Chesapeake Discovers the Price of a Costly Quest for Oil

Chesapeake Energy is discovering the price of its costly quest for oil. The embattled driller is offloading another $1 billion of assets. It needs cash because even though Chesapeake has found more U.S. crude than any rival, including Exxon Mobil, in recent years, it spent too much to do so. Founder Aubrey McClendon may be gone, but his painful legacy lingers.

The low price of natural gas has taken a big toll on Chesapeake. The fuel accounts for about 75 percent of production. Its response, like that of competitors in the space, was a desperate search for more lucrative oil. Even critics would have to concede that in this regard the company succeeded.

Chesapeake added 705million barrels of U.S. oil to reserves the last two years, making it the nation’s most successful explorer, according to research by consultancy IHS. In 2012 alone, the Oklahoma-based company uncovered twice as much oil as Chevron, whose $230 billion market value is over 16 times higher than Chesapeake’s.

This enterprising result isn’t all it’s cracked up to be, though. Since 2011, Chesapeake has shelled out about $25 billion for the finds, equivalent to about $35 a barrel. By comparison, EOG Resources, the No. 2 discoverer, invested just $23 on average for each of the 647 million barrels it found. Continental Resources spent just $20. And Chesapeake’s result is flattered by its tendency to book reserves at an earlier stage of development than rivals.

The sale to Exco Resources announced on Wednesday - part of a broader $7 billion initiative - shows that Chesapeake is making progress to shore up its balance sheet following Mr. McClendon’s splurge. New Chief Executive Doug Lawler says this year’s capital expenditure budget is now fully funded.

Even so, Chesapeake’s financial straits have made it tough to secure top-notch valuations for the properties it is flogging. For example, production from the shale acreage it is selling to Exco, including 6,100 barrels of oil a day and 114 million cubic feet of gas, were alone worth about $1 billion based on oter recent deals, according to Brean Capital. That means Chesapeake is pretty much giving away the undrilled land for free. The recovery, it would seem, comes with a price of its own.

Christopher Swann is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Reform, Not Cap, Is Right Move on Fund Bonuses

European fund managers can heave a sigh of relief. On Wednesday, the European Parliament rejected the plan of Sven Giegold, a German representative, to place strict limits on bonus payments and to outlaw some performance fees.

Legislators are right to butt out. Fund management firms are private, self-sustaining enterprises. Unlike banks, they don’t need state-financed rescues when they fail. They should be left to agree on pay schemes with their customers.

Much of Mr. Giegold’s thinking, however, is valid. Carelessly constructed bonus schemes may encourage senseless risk taking. And mediocre fund managers can receive supercharged pay packages simply for riding market upswings.

Fund management houses complain that bonus caps force up salaries and reduce flexibility. But greater pay certainty might be a good thing, aligning the interests of managers and clients. After all, this industry is supposed to offer good service and keep a long-term perspective. Rewards for short-term performane tend to discourage paying attention to the clients, and to penalize cautious managers, who may have served clients well by reducing the risk of losses.

Wednesday’s vote may not be the last word. The regulations for “UCITS” funds, which can be sold over the whole European Union, might be changed to include some Giegoldian limits. Fund managers for 6.3 trillion euros of assets may well be obliged to award bonuses based on multiyear performance statistics and to defer payments to ease possible clawbacks for performance that subsequently proved illusory.

If fund management houses want to keep most of their pay freedom, they should embrace reform. Some of the best operators have already started. Laggards may find that clients, if not European lawmakers, will make them play catch-up.

Robert Cole is assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Knight Capital Chief Quits

The popular leader of the trading firm Knight Capital, Thomas M. Joyce, unexpectedly resigned from the company a few days after it was formally taken over by the high speed trading firm Getco.

Mr. Joyce’s resignation from his position as chairman of the newly formed KCG Holdings is the latest fallout from the technology glitch that hit Knight last August and caused a $440 million trading loss cap

Mr. Joyce managed to save Knight from bankruptcy in the days after that mishap by winning the backing of a group of investors, including the Chicago-based Getco. Mr. Joyce sought to keep Knight independent, but in December, Getco reached a deal to acquire the firm in a $1.4 billion deal.

Within the industry, Mr. Joyce was seen as a key part of Knight’s good relationship with the clients who send their orders to Knight, including reail brokers such as TD Ameritrade and Fidelity. He is also credited with helping the organization recover from another near-death experience when he joined the company as chief executive in 2002.

