Assets

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There’s this thing where:
(1) You run a Public Company.
(2) You make the moneys For The Shareholders.
(3) They thank you by giving you some of the moneys, more of them if you make them lots of the moneys, less if you don’t.

This is I suppose a venerable model though probably not the venerablest. The venerablest goes more like:
(1) You are a guy (or girl, but not so much in the venerablest model).
(2) You do a thing that makes the moneys. For you.
(3) You want to do more of that thing so you go to a bank and ask them to lend you money.
(4) You want to do even more of that thing and/or the bank said no because the thing is too risky, so you ask people to buy equity in your thing.
(5) They do.
(6) Now you keep doing your thing and any money that is left over after paying the expenses and the banks and stuff goes to you and your shareholders in proportion to how much equity you and they own.
(7) You feel a vague sense of fondness for those shareholders, if they don’t harass you too much, and sometimes you write them letters being like “hey, thanks for the money you sent me, hope you’re enjoying the money I’m sending you.”

The first model is sort of weird! Read more »