The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (15 page)

Soon, Ward noticed someone else in town employing a similar strategy. His rival was just as aggressive with landowners and oil companies as he was, and just as successful, but the young man stood out from others in the business. His name was Aubrey Kerr McClendon, and it was obvious that he was destined for great things.

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B
orn in 1959 in Oklahoma City, just three days before Ward, McClendon came from true Oklahoma and energy nobility. His great-uncle was Robert Kerr, the former Oklahoma governor and powerful U.S. senator. Kerr also was the cofounder of oil and gas pioneer Kerr-McGee Corp., the company that would purchase Robert Hauptfuhrer’s Oryx Energy. McClendon’s mother, Carole Kerr, was Robert Kerr’s niece.

Aubrey’s father, Joe, arrived at the University of Oklahoma with limited means and worked his way through school, taking time off to serve in World War II and the Korean War. He met Carole in college, where she was the president of her sorority and an outgoing campus leader. After graduating, Joe McClendon joined Kerr-McGee and rose within its ranks, as if the oil giant was the family business.

Aubrey McClendon grew up in Belle Isle, an upper-middle-class suburb of Oklahoma City, and his family lived in one of the few two-story homes in the neighborhood, a 2,400-square-foot house. The McClendon family was comfortable, though they weren’t wealthy. Friends were well aware of Aubrey’s rich pedigree, however.

“Aubrey was big-time, even back then,” recalls Chuck Darr, a friend from grade school. “He was a Kerr, we all knew it.”

As a boy, McClendon was friendly and popular. He also demonstrated early signs of a sharp intellect. At Belle Isle Elementary School, he regularly read more books than other kids, wowing classmates when his teacher made a regular tally. Later, he received straight As at Heritage Hall Middle and Upper School, a private college-prep school regarded as among the best in the city. McClendon also had a fierce competitive edge. At nine years old, for example, while playing a game of backyard football, he broke his good friend’s collarbone with a hard tackle into a house, a friend recalls.

Future energy tycoons often show an early love for science, geology, or engineering. McClendon’s passion was geography, a hint at a focus later in life. On car trips with his parents, he brought along maps to trace the route as his father drove. “Some people are born with art or science influence; I’ve always liked places and geography,” says McClendon.
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During one year in high school, McClendon grew eight inches to reach six foot two, enabling him to start as a wide receiver on the high school football team. Athletic, tall, and slender, with a passing resemblance to actor Richard Gere, McClendon dated an attractive cheerleader, Mary Anne Brown.

McClendon proved a natural leader. He was senior class president, co-valedictorian of his class, and led a number of clubs. The high school team was called the Chargers; McClendon earned the nickname of “head Charger.”

McClendon was such a smooth talker that he could persuade others to follow him, even if it meant doing something dangerous. During high school, he founded a drinking club called “The Soused Seniors of ’77.” Classmates recall that he printed T-shirts to build camaraderie and persuaded fellow students to drink eight full ounces of hard liquor in a single shot to gain entrance to the club.

“He convinced us all to chug eight ounces,” one friend recalls. “He was very articulate.”

Aubrey McClendon may have come from Oklahoma royalty, but true wealth seemed just out of reach. Joe McClendon spent thirty-five years at Kerr-McGee, but he was on the dull and dreary side of the business. He worked for Kerr-McGee’s refining and marketing division, which operated the company’s decidedly unglamorous filling stations and sold various other products. Joe McClendon never searched for oil and gas and he never became rich.

“As a kid, with him, I didn’t spend time on oil and gas rigs,” said Aubrey McClendon. “I spent time looking at dirty bathrooms in gas stations.”

Joe McClendon had ample time to spend with his kids and coach Aubrey’s sports teams. He was a relaxed presence around the house and something of a neighborhood comic, say McClendon’s friends, who remember Joe with a constant smile on his face.

Carole McClendon, a schoolteacher, could be a different kind of parent. Aubrey’s friends recall her as a stern, strict disciplinarian who demanded respect and pushed Aubrey to excel. “You didn’t want to mess up in front of her,” Chuck Darr, the old friend, recalls. “I was afraid of her growing up.”