Throughout the acquisition, Getco said that Mr. Joyce would be replaced as chief executive by Getco’s chief executive Daniel Coleman, but that he would stay with the company as chairman of the board.

On Wednesday morning, two days after the formal merger of the companies, Mr. Joyce wrote to the board and said “As you know, it was my recommendation to the Board that Knight remain independent,” according to a copy of an e-mail first published by Business Insider.

“I remain confident that, once the issue of independence was taken off the ta! ble, the merger with Getco was the best alternative available to Knight shareholders and other key stakeholders,” he said in the e-mail.

Larry Tabb, founder of the industry consultant, the Tabb Group, said it would be “critical” for the new Getco management to make sure that the retail brokers who work with Knight are comfortable with the new owners.

The company said that Mr. Joyce would be replaced by one of the founders of Getco, Stephen Schuler. In a statement. Mr. Coleman said, “Tom Joyce has always put clients first. His focus on client service continues to influence every aspect of our new organization.”

Fashion Label Nicole Farhi Is in Bankruptcy

LONDON - Nicole Farhi, the upmarket fashion label, has run out of money and filed for a form of bankruptcy proceedings in the latest sign of trouble for British retailers.

Nicole Farhi, named after the designer who founded it in 1982, appointed the restructuring adviser Zolfo Cooper to take over the business and find a buyer, Zolfo Cooper said Wednesday. If no buyer can be found, the label may have to close.

Nicole Farhi was set up as part of the larger British fashion company French Connection. French Connection, which is run by Ms. Farhi’s ex-husband Stephen Marks, sold the label in 2010 to a private equity firm for about £5 million ($7.6 million). It was then sold again to the private equity firm Kelso Place Asset Management, which has been investing in other fashion labels, including the handbag designer Anya Hindmarch.

The label ran into trouble because of dwindling demand from consumers as some opted for cheaper fashion items amid a difficult economic environment. Ark Clothing, the toy and model retailers Modelzone and Dwell, a furniture retailer, are other British retailers that have faced difficulties recently.

Zolfo Cooper said that it was already in discussions with “a number of interested parties” with regard to the fashion house. Nicole Farhi, who has not been directly involved with the label for some time, might be considering buying the brand, newspaper reports said.

Pressure to Raise Offer for Dell

Michael S. Dell may have to raise his $24.4 billion bid for the computer company he founded, DealBook’s Michael J. de la Merced reports. A special committee of Dell’s directors encouraged Mr. Dell over the weekend to raise the offer price of $13.65 a share, a person briefed on the matter said on Tuesday. But Mr. Dell has not committed to a course of action and has not discussed raising the current price with his private equity partner, Silver Lake, Mr. de la Merced reports.

Pressure is growing as two big shareholders, Carl C. Icahn and Southeastern Asset Management, continue to attack the deal before a shareholder vote set for July 18. And the special committee is growing worried that the buyout offer will fail to win enough support. “The directors have already taken a number of meetings with major invesors that have left them pessimistic about the bid’s prospects, and now believe that a major shareholder advisory firm is poised to recommend a rejection of the takeover,” Mr. de la Merced writes.

Mr. Dell would be the most likely source of any additional money. “Silver Lake, which had refused to raise the bid beyond $13.60 at one point, has become increasingly worried about the deterioration of Dell’s business, a person close to the firm said. At the moment, it would not be devastated if the deal fell apart,” Mr. de la Merced reports.

AGENCY SPLIT OVER TRADING RULES ABROAD  |  With a July 12 deadline to complete rules that would rein in lucrative trading by banks overseas, the Commodity Futures Trading Commission is divided over the plan, DealBook’s Ben Protess reports. Amid pressure from W! all Street lobbyists, the agency, which is known for its cordial style and unanimous votes, is experiencing “a rare breakdown of decorum,” Mr. Protess writes.

Mark Wetjen, a Democratic commissioner who holds the swing vote, recently called the deadline “arbitrary.” He irked some colleagues last week when, without warning them, he delivered a speech to bankers in London that called for a new “interim” plan, according to an e-mail reviewed by The New York Times, Mr. Protess writes. “Even in a town known for its partisan outbursts and vitriolic finger-pointing, the tension at the agency was striking to political insiders,” Mr. Protess says. One Congressional aide put it this way: “It’s like the seventh grade but without the lollipops.”

A TO-DO LIST FROM THE FED  |  The Federal Reserve approved a sweeping new set of rules on Tuesday intended to reduce the riskiness of banks and make the more resilient to losses, DealBook’s Peter Eavis writes. The rules, stemming from an international agreement known as Basel III, require that banks maintain high-quality capital â€" the all-important cushion against losses â€" equal to 7 percent of their loans and assets, with the biggest banks potentially required to hold more than 9 percent.

