The FAQ's About Chesapeake Energy

Chesapeake Energy is the second largest producer of natural gas in the country, and also a top producer of oil and natural gas liquids. The company is headquartered in Oklahoma City and has 5,500 employees, compared to a high of more than 12,000 workers in 2011. Chesapeake’s main business strategy centers on natural gas extraction from unconventional sources, including those located in deep, near impermeable rock formations, or in shale. Chesapeake management prides itself on a “value-driven strategy” and “a disciplined approach to liquidity.”

Chesapeake was founded in 1989 by Aubrey McClendon and Tom Ward. The two had been in private partnership since 1983 and started with just ten employees and a $50,000 investment. By concentrating on drilling and developing horizontal natural gas wells in unconventional reservoirs, the young company built significant positions in the Golden Trend and Sholem Alechem fields of South-central Oklahoma and in the Giddings field along the Gulf Coast. With this early success, the company increased production, grew its reserves, and in February 1993 went public.

Following a significant important natural gas discovery in the Deep Giddings portion of the Austin Chalk formation in Southeastern Texas in 1994, the company began another wave of enormous growth. Between 1994 and 1996, the firm had the highest growth rate in the industry, and continued its widespread use of horizontal drilling and innovative geological assessment techniques. But high drilling costs and an unexpected collapse in oil and natural gas prices forced Chesapeake leadership to change strategies.

The company became focused almost exclusively on natural gas production and largely abandoned the Austin Chalk for a return to Oklahoma. Chesapeake continued to use the newest technologies to discover new reserves, but now, for the first time, began to incorporate growth by acquisitions into its business plan. The company soon expanded its production and presence through a balance of acquisitions and new drilling. Owing in part to tightening supply, natural gas prices began to rise, accelerating all the way through 2007. Recognizing that rocketing prices paired with improvements in horizontal drilling and completion technologies would enable the industry to develop monumental new supplies of natural gas from unconventional reservoirs, Chesapeake expanded its land positions to include fractured carbonates, tight sandstone and shales, such as the Barnett, Fayetteville, and Marcellus shales. The commitment to horizontal drilling and exploring unconventional reservoirs proved successful, and others began follow Chesapeake’s lead, abandoning the increasingly elusive and expensive search for undiscovered conventional natural gas reserves.

In 2006, co-founder Tom Ward, who had been serving as Chesapeake’s President and COO, left the company. (He founded SandRidge Energy in 2006, took it public in 2007, and was fired in 2013; he is now President and CEO of Tapstone Energy, which he founded in October 2013.) Aubrey McClendon, then the Chairman and CEO, continued his aggressive acquisition of acreage for new exploration and production. Increasingly, analysts criticized the strategy, as these quick expansions worsened the company’s debt position. When commodity prices began to sag, Chesapeake was forced to sell assets or find large multinational integrated oil partners for some of the more prime drilling prospects, as it did in 2008 with its 32.5% sale of its Marcellus shale assets to Norwegian giant Statoil.

Still, by 2009, Chesapeake’s debt was a crippling $14 billion. By 2012, with the price of natural gas at a 10-year low, the amount of debt was pushing the company towards bankruptcy. As troubling as that was, Chesapeake was actually facing a bigger problem: a corporate governance scandal had shattered investor confidence in McClendon’s leadership.

A series of stories by Reuters, starting in 2012, raised questions about some of the perks McClendon was receiving and whether they incentivized him to put his own interests ahead of the company’s. The stories also raised questions about the effectiveness of the company’s board of directors. Further reporting presented evidence of collusion between Chesapeake and competitor Encana in a 2010 land sale in Michigan.

In May, 2012, directors announced they would name a new non-executive chairman to replace McClendon and disclosed that the Securities and Exchange Commission had opened an informal inquiry. Archie Dunham was named as McClendon’s replacement as Chairman in June. Still, corporate raider Carl Icahn demanded more, and in June, after amassing a 7.6 percent stake in the company, Icahn forced Chesapeake to replace four of its nine directors with people picked by him and Southeastern Asset Management, Chesapeake’s largest shareholder.

Less than a year later, on April 1, 2013, bowing to pressure from shareholders, McClendon walked away from the company he helped found. (Later that same month, McClendon founded American Energy Partners.)

In June 2013, the board announced McClendon’s replacement: Doug Lawler. Lawler came from Anadarko Petroleum, where he had been the Senior Vice President of International and Deepwater Relations. As President and CEO of Chesapeake, Lawler immediately launched a top to bottom evaluation of the company’s competitiveness, with the goal of “[creating] a business built to deliver a sustainable and profitable future.”

The result of the internal review was, in the fall of 2013, an organizational restructuring that left approximately 800 employees without jobs. In a letter to Chesapeake workers, Lawler explained that, going forward, the company would be focused on executing strategies of “1) Financial Discipline and 2) Profitable & Efficient Growth from Captured Resources.”

As part of its strategy of financial discipline, Chesapeake intensified efforts to sell assets and streamline operations. The company continued to dump midstream assets and, in 2014, spun off its oil services business into a stand-alone, publicly traded company. Although not a reduction in workforce, the move, technically, cut Chesapeake’s number of employees from 10,800 to 5,500.

Meanwhile, Chesapeake continues to deal with what it calls “legacy” issues – a host of primarily legal challenges rooted in the practices of Mr. McClendon that still hamper the company’s profitability two and a half years after he left. Early in 2015, Chesapeake actually filed suit against McClendon, charging him with misappropriating "highly sensitive trade secrets from Chesapeake," and then "using these trade secrets for the benefit of his new company.”

The suit claims that McClendon asked his assistant to print maps and data about unleased acreage that Chesapeake Energy was evaluating in the Utica Shale formation to potentially acquire drilling rights on this land. Further, he's accused of sending himself blind copies of these same documents to a personal email address right before he left the company, which it says was uncovered through a forensic analysis of his Chesapeake email account. McClendon argues that the lawsuit is baseless, as his severance agreement with the company included "the right to own and use this information."

On top of that, the company is dealing with a number of legal issues regarding royalty payments to landowners. Chesapeake is facing several lawsuits across the country that suggest the company underpaid royalties by using improper deductions. In fact, the company recently paid out $119 million to royalty owners in Oklahoma under a preliminary settlement to resolve claims dating back more than a decade.