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Tom L. Ward, co-founder and former chief operating officer of Chesapeake Energy Corp. (CHK), said Friday he took out personal loans against stakes in the Chesapeake natural-gas wells using the same program that has landed the natural-gas giant's current CEO in turmoil.
Ward said in an interview he used Chesapeake's Founders Well Participation Program to acquire stakes in wells that he then used as collateral for personal loans. He said he didn't use the well stakes to receive financing from private-equity firms doing business with Chesapeake, Ward said.
Chesapeake Chief Executive Aubrey McClendon has become the center of controversy at the company after it was revealed he used Chesapeake's program to finance up to $1.4 billion in personal loans, some from private-equity firms such as EIG Global Energy Partners, which did business with the natural-gas giant. The Founders Well Participation Program, approved by Chesapeake's board, allowed the co-founders to acquire personal stakes of up to 2.5% of every well Chesapeake drilled.
Investors and analysts have said the CEO's use of personal stakes in Chesapeake wells to win loans from EIG and others have set up McClendon for possible conflicts of interest and have called for a shake-up of Chesapeake's management and board. At least one investor, Deborah G. Mallow IRA SEP Investment Plan, filed a lawsuit against the company asking for independent oversight of the program. The existence of the loans was first reported last month by the Pittsburgh Post-Gazette and then on Wednesday by Reuters.
The loan revelations have caused Chesapeake's stock price to tumble 8.3% since Tuesday's close, costing the company $1 billion in market value. Chesapeake shares traded at $17.49 late Friday.
Ward, now the chief executive of SandRidge Energy Inc. (SD), said during his time at Chesapeake he opted to buy stakes in Chesapeake's wells every year between 1989 and 2006, a period he said during which the company drilled "tens of thousands" of wells. He used the stakes in the wells as collateral on personal loans, he said, but went through banks that had no business dealing with Chesapeake. Ward declined to give the amount of the loans.
"I had personal loans against a part of the investments," Ward told Dow Jones. "It was just traditional bank debt."
Ward said he sold his stakes in Chesapeake wells to third-parties in 2008 as natural-gas prices fell by more than half after reaching a peak of $13 a million British thermal units. Ward declined to say how much money he received from the sale or name the buyers.
"I sold the wells for more than what was owed," Ward said.
Ward and McClendon co-founded Chesapeake in 1989 and together grew the company. Today, Chesapeake is the second largest U.S. natural-gas producer after Exxon Mobil Corp. (XOM). Ward left Chesapeake to take over SandRidge in June 2006.
At SandRidge, Ward was allowed to take a 3% stake in every well the company drilled under a program similar to Chesapeake's. SandRidge gave the same reasons for the benefit that Chesapeake now cites: to align executives' interest with that of shareholders.
In October 2008, SandRidge ended the program and bought out Ward's interests for $67.3 million, according to a proxy statement the company filed in 2009.
Ward said he exited the SandRidge wells at the same time he sold off his interest in the Chesapeake wells -- and for the same reasons: falling natural gas prices.
SandRidge said it ended the program "to retain a greater working interest in future wells, thus increasing proved undeveloped reserves" according to the proxy.
-By Ben Lefebvre, Dow Jones Newswires; 713-547-9201; firstname.lastname@example.org
--Daniel Gilbert contributed to this story