“The Basel approach to capital has drawn criticism, however,” Mr. Eavis writes. “For one thing, it uses something called risk weighting, which means less capital can be held against loans or bonds that are perceived to be less risky even though they may end up producing higher-than-expected losses. Basel may also give banks too much leeway when calculating how much capital they have to hold, because the banks get to apply the risk weightings. Finally, for some, Basel’s capital ratios are simply too low to protect a bank from a real shock.”

ON THE AGENDA  |  A report on the international trade deficit for May is out at 8:30 a.m. Edward Djerejian, a former ambassador who is chairman of Occidental Petroleum, is on Bloomberg TV at 1:30 p.m.

KOCH BROTHERS WANT A BIGGER ROLE IN DEALS  |  The billionaire brothers Charles and David Koch have a message for Wall Street: pitch us the type of deals you would pitch to Warren E. Buffett. In an interview with The Wall Street Journal, Charles Koch, the chairman and chief executive of Koch Industries, said of Mr. Buffett: “He’s done a great job of having a brand that if you want to sell your business and continue to run it, come here.” The chief financial officer of Koch Industries, Steve Feimeier, said some sellers have pitched Mr. Buffett alone “because he was viewed as the only person who could write a hefty check [and] could do it very quickly.” But the Kochs, according to the newspaper, want it to be known that they can do that, too.

 |  Please note: The Morning Agenda newsletter is off Thursday and Friday for the holiday, but DealBook will continue to publish news online and in the paper.

Mergers & Acquisitions »

Founding Family Raises Bid for American Greetings  |  The founding family of American Greetings has raised its offer to take the company private to $19 a share from an earlier bid of $18.20. DealBook »

Diller Is Fined Over Coca-Cola Trades  |  Barry Diller agreed to pay $480,000 in fines over what regulators said were violations of disclosure rules when he bought shares of Coca-Cola between 2010 and 2012. WALL STREET JOURNAL

At Microsoft, Skype President May Get a Role in Deals  |  Steven A. Ballmer, chief executive of Microsoft, “is considering a reorganization that would put Skype president Tony Bates in charge of acquisitions and relationships with software developers, according to people familiar with the matter,” Bloomberg News reports. BLOOMBERG NEWS

Cargill Said to Consider Buying Unit of A.D.M.  |  Cargill “has explored the possibility of buying” the cocoa business of Archer Daniels Midland, Reuters reports, citing an unidentified person familiar with the situation. REUTERS

Front-Runner Emerges to Lead Time Inc.  |  Michael Klingensmith, former chief financial officer of Time Inc., “is a leading contender to become chief executive of the magazine giant, which is due to be spun out of Time Warner Inc. around the end of the year, say people familiar with the matter,” The Wall Street Journal reports. ! WALL STREET JOURNAL

Rosneft Takes Over Russian Gas Producer in $2.9 Billion Deal  |  Rosneft says it is buying the 49 percent of the Itera Oil and Gas Company that it does not already own for $2.9 billion in a bid to expand the company’s relatively modest natural gas operations. DealBook »

Yahoo Buys Qwiki, Movie-Making App  |  The deal for Qwiki, which makes an app that lets people turn photos, music and videos into short movies, was said to be worth around $50 million, according to AllThingsD. ALLTHINGSD

INVESTMENT BANKING »

Deutsche Bank Resists Pressure to Scale Back Its Global Ambition  |  The universal banking model is under attack by regulators, but Deutsche Bank seems determined to keep its two-track focus of branch network and investment bank. DealBook »

S! .&P. Cuts! Ratings of 3 European Banks  |  Barclays, Deutsche Bank and Credit Suisse had their credit ratings reduced by Standard & Poor’s, which cited “uncertain market conditions.” BLOOMBERG NEWS

Goldman Faces Arbitration Claim Over Sale of Securities  |  The National Australia Bank is pursuing a $230 million arbitration claim against Goldman Sachs over sales of mortgage-linked securities that declined in value, The Wall Street Journal reports. WALL STREET JOURNAL

A Lucrative Business at Citigroup Catches Rivals’ Attention |  Citigroup may face increased competition in transaction services, a moneymaker since the financial crisis, Reuters writes. REUTERS

R.B.S. to Cut Up to 1,800 Jobs in Irish Unit  |  The Royal Bank of Scotland plans to eliminate as many as 1,800 jobs at its Ulster Bank Group unit in Ireland as it aims to make the business profitable again by 2016. DealBook »