Dan Jordan, an energy industry executive who got to know McClendon’s family, says Aubrey’s mother was cut from a different mold. “The Kerrs are tough . . . they eat their own,” he says.

McClendon grew up with more money than many of his friends. But it wasn’t enough to afford everything he wanted, so Aubrey worked for his spending cash. He sold holiday cards door-to-door, delivered newspapers, and started a lawn-mowing service, competing with a boy three years older named Shannon Self. The energy business was booming, the local economy was strong, and McClendon could charge as much as ten dollars for an hour’s work on a lawn. Each week during the summer, he rode his bicycle to deposit his earnings in Penn Square Bank, saving nearly $3,000 to help buy his first car, a 1977 black Oldsmobile Cutlass. (His parents kicked in the other $3,000.)

“The eight years I was in high school and college, the price of oil went from three dollars a barrel to thirty-nine dollars a barrel,” McClendon recalls.

McClendon traveled to North Carolina for college, attending Duke University. He was a history major and was serious about both his studies and his social life. Friendly and personable, he was an active member of the Sigma Alpha Epsilon fraternity. He served as social chair for his pledge class during his freshman year and rush chair during his junior year.

“Athletes and non-Athletes, party boys and geniuses. . . . It was a collection of good guys from across the nation,” McClendon later told a Duke University publication. “We studied hard, we played hard.”

McClendon was tenacious at forming social connections. At a frat event one time, he struck up a conversation with another undergraduate, Ralph Eads, peppering him with questions about his background. They would forge a lifelong friendship that would come in handy when Eads emerged as one of the nation’s most prolific energy bankers.

“Aubrey had this energy and intelligence, he did his schoolwork and then read a book or magazine, he was always reading,” Eads says. “Who even knew what the
Economist
was? We didn’t have any idea.”

McClendon’s inquisitiveness left an impression on Eads. “He always wanted to know everything you knew, as rapidly as possible,” according to Eads.

Even when McClendon failed, he somehow emerged a winner. He didn’t always have much success organizing formal events and one time found himself without a date at a fraternity party. He saw an attractive brunette, Katie Upton, who also seemed to be alone. Upton’s date, a fraternity brother of McClendon’s, had become ill earlier in the day when McClendon brought him to his first barbecue dinner.

“That opened the opportunity for me and I took it,” according to McClendon.

It wasn’t a plan, of course, but McClendon took advantage—he approached Upton and struck up a conversation. It turned out that Upton was from a small town on the shore of Lake Michigan and was the granddaughter of Frederick Upton, cofounder of home appliance giant Whirlpool Corp. Soon they were dating.

McClendon seemed on such a sure path to success that classmates took to emulating him. He participated in a Big Brother program at Duke, arranging for fraternity brothers to mentor local underprivileged boys. He often was seen around campus with his assigned brother, Terry, on his shoulders. McClendon encouraged his fraternity brothers to join the program, and John Landa Jr., who was a freshman during McClendon’s senior year, says that’s why he also enlisted. “Aubrey was a role model for many of us, he was a guy who had it all together and someone we could learn from,” Landa recalls. “He was kind, considerate, and fun to be around.”

McClendon graduated in 1981 and prepared to move to Dallas to work at Arthur Andersen, the big accounting firm. The nation’s economy was struggling, as crude oil prices saw a thirteenfold increase since the 1973 Arab oil embargo, but the Southwest was a pocket of strength, thanks to the local energy business. Just before McClendon left for the accounting job, though, his uncle Aubrey Kerr Jr. called to offer him a job as a staff accountant for his small oil and gas company in Oklahoma City, Jaytex Oil & Gas Company.

“He offered me $3,000 more than Arthur Andersen, so I thought it’d be fun to come back to Oklahoma City,” according to McClendon. Having by then married Katie Upton, he convinced his new wife to move to his hometown.

McClendon was no natural-born wildcatter, like George Mitchell. He only took the job because it was the best one available. But McClendon had spent some time thinking about the oil business in his senior year at Duke. That’s when he came across an article in the
Wall Street Journal
about two young men who had made a killing in energy.

