McClendon IPO plan is echo of bad old Chesapeake

December 17, 2013

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Aubrey McClendon’s new public offering plan is an echo of the bad old Chesapeake Energy. He lost his job as chief executive of the energy firm over excessive spending and conflicts of interest. A new $2 billion venture would allow him to cherry-pick assets ahead of his investors and reward him generously. Despite McClendon’s knack for buying oil and gas properties, investor skepticism is in order.

The former Chesapeake CEO is a talented entrepreneur who helped pioneer America’s shale revolution, transforming the company from a $61 million minnow in 1993 to a $37.5 billion giant by 2008. Those who buy into the new partnership, American Energy Capital Partners, could benefit from McClendon’s ability to spot emerging shale fields ahead of the crowd.

A big downside – as it also turned out at Chesapeake – is that they can’t rely on McClendon’s undivided attention or loyalty. In addition to selecting wells for AECP, he will be at liberty to do so in other capacities, whether corporate or personal, without any need to give AECP first dibs. That recalls his personal dealings, often self-serving, at Chesapeake – and sometimes with Chesapeake. One obvious temptation might be take the best opportunities personally and leave AECP with the rest.

For what may only be a part-time job, McClendon’s management company for AECP will also be receiving a long list of fees – including an annual levy of up to 4 percent of the partnership’s capital – both equity and debt – plus 2 percent of any acquisitions and 0.5 percent of any disposals, among others.

McClendon is not the only tarnished energy patch boss to show such chutzpah. Ousted BP boss Tony Hayward runs Genel Energy, an acquisition vehicle backed by Nat Rothschild, which guarantees its key people a handsome share of rewards. But despite his clumsy handling of BP’s huge Gulf of Mexico oil spill in 2010, Hayward was never accused of McClendon-style conflicts of interest.

Investors’ cash will potentially be locked up for years and AECP’s units may never be publicly traded, so that should keep widows and orphans away. But even for sophisticated investors, that’s a big risk given McClendon’s record and the AECP small print. At least Chesapeake’s shareholders could sell.

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