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Chesapeake Conflict of Interest Seen in Thunder Playoffs

Chesapeake Energy Corp. (CHK), whose top executive invested in the Oklahoma City Thunder, almost doubled its spending on the professional basketball team during the past four years buying tickets, luxury box seats and naming rights for the home arena.

Chesapeake directors are under pressure to investigate conflicts between Aubrey McClendon’s duties as chief executive officer and his personal finances, which include a 19.2 percent stake in the Thunder. New York City pension funds, which own 1.9 million Chesapeake shares, complained this month about the company’s spending on the National Basketball Association squad.

While the $8 million expenditure so far this year on the team is less than half of what Chesapeake spends drilling for oil and gas in an average day, it underscores how the company’s board hasn’t always erred on the side of caution while overseeing McClendon’s potential conflicts of interest. On May 27, the Thunder will add to Chesapeake’s bill when it enters a third round of playoff games against the San Antonio Spurs.

“I’m a basketball fan too and believe that everyone has the right to invest in their local team,” New York City Comptroller John C. Liu, who oversees the pension fund investments, said in an e-mailed statement this week. “But as long-term Chesapeake shareowners, we have a real problem with a board that allows the use of the corporate treasury to support personal investments.”

‘Oversight Failures’

As Chesapeake traded at about half its year-ago price, Liu chided Chesapeake directors in a May 17 letter for “costly oversight failures,” including the company’s “multi-million dollar deals” with the sports team partly owned by McClendon.

Chesapeake’s May 23 statement responding to Liu’s criticism did not mention the Oklahoma City Thunder.

Chesapeake expects to benefit from the team’s success on the court, Jim Gipson, a company spokesman, said yesterday in an e-mail.

“The success of any professional sports team significantly increases the value of an arena naming agreement,” he said. “Our naming agreement and sponsorship are valuable investments.”

The shares rose 1.5 percent to $15.81 at the close in New York.

Chesapeake’s spending this year is up 72 percent from the $4.7 million it spent after joining four other corporate sponsors during the Thunder’s inaugural 2008-2009 season, a Bloomberg review of federal filings show.

Playoff Tickets

The company also has committed to buy an undisclosed number of tickets for all playoff home games; the Thunder are making a second-consecutive appearance in the Western Conference Finals in a best-of-seven series with the San Antonio Spurs. Last year’s playoff spending added $1.4 million, triple the year- earlier playoff spending of $400,000, according to filings.

“Our season tickets are used for our business partners, potential partners, customers and by our employees,” Gipson said. “We do not resell tickets.”

McClendon has been a fixture at Thunder home games during the playoffs, sitting a couple of rows back from courtside in Chesapeake Energy Arena. As television cameras followed the action up and down the court during the Thunder’s May 21 elimination of the Los Angeles Lakers, McClendon was seen decked out in a blue t-shirt with the team’s “Let’s Go” logo pulled over his office attire.

Chesapeake employees are a big part of the scenery at every game, said Royce Young, an Oklahoma City-based NBA reporter for CBSSports.com who also writes Daily Thunder, a blog for ESPN.

Chesapeake Fans

“Chesapeake buys an ungodly amount of tickets to the games, and people go,” Young said.

Dan Mahoney, a spokesman for the Oklahoma City Thunder, didn’t return e-mail and telephone messages.

In a 2011 filing, Chesapeake said McClendon’s ownership was not “a determining factor” in the company’s sponsorship of the team. Chesapeake’s support of the Thunder and other local sports teams is part of its commitment to the community, it said in the filing.

“In addition, we make game tickets available to our employees as a way to thank them for their hard work and dedication,” the company said.

In a filing last month, the board’s audit committee wrote that it had reviewed and approved the company’s financial support of the Thunder “in accordance with its policy on transactions with related persons.”

Cash Shortfall

Chesapeake is facing a cash-flow shortfall that Fitch Ratings estimates will reach $10 billion this year. Chesapeake has taken a new $4 billion loan and plans to sell as much as $14 billion in assets this year to help close the cash-flow gap. The company’s stock plunged 30 percent this year as gas prices hit a 10-year low and the company and federal agencies said they would review McClendon’s personal loans with companies also doing business with Chesapeake.

The company’s 6.775 percent notes due in March 2019 fell 0.25 cent on the dollar to 93 cents on the dollar at 9:42 a.m. today in New York, according to Trace prices for trades of at least $1 million. At that price, the notes yield about 696 basis points more than a benchmark government security of similar maturity, up from the 562 basis-point spread at which the $1.3 billion of bonds were issued in February this year, according to Bloomberg bond trader prices.

The board said last month it will strip McClendon of his chairmanship and call an early end to a program that allowed the CEO to own 2.5 percent of almost every well the company drills. The well stakes served as collateral for McClendon’s loans.

Team Owners

There are other examples of business executives who own part of the home-town team providing financial support through their companies, including buying stadium naming rights. The Detroit Lions signed a $50 million, 25-year naming rights deal with Ford Motor Co. (F) in 2002 when William Clay Ford Sr., the team’s majority owner, was still a director. William Clay Ford Jr., the manufacturer’s executive chairman, also is a minority owner in the team.

McClendon was part of a group of Oklahoma City businessmen who bought the team in 2006 from Starbucks Corp. Chairman Howard Schultz when the club was known as the Seattle SuperSonics. The Thunder investor group’s chairman is Clayton I. Bennett.

Tom Ward, who co-founded Chesapeake with McClendon and now is CEO of SandRidge Energy Inc. (SD), also has a 19.2 percent stake in the team. SandRidge spends about $3.5 million a year on the basketball team, according to federal filings.

‘Starting Five’

Other members of the Thunder’s “Starting Five” sponsorship group were Devon Energy Corp. (DVN), MidFirst Bank, and The Oklahoma Publishing Co.

The oil and gas industry is one of the most active users of sports games to entertain customers, said Tony Knopp, chief executive officer of Calabasas, California-based Spotlight Ticket Management. The company counts Plains Exploration & Production Co. (PXP) and Schlumberger Ltd. (SLB) among its clients, and doesn’t do business with Chesapeake, he said.

“Sports tickets are a significant way of oil and gas companies driving business,” said Knopp, whose firm advises executives on how and when to use their game tickets for entertaining clients.

Playoff games between the Thunder and the Los Angeles Lakers were the four most-watched programs on U.S. cable television the week of May 14, according to Nielsen Co. data. The fourth game of the series reached 7.4 million households.

Naming Rights

In 2011, Chesapeake broke from its history of successive one-year sponsorship agreements with the Thunder and signed a pair of 12-year advertising deals that each pay the team about $3 million a year, plus an additional commitment to buy $3 million worth of game tickets for the regular season that ended last month.

One of the 12-year contracts concerned naming rights to the arena. Under the terms of that arrangement, McClendon will donate to Oklahoma schools the portion he personally receives from the arena naming-rights deal for at least the next two years, according to an April 20 federal filing.

To contact the reporters on this story: David Wethe in Houston at dwethe@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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