I think most people here can agree that Oklahoma City’s Chesapeake Energy Corp. is a significant financial component of the local and state economy and any major calamity to its overall business structure could have widespread, devastating effects.
Recently, it was widely reported that decreasing natural gas prices have made Chesapeake CEO Aubrey McClendon, the company’s founder, pictured right, search for ways to raise cash for the company. Now a Reuters article is citing several people who say $1.1 billion in loans made to McClendon that use his stake in the company’s oil and gas wells as collateral have raised questions about his “fiduciary duty.” Here’s a key paragraph in the article:
The size and nature of the loans raise concerns about whether McClendon’s personal financial deals could compromise his fiduciary duty to Chesapeake investors, according to more than a dozen academics, analysts and attorneys who reviewed the loan agreements for Reuters.
Chesapeake, of course, immediately denied that there’s anything wrong with the loan arrangement. Here’s its response. After the article was published, Chesapeake stock shares dropped by 5.5 percent.
The main issue for Chesapeake, at the moment, seems to be lower natural gas prices, caused partially by a warmer than normal winter in the United States.
I wrote recently about how declining natural gas prices, perhaps caused by global warming, has affected the state’s revenues because of declining gas production taxes, but Chesapeake’s issues also call attention to the boom-and-bust cycle of the state’s energy industry. Anyone who lived here as an adult during the early 1980s can attest to what a “bust” can do to an economy.
A warm winter, which causes dropping natural gas prices, the need for Chesapeake to raise cash, a one-day significant drop in its stock price and bad publicity for its CEO don’t necessarily mean a major business calamity is pending, but it does mean the state’s legislative leaders should be prudent as they consider cuts to the state’s income tax.
What would happen to our state revenue base, for example, if there were massive layoffs at Chesapeake? I’m not arguing that’s going to happen, but the drop in natural gas prices alone raise that question. What if next winter is as warm as this winter? The Reuters article only adds more questions to what’s going on at the company these days.
Again, all of this is yet another reason not to cut the state’s income tax this year.