I"ll probably have to start spelling the big gas E&P's name with three crooked E's.
It usually starts with some innocuous off-balance sheet financing, maybe a SIV here or there and before you know it, like the lady with a hundred cats, you're telling the media "it kind of got away from me."
From FT Alphaville:
Some good information is starting to come out about the nature of the liabilities Chesapeake’s CEO Aubrey McClendon managed to saddle the company with.I'll get around to the corporate governance similarities next week, for now I have to find Siva the tech guy with photoshop skills.
As the Wall Street Journal reported on Thursday (our emphasis), much of it was positioned off-balance sheet via a type of deal known as a volumetric production payment (VPP):
Chesapeake, the second-largest natural-gas producer in the U.S., has made a number of long-term commitments to Wall Street banks that require it to deliver specific amounts of oil and natural gas each month through 2022, in exchange for upfront cash. Those deals, known as volumetric production payments, or VPPs, are essentially debts, with payments made in fuel rather than cash.According to the paper, the ‘unusual’ deals, which were arranged by banks including Wells Fargo, Barclays and Morgan Stanley, brought in as much as $6.4bn for the company since 2007.
Their opaque nature, however, meant analysts failed to recognise their significance — especially since other companies that do such deals provide much more information about them.
If you’re thinking that all of this echoes Enron-style accounting practice far too closely for comfort, you wouldn’t be completely unjustified in that view.
Just type in “prepaid commodity transactions” into Google and you’ll see that these sorts of deals were at the heart of the Enron scandal, allowing the company to effectively disguise loans as trading liabilities....MORE