In the weeks before Chesapeake Energy Corp. chief executive Aubrey McClendon was stripped of his chairmanship over his personal financial dealings, he arranged an additional $450-million (U.S.) loan from a long-time backer, according to a person familiar with the transaction.
That loan, previously undisclosed, was made by investment management firm EIG Global Energy Partners, which was at the same time helping arrange a major $1.25-billion round of financing for Chesapeake itself.
The new loan brings the energy executive’s total financing from EIG since 2010 to $1.33-billion and his current balance due to $1.1-billion, this person said. It was secured by Mr. McClendon’s personal stakes in wells that have yet to be drilled by Chesapeake – and by his own life insurance policy.
A spokesman for Mr. McClendon declined to comment; a spokesman for Chesapeake didn’t respond to a request for comment.
The latest insight into Mr. McClendon’s personal financial deals comes in the wake of an April 18 Reuters investigation that found he had borrowed heavily against his interests in wells owned by Chesapeake, mostly from EIG.
Last week, Reuters reported that Mr. McClendon had co-owned and actively invested in a $200-million hedge fund that bought and sold the same commodities produced by Chesapeake.
An outcry over potential conflicts of interest in the loans prompted inquiries by the Securities and Exchange Commission and the Internal Revenue Service. It also spurred Chesapeake’s board on May 1 to remove Mr. McClendon as chairman (though not as CEO) and to declare an early end to a controversial perk at the centre of the borrowings.
All told, Mr. McClendon has taken out loans worth $1.55-billion since 2009 from EIG and other lenders to fund his involvement in Chesapeake’s Founders Well Participation Program. That perk enables him to receive a stake of up to 2.5 per cent in all the wells Chesapeake drills in return for shouldering the same percentage of the wells’ costs.
The latest loan was arranged in late March through a company controlled by Mr. McClendon called Pelican Energy LLC, which was formed on March 6.
The deal initially was intended to be significantly larger, up to $750-million, said the person familiar with the transaction. It was scaled back last week after the Chesapeake board announced the early end to the well-stake perk, which is now slated to conclude in June 2014.
The newest financing for Mr. McClendon closed shortly before EIG joined with other investment firms and hedge funds, such as TPG Capital and Magnetar Capital, in purchasing preferred shares in a newly formed Chesapeake subsidiary that has an interest in some of the company’s wells.
EIG invested $100-million in that deal, called CHK Cleveland Tonkawa, which raised $1.25-billion for Chesapeake.
An EIG spokeswoman declined to comment on the newest loan or on concerns of some analysts over EIG’s dual role as a financier to Chesapeake and its CEO.
In an April 23 letter to investors in two of EIG’s investment funds, EIG chief executive officer R. Blair Thomas said it is “simply untrue” that there was any conflict of interest in its loans to Mr. McClendon and dealings with Chesapeake.
The SEC has opened an informal inquiry into Chesapeake’s well program and the transactions involving Mr. McClendon.
In the letter, Mr. Thomas discussed two earlier loan deals that EIG had done with Mr. McClendon, involving McClendon-controlled entities called Larchmont Resources LLC and Jamestown Resources LLC. There was no mention in the letter of the financing deal completed in March to Pelican Energy.
The person familiar with the deal said Pelican was not mentioned in the letter because EIG clients “already knew about Pelican” and the loan hasn’t been disbursed yet.