How Do You Know It's Time to Run From a Stock? Here's How.

The headline from Forbes' Francine McKenna reads: "Chesapeake Energy: CEO McClendon Serves Himself First." I think she nailed it.

The sad part though is that the "me first" attitude of Chesapeake's (NYS: CHK) CEO isn't news. Or, at least, it's not new news.

For years, Aubrey McClendon has intermingled personal and business expenses, receiving outlandish pay packages, sweetheart investment deals and, of course, that infamous $12 million map debacle. In May of last year, I shared this regarding McClendon's historical pay and perks:

For the five years ending in 2010, Chesapeake handed over $193 million in total pay, including a gargantuan $112 million jackpot in 2008. And if all of this isn't enough to make your blood boil, consider that the massive 2008 payday was during the same year that McClendon got battered for stacking up his stock holdings on margin. It was also in 2008 that the company infamously spent $12 million to buy a set of historical maps from McClendon and became a founding sponsor of the Oklahoma City Thunder -- an NBA team that McClendon owns nearly 20% of.

But the current kerfuffle isn't simply over what McClendon is being paid. Rather, it's over $1.1 billion in loans that Reuters uncovered that McClendon used to finance a company perk known as the Founder Well Participation Program, or FWPP. The program allows McClendon to invest directly in Chesapeake's wells, buying up to a 2.5% interest and paying all applicable costs.

Last summer, I took a closer look at this program and suggested that it may be far more worrisome than the kingly sums that the company pays McClendon for his CEO duties:

Shareholders may look at this arrangement and brush it off because it seems pretty fair. McClendon pays well costs out of pocket and he gets a share of the spoils.

But I think it's silly to assume that McClendon is simply tapping his piggy bank to pay these costs. Between 2005 and 2010, Chesapeake's total debt more than doubled, from $5.5 billion to $12.5 billion. Combine that with McClendon's stock-margin debacle, and it's clear that the man is not afraid of a little debt.

Reuters tracked down the fire, but even at that point I smelled smoke:

As I noted above, it's as if McClendon has his own little company here, and it's quite possible he's using a lot of borrowed money to stock that company with pieces of Chesapeake assets.

What's the big deal?
In Reuters' report, McClendon was quoted defending his great perk and the financing arrangements he used to sustain it.


And in its filings, Chesapeake claims that having the FWPP in place at all is a good thing because it motivates McClendon and better aligns him with shareholders.

We believe the FWPP fosters and promotes the successful development and execution of the Company's strategic business plan by ... aligning the financial rewards and risks of Mr. McClendon with those of the Company more effectively and directly than other performance incentive programs maintained by many of the Company's peers.

But the question that investors should have been asking themselves all along is: If the goal is to align McClendon's interests with shareholders and the company as a whole, why isn't he just buying Chesapeake stock? Now that we know that McClendon has been facilitating his FWPP participation by leveraging himself to the hilt, it makes the idea of "alignment with shareholders" laughable. This isn't shareholder-friendly aligning of interests -- this is a gambler making the most of the public markets to make huge, leveraged bets for himself.

It's a joke, but if you want to be the punch line...
But the bottom line is that although some of the details here are new, the core of the issue -- that Aubrey McClendon runs Chesapeake Energy for his own benefit and without regard to public shareholders -- shouldn't be news to anyone.

In the past, at least shareholders could hang on to the fact that McClendon owned a reasonably large stake in the company -- 5.7% of shares outstanding as of 2007. But even that was revealed as a mirage. It turned out that McClendon had levered up to buy that stake and he lost the vast majority of it when the market went south. Today, he owns roughly one half of one percent of the company's shares.

Yet through all of this, many shareholders have stuck around, so it seems pretty unlikely that this most recent revelation will do much to shake what could probably be best termed "The Cult of McClendon."

And I'll admit it, it may all work out in shareholders' favor. Investing isn't a game of absolutes -- it's about probabilities. Even when the odds are long, sometimes those three cherries come up and you hit the jackpot. But for most people, consistently betting on those long odds will end up being a bank-account-draining experience.

Aubrey McClendon has proven himself to be a big-swing gambler and a CEO who makes sure that he's always by himself at the front of the line when it comes to divvying up the spoils. For some investors, perhaps the gamble on the gambler seems worth it. But considering the way that McClendon conducts himself with regard to Chesapeake, I think it's unlikely that the odds are in shareholders' favor.



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