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Chesapeake Bankruptcy – The Rise and Fall of a 21st Century Wildcatter

I first wrote about Chesapeake Energy in 2009, and I’ve written multiple posts about the company since. Founded in 1983 by two Oklahoma landmen, Aubrey McClendon and Tom Ward, Chesapeake grew into one of the largest natural gas producers in the country. During that time the company transformed natural gas production in the US, changing the country from an importer of natural gas to an exporter. Chesapeake also angered its competitors by outbidding them for leases and then used innovative marketing methods to reduce its royalty obligations to its lessors, ending up in multiple cases brought by landowners wherever it did business. Chesapeake’s success was also the germ of its demise; the growth of shale gas production ultimately reduced its price so far that the company was unable to carry its heavy debt burden, and its late effort to shift into oil plays was met with the 2020 oil glut and the COVID-caused reduction in consumption.

McClendon was the consummate wildcatter. He and Ward drilled their first two wells in Garvin County, Oklahoma, in May 1989. He moved into the Barnett Shale in North Texas and the Haynesville in Louisiana, and later into the Marcellus Shale in Pennsylvania, buying leases at then-unheard-of prices of $10,000 an acre and more. McClendon took the firm public in 1993, and the company’s stock rose 274% by 1997. In 2008, McClendon was the highest-paid CEO of all S&P 500 companies. Chesapeake’s gas production grew from 5 million to 2.5 billion mcf per day between 2009 and 2013. By the end of 2011 Chesapeake had acquired leases on 600,000 leases covering 9 million acres, paying $9 billion in bonuses. In 2010 Chesapeake paid $1.7 billion for 700,000 acres in the Eagle Ford, and then sold a one-third share of that to China’s state-owned oil company for $1.1 billion and an additional commitment to pay $1.1 billion in future drilling costs. The company made similar deals with BP, Statoil and Total to lay of interests in some of its acreage.

McClendon made Tulsa Chesapeake’s home. He built a 110-acre campus for the company. He brought the Seattle SuperSonics to Oklahoma City in 2008 and renamed them the Oklahoma City Thunder. Its arena is named for the company. He served on many charitable boards and made substantial donations to eleemosynary organizations. He donated $15 million to Duke University and $12.5 million to the University of Oklahoma.

McClendon owned a personal wine collection estimated to contain more than 100,000 bottles, an extensive map collection, and a collection of vintage motor boats.

In 2008, McClendon was forced to sell most of his shares of Chesapeake to pay his personal debt. McClendon was accused of conflicts of interest between his personal and company businesses in 2012.  He was forced to relinquish his chairman title in 2012, and he stepped down as CEO in 2013, at a time when the company was estimated to be the second largest natural gas producer in the country, behind ExxonMobil.  That same year McClendon founded American Energy Partners, LP, raising $15 billion in equity and debt commitments. (The company folded in 2016, shortly after McClendon’s death.) In 2015 Chesapeake sued McClendon, accusing him of misappropriating company data on land lease purchasers, a case which settled. On March 1, 2016 he was indicted by a federal grand jury for colluding with another company while CEO of Chesapeake not to bid against each other for the purchase of leases in northwest Oklahoma, in violation of antitrust laws. The day after the indictment McClendon crashed his SUV into an embankment on a rural Oklahoma road going 78 miles per hour. Although classified by the medical examiner as an accident, there was speculation that it was suicide. He left a wife and three children.

In a 2011 interview with Forbes, McClendon said this about the future of natural gas in the US:

I think gas supply will continue to grow in the US, but that’s a good thing, not a bad thing. The reason I think that’s a good thing is you have to achieve a supply revolution before you can achieve a demand revolution. You can’t ask people to use more of your product unless you can prove to them that you can produce more of the product at the same price every day. I think we have successfully done that and have kicked off the beginning of a demand revolution in the US, which will result in an industrial rejuvenation, a cleaner environment by burning less coal, and in an economic revival in the US when we finally figure out that we can’t afford to export $5 trillion of national wealth every 10 years for the importation of foreign oil.

The July 4 edition of The Economist writes:

Ironically, the recent collapse in American oil production will curb associated-gas supply, potentially supporting natural-gas prices. Moreover, the coronavirus crisis may well lead to further bankruptcies and more consolidation in the shale industry, which could put assets into the hands of big firms with stronger balance sheets, boosting profitability. The romance of the early wildcatters and landmen will be gone. The revolutionaries will be replaced by bureaucrats. The over-exuberant and undercapitalised industry’s financial discipline will improve. but especially in these troubled times, spare a thought for Chesapeake. Until it got the better of the company, its hubris helpd change the world.


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