Aubrey and Ralph – BFFs

Aubrey McClendon, CEO of Chesapeake Energy and Ralph Eads III, the Chairman of Jefferies Energy Investment Banking Group go way back in their association.

McClendon and Eads were Sigma Alpha Epsilon fraternity brothers at Duke University.

Prior to joining Jefferies, Eads was Co-President of Jefferies Randall & Dewey.   In February 2005, Jefferies acquired Randall & Dewey, which became Jefferies’ Energy Investment Banking Group.  Eads was President of Randall & Dewey.

His career includes being the Executive Vice President of El Paso Corporation, where he was responsible for El Paso’s unregulated businesses. Previously, he was Managing Director and head of the Energy Group at Donaldson, Lufkin & Jenrette. He has held investment banking positions at S.G. Warburg, Lehman Brothers, and Merrill Lynch.

Eads is the Board of Trustees for Duke University.   Also on the Duke Trustee board is Xiqing Gao, the Vice Chairman, President and Chief Investment Officer of the China Investment Corporation (CIC), China’s sovereign investment fund.  CIC has minority interest in Chesapeake Energy’s CHK-Utica in Ohio.

McClendon started his first oil and natural gas investment company, Chesapeake Investments in 1982.  He co-founded Chesapeake Energy Corporation with the company’s former president Tom L. Ward, currently the CEO of Oklahoma City-based Sandridge Energy Corporation, in 1989 with a $50,000 initial investment.  They took the company public in 1993.

McClendon and Eads are partners in Clos Dubreuil, a winery in Bordeaux, France.

Jefferies Energy Investment Banking Group, acting as financial advisor, has assisted Chesapeake Energy with many of its recent ventures which include CNOOC Ltd of China, Hopu Investment Management Co. Ltd. of China, Statoil of Norway, and Total SA of France.  While Chesapeake Energy is not the sole client of Jefferies, Chesapeake is a substantial client in comparison.

In the past few months, Chesapeake Energy has taken a beating.   Shares are in the $14 range, and have hit a 52 week low of $13.32.   The “Aubrey problem” has contributed to the lack of enthusiasm from various market analysts and the recent S&P downgrade of Chesapeake to BB- rating hasn’t helped.

While many market analysts have downgraded Chesapeake from “Buy” to “Hold”, or “Hold” to “Sell”, the analysts at Jefferies are defending their “BUY” rating.

Jefferies said that the sale of some of the company’s assets in the Marcellus Shale should help bridge the 2012 funding gap. Commenting, the analyst noted that “Progress along this front should result in the stock reflecting more of the upside embedded in CHK’s asset base. An update on the Utica JV should be imminent.”

Regarding the recent $4-billion dollar loan to Chesapeake, a May 18, 2012 Bloomberg article described it as:

McClendon is depending now on his Jefferies confidant at an even more crucial moment. Falling gas prices, combined with the buying binge, is forcing Chesapeake to unload assets to keep the company afloat. Along with Goldman Sachs Group Inc. (GS), Jefferies bankers are seeking buyers for oil-rich prospects and lending Chesapeake $4 billion in the meantime.

“Without Wall Street, Chesapeake wouldn’t be able to do what it has done,” said Phil Weiss, an analyst at Argus Research in New York who rates the shares “sell.”

Eads and New York-based Jefferies declined to comment.

“Ralph Eads and Jefferies have unmatched expertise in the E&P business and have added enormous value to Chesapeake’s business and its shareholders over many years,” Chesapeake said in a statement, referring to the exploration and production industry. “We deeply value our long-term relationship.”

Surprised?  You shouldn’t be – that’s what friends are for……

Dory Hippauf



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