An E.T.F. Too Far  |  In the wake of the hoopla over the proposed Winklevoss exchange-traded fund in bitcoins, Peter Thal Larsen of Reuters Breakingviews offers a modest proposal.! REUTERS BREAKINGVIEWS

PRIVATE EQUITY »

Carlyle Said to Consider I.P.O. for CommScope  |  The Carlyle Group may pursue an initial public offering of the CommScope Holding Company, a telecommunications equipment firm it bought for $3.9 billion, including debt, in 2011, Reuters reports, citing two unidentified people familiar with the matter. REUTERS

HEDGE FUNDS »

Investors Pull $9.6 Bllion From Pimco Fund  |  Investors pulled a record amount of money from Pimco’s flagship Total Return bond fund in June, a stark indication of how rising interest rates have pushed bonds out of favor. DealBook »

New Bank Product: Hedge Funds for Small Investors  |  CNBC reports: “Several investment banks are said to be eyeing the launch of hedge funds for retail investors with minimum investments as low as $1,000 following the launch of a Goldman Sachs fund in May that raised $58 million in less than two months.” CNBC

I.P.O./OF! FERINGS Â! »

Suntory Unit’s $4 Billion I.P.O. Rises in Tokyo Trading Debut  |  Shares in Suntory Beverage and Food gained modestly in their debut in Tokyo on Wednesday despite the recent shaky response to new offerings in markets around the world. DealBook »

VENTURE CAPITAL »

It’s a Catchy Tune, but Can You Manage to It?  |  Andrew Mason, former chief executive of Groupon is trying on a new role as a motivational singer, with an album of seven songs about business. DealBook »

Homebrew, a New Venture Capital Firm, Raises First Fund  |  Run by a former Google executive and a former Twitter executive, Homebrew raised $35 million for its first fund, Fortune reports. FORTUNE

LEGAL/REGULATORY »

Payroll Cards Are Under Scrutiny by New York’s Attorney General  |  Eric T. Schneiderman, New York’s attorney general, has sent letters to 20 employers seeking information on the prepaid cards, whose fees can eat into an hourly worker’s pay. DealBook »

Prudential Objects to Systemic Label  |  Prudential Financial said in a securities filing on Tuesday that it would contest its designation as a systemically important institution by the Financial Stability Oversight Council. DealBook »

Cengage Learning Files for Bankruptcy |  The education company Cengage Learning, backed by private equity, has filed for Chapter 11 bankruptcy protection as part of an effort to reduce its $5.8 billion debt load. DealBook »

Requiring Defendants to Admit Guilt Will Be Costly for S.E.C.  |  The Securities and Exchange Commission’s new policy on requiring some defendants to admit misconduct when settling cases will make pursuing the big fish draining for the agency, David Zaring of the Wharton School of Business writes in the Another View column. DealBook »

Judge Approves HSBC’s Settlement! of Money! -Laundering Charges  |  The settlement with federal and state regulators was worth $1.92 billion. REUTERS

Deutsche Annington Shelves I.P.O. Plans

LONDON - A German real estate company owned by Terra Firma, the private equity firm run by the British financier Guy Hands, has shelved a planned initial public offering, citing adverse market conditions.

Deutsche Annington, one of Germany’s largest residential landlords, said in a statement late on Tuesday that the initial public offering that was planned for Wednesday in Frankfurt was called off, but that the company would continue with its investment plan. Deutsche Annington said it would continue to evaluate the market environment and might sell shares sometime in the future.

Terra Firma, which was set up by Mr. Hands in 1994, had been expected to sell a part of its investment in Deutsche Annington in the initial share sale. Terra Firma bought Deutsche Annington in 2001 and has since helped it to grow through acquisitions of arge real estate portfolios, betting on the relative stability of the German residential real estate market.

Deutsche Annington was expected to raise 1.1 billion euros, or $1.4 billion, in the sale. It would have followed some successful initial offerings of similar businesses this year, including Germany’s LEG Immobilien. But concerns among investors that central banks could curb stimulus and start to unwind any support for the markets since the financial crisis five years ago had recently weighed on stock prices around the globe.

‘‘Based on our strong financial position, we will focus on driving our operational performance including continuing our investment and modernization program as planned,’’ Rolf Buch, Deutsche Annington’s chief executive, said in a statement.

Deutsche Annington owns more than 180,000 residential units worth a combined 10.4 billion euros. The company employs about 2,400 people.