“They sold their stake . . . and got a $100 million check. I thought, ‘These are two dudes who just drilled a well and it happened to hit,’” McClendon later told
Rolling Stone
magazine. “That really piqued my interest.”

After nine months in his uncle’s accounting department, McClendon shifted to the land group, which acquired and leased land. Like Tom Ward, Aubrey McClendon had found his calling. Land combined his love for history, maps, and math. He even had to do some detective work when he tracked down who owned which below-surface minerals.

It didn’t take long for McClendon to bump up against the hard realities of the oil business, however. Jaytex ran into trouble, much like Tom Ward’s first employer did, and soon McClendon also needed a new job. Katie McClendon might have been a Whirlpool heiress, but her trust fund wasn’t huge and no fortune flowed to the McClendon home.

The 1980s were among the worst periods in the history of the domestic energy industry, amid a glut of oil and slowing demand. An estimated 90 percent of oil and gas companies went out of business and the bulk of the industry’s petroleum engineers left to try their luck in more promising businesses. Some called it the industry’s “gulag” era. It was difficult to persuade investors to finance attempts at discovering new oil and gas deposits. The most they would do was invest in drilling of already proven energy deposits that carried less risk and had fewer capital requirements. The days of the American wildcatter seemed over and the job market seemed closed to McClendon.

“You couldn’t get a job at a bank, oil and gas companies weren’t hiring and there really weren’t any jobs in town,” McClendon later told Oklahoma City’s
Journal Record.
“I didn’t want to leave town so I thought, ‘Well, I’ll go hang out by myself for a couple of years and see what I can learn about the business.’”

In 1982, McClendon bought a typewriter and some maps, rented an office, and turned himself into an independent landman, trying to lease small parcels of land in areas where the biggest exploration companies were already drilling. Charismatic and outgoing, he proved a natural. It helped that competitors had vanished, many after suffering huge losses from the fall in prices. McClendon had the added advantage of being able to drop his well-known name on leaseholders.

“He could go out there and blend right in because he was an Oklahoman and because of his family name—the Kerrs,” says Ted Jacobs, who sometimes competed with McClendon.

McClendon searched for leases in prime areas of the region, persuading landowners to lease acreage that he flipped to larger oil companies, just like Tom Ward was doing. McClendon dug up information about successful wells and became familiar with the area. Then he’d find available leases and cobble them to together to enable a more lucrative sale to a larger company.

“What Aubrey would do, in essence, he was out there picking up a lot of crumbs . . . getting in everybody’s deal,” Jacobs says. “He put enough crumbs together to where he was able to put together a whole loaf of bread.”

In the spring of 1983, Ward and McClendon began bumping into each other while vying for the same oil and gas leases, many near Will Rogers World Airport. One day, McClendon called Ward with a proposal.

“Why don’t we just join forces?” McClendon asked.

Ward agreed. They decided to keep their companies apart, with offices in separate locations, but to work as fifty-fifty partners with only a handshake binding the twenty-three-year-olds. For the next six years, Ward and McClendon put together deals, often holding on to the leases instead of flipping them, while mustering enough cash to participate in drilling done by others.

McClendon and Ward were “non-operators,” or individuals who participated in the drilling and production of others rather than doing it themselves. It was a profitable business, but not a way to get rich. McClendon was making less than $30,000 a year in some of those years, friends say, and Katie often made more in her job as a real estate agent.

By May 1989, McClendon and Ward were ready to search for oil and gas themselves, hoping to score some real wealth. McClendon asked his old lawn-mowing competitor, Shannon Self, who had become a lawyer, to help them incorporate.

The organization didn’t seem built to last. McClendon and Ward continued to maintain separate offices, with McClendon in a suburban brick building and Ward in a nearby building of his own. The young men made important decisions after a fax or phone call, rather than conversing in the same room. They began with $50,000 in cash, eight employees, and no oil or gas reserves, a fragile position in a horrible energy market. Most of their money was gone on their very first day of business as start-up expenses quickly piled up.

McClendon later said he and Ward didn’t want to name the company after themselves because times were so tough there was a good chance of failure. McClendon, the geography buff, named the company Chesapeake Energy after the Chesapeake Bay, an area of the country he’d always enjoyed visiting.