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Chesapeake’s Aubrey McClendon

Christopher Helman has recently written two articles on Aubrey McClendon, CEO of Chesapeake Energy, one in the October 24 edition of Forbes, and one — an interview with McClendon —  on Helman’s blog. McClendon is the Steve Jobs of the US oil & gas exploration industry, in many ways the face of the industry. And he’s not bashful about taking that role. Helman’s articles provide a good summary of McClendon’s and Chesapeake’s meteoric rise and the controversies surrounding him and the industry.

Chesapeake has a market capitalization of $17 billion and is
estimated to have $2 billion in profits on $9.5 billion in revenues this year. It has 12,000 employees and added 3,300 employees this year. The
company has 4,500 land scouts acquiring oil and gas leases from Ohio to
Pennsylvania to Michigan to South Texas. Chesapeake is expanding beyond
the E&P business into the oilfield service industries. According to
McClendon, it is the fourth-largest drilling company in the US, the
second-largest compression company, and in the top three in oilfield
trucking and tool rental. Chesapeake intends to spin off its oilfield
services businesses next year into a new public entity.

McClendon’s great uncle was Robert Kerr, founder of Kerr-McGee Oil
& Gas and a goveronor of Oklahoma. At age 23, he partnered with Tom
L. Ward to start Chesapeake, and it went public in 1993. Ward and
McClendon parted ways in 2006, and Ward started his own company,
SandRidge Energy. McClendon owns a huge wine collection that is served
at his Oklahoma eatery the Deep Fork Grill. He recently sold his
personal collection of antique maps to his company for $12 million. 

Now 52 years old but looking much younger, according to Forbes McClendon is worth $1.2 billion. He owns 2.5% of every well Chesapeake
drills–interests now worth some $500 million. “You could say I’m the
only CEO in America who truly participates alongside his company in the
day-to-day business activity on the same basis as the company,” he says.
“Would we have had the financial collapse in 2008 if every CEO of a
bank, of a mortgage company or a securities firm had been forced by his
board to participate personally in some proportionate part of every loan made, every mortgage-backed security sold or every real estate deal
financed by those firms?” In 2009 his Chesapeake compensation package
was valued at $100 million, including $20 million in CHK stock.

Chesapeake is admired and hated in the industry. The company sweeps
into each new play paying the highest prices for leases and gobbling up
all acreage in sight. In the past five years the company has acquired
600,000 leases covering 9 million acres, paying $9 billion in bonuses.
Chesapeake paid $1.7 billion for 700,000 acres in the Eagle Ford in
2010; then in November 2010 the company sold a one-third share of that
acreage to China’s state-owned oil company for $1.1 billion and an
additional $1.1 billion in future drilling costs. Chesapeake has entered into similar agreements withe BP, Statoil and Total to lay off
interests in its acreage.

Chesapeake also is cutting-edge in its use of vehicles to finance its activities. Chesapeake’s debt-to-capital ratio is 40%, the highest in the industry. It is planning to raise $500 million this year in the sale of publicly traded shares in a royalty trust. It has raised $6 billion from sale of “volumetric production payments” — in effect selling a portion of the company’s reserves in advance of  production. All of this has led some analysts to compare Chesapeake to Enron, which causes McClendon to bristle with indignation: “We are the definition of the anti-Enron,” says McClendon. “They sold all their oil and gas assets; that’s all we have.”

Quotes from McClendon’s interview:

“A key to success in any walk of life is having a short memory and a thick skin.”

On the future of natural gas in the U.S.: “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 successfuly 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.”

On fracking: “This is a process … that our company has performed 16,000 times since 1989, the most of any company in the world, and over 1.2 million times by our industry since 1948. Against that track record of over 1.2 million frac jobs performed by the industry, our critics can only find one or two instances of alleged groundwater pollution, and having examined those few instrances ourselves, we don’t agree that fracking had anything to do with the alleged groundwater contamination. Even in the gas migration incidents in Pennsylvania in the past few years that drew so much media attention, only a couple dozen homeowners claim to have been affected — and these incidents were not related to fracking. … Rember that without the use of this fracking technique there would be no new natural gas wells in the US.”

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