Chesapeake CEO Found Running In-House Hedge Fund

Aubrey McClendon, CEO of Chesapeake Energy, got into more trouble with the recent revelation of a $200 million hedge fund after he was forced to give up Chairmanship earlier this week due to concerns raised by shareholders regarding the company’s Founder Well Participation Program (FWPP). Chesapeake is the second largest natural gas producer in the U.S. after Exxon Mobil (NYSE:XOM) and operates in oil and natural gas exploration and production and provides drilling and trucking facilities at wells. It competes with other oil and natural gas companies like Linn Energy (NASDAQ:LINE) and Cimarex Energy (NYSE:XEC), among others.

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The company, despite having quality assets over the years, went into limbo driven by falling natural gas prices. Ironically, this can be related to the natural gas boom created by Chesapeake itself using its unconventional drilling techniques.

Heritage Management Company, the $200 million hedge fund which McClendon started with Chesapeake’s co-founder Tom Ward, traded in the same commodities which Chesapeake produces and employed the same people who were working with Chesapeake. ^[1]

Given the fact that Chesapeake is the second largest gas producer and its decisions hold potential market moving ability for gas prices, the existence of this hedge fund has justifiably caused some controversy. While there is no evidence of any wrongdoing on his part, there are certainly issues with respect to a potential conflict of interest.

Despite the recent controversy we believe that Chesapeake still holds valuable assets and its recent focus on diversifying its portfolio to have more equitable exposure to various commodities is a smart move. We expect through corrective action the company will be able to bounce back from these recent issues.

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1. Special Report: Inside Chesapeake, CEO ran $200 million hedge fund, Reuters, May 2, 2012 [↩]