The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (18 page)

The men didn’t want to direct too much anger at Chesapeake. Jobs were scarce and they didn’t have a contract with the company to give them any security. Finally, a meeting was arranged at Chesapeake’s offices.

“Y’all are doing a great job, you’re picking up a lot of leases,” Aubrey McClendon told Creighton and a few others. “Y’all have any suggestions on how to do things better out there?”

“Yeah, I got a suggestion,” one of the captains on the project said. “Pay us.”

McClendon looked confused. He didn’t seem to realize the Louisiana crew hadn’t been paid. He looked to his lieutenant and former classmate at Duke, Henry Hood, for an explanation.

“Well, I think we’re a little bit behind right now,” Hood said sheepishly.

By the end of the day, McClendon got the men paid. But McClendon and Ward watched with dismay as production kept declining. Not only that, but the Louisiana wells produced huge amounts of water that had to be disposed of.

It turned out that the Louisiana fields were very different from those in nearby Texas. The rock in Louisiana didn’t have as many fractures and it was more expensive to separate the energy in its pores. By the end of 1997, Chesapeake had abandoned almost the entire area, forcing the company to record a painful write-off of more than $200 million.

“I thought the play extended, but it didn’t,” Ward says.

Chesapeake was hit by shareholder lawsuits once again, this time charging that it had overstated the value of its Austin Chalk acreage. The company fended off the suits, but was on the ropes once more.

McClendon and Ward retreated to Oklahoma, vowing to use their remaining cash on more conventional natural gas formations. They’d avoid drilling for oil and focus on simple, boring gas fields. “We had been the darlings, and we had been the goat, and now just wanted to be a regular company,” according to McClendon.
⁸

Chesapeake had taken on so much debt to finance its land acquisitions and drilling that the company owed a billion dollars. But McClendon had made sure most of it wasn’t due for several years, giving Chesapeake breathing room. Within six months, Chesapeake had spent $800 million to buy a series of companies with about eight hundred billion cubic feet of gas equivalent reserves, as it reinvented itself as a traditional gas exploration company.

The purchases didn’t help much, though. Anemic oil and gas prices kept pressure on Chesapeake shares, as the Asian financial crisis and OPEC’s inability to keep a lid on its members’ production flooded the market with surplus energy. By February 1999, Chesapeake shares traded at a measly seventy cents each, giving the company a market value of only about $75 million.

When McClendon and Ward met with veteran landman Larry Coshow to try to recruit him, Coshow was skeptical: “Man, I’ve been reading y’all’s balance sheet and y’all are
broke
.”

McClendon and Ward couldn’t believe it. They were sure Chesapeake owned natural-gas-producing assets that had more value than the market was according them. The tumbling stock brought special pain for the Chesapeake cofounders; they each had borrowed millions of dollars from banks to purchase boatloads of their company’s shares. Now they, too, were nearly broke and the banks were making noises about calling in the loans.

The U.S. economy was on a roll, so bankers gave McClendon and Ward some time to meet their payments. McClendon and Marc Rowland, the chief financial officer, flew to New York to ask some big-name investors, like Carl Icahn, to buy Chesapeake. After an hour’s discussion at Icahn’s office, he came to a decision.

“Your bonds aren’t cheap enough,” Icahn said.

His point: Chesapeake wasn’t yet enough of a bargain, even at seventy-five cents a share, because its debt wasn’t trading at the dirt-cheap prices that usually got Icahn excited.

Other investors were even more dismissive. It was 1999 and technology, Internet, and biotechnology shares were all the rage. Natural gas was about the last thing anyone wanted to invest in. Gas prices were below two dollars per thousand cubic feet and oil prices were around twelve dollars a barrel, close to the lowest levels of the decade. Experts anticipated that a glut of energy and continued limp demand would keep prices under wraps for years to come, just as it had in the 1980s.

At the time, fewer than five hundred oil and gas rigs operated in the country, down over 10 percent in a year, as companies went out of business or stopped searching for gas with prices so low. That could only mean less supply in the years ahead, McClendon and Ward figured, no matter what the experts said.

Meanwhile, demand for natural gas seemed to be growing, as a decade’s worth of low prices spurred utilities and others to use more cheap gas and less coal and other energy sources. The Department of Energy’s Energy Information Administration produced a study saying the country needed thirty trillion cubic feet of natural gas a year to meet growing demand from a new generation of power plants. If demand for gas was growing and supply was shrinking, prices were destined to climb, the Chesapeake executives concluded.

To test their hypothesis, McClendon and Rowland, got on a plane to San Jose, California. There, they met with Peter Cartwright, the chairman and chief executive officer of Calpine, one of the fastest-growing power companies in the country, and Ann Curtis, Calpine’s executive vice president. McClendon and Rowland wanted to see how serious Calpine was about its announced plans to build a slew of new power plants fueled by natural gas aimed at helping Calpine become the world’s biggest natural gas consumer and electricity generator.

During the meeting in Calpine’s dining room, the Calpine executives seemed distracted. Every five minutes or so, one of them got up to check their company’s soaring stock price, Rowland recalls. When they returned, they emphasized how Calpine was determined to grow its power production by expanding its use of natural gas.

“Our business model is that gas will be” in the range of two dollars or less for a long time, Cartwright told them. “There’s so much cheap gas” that Calpine could generate huge profits building new plants relying on inexpensive natural gas, Cartwright said.

McClendon and Rowland were floored. The Calpine executives were going to build enough capacity to make use of fifteen billion cubic feet of gas a day—one-third of what the entire country was consuming at the time. If Calpine even consumed close to that amount and others followed their lead, prices would leap, McClendon and Rowland agreed.

“These guys are really betting on cheap gas forever,” Rowland told McClendon as they flew back to Oklahoma City.

Back at the office, Ward grew excited when he was apprised of the meeting. Everyone else in the business seemed stuck in a mind-set of weak demand and falling prices, they thought. But the United States seemed to be transforming into an economy more dependent on natural gas than ever.

McClendon and Ward had an opportunity to make a fortune. They crafted a strategy to buy the best natural gas assets in the country as quickly as possible. They felt compelled to act quickly, before others caught on that prices were headed higher. They suspected they could use newfangled horizontal drilling techniques to help locate gas.

Around the same time, Harold Hamm, their former legal combatant, was making plans of his own to change the country’s energy equation. Like McClendon and Ward, Hamm was convinced that energy prices were heading higher.

Hamm thought McClendon and Ward had it all wrong, though. Oil wells—not natural gas—held real promise for the country. Hamm even had a hunch where he might find enough crude to change America’s direction, as well as his own.

Formula for success: Rise early, work hard, strike oil.

—J. Paul Getty

H
arold Hamm had a lot in common with Aubrey McClendon and Tom Ward. Hamm was born in Oklahoma, just like the Chesapeake Energy cofounders, and he also ran an energy company in the state. By 2000, all three men suspected that America held vast energy resources that might be tapped profitably, despite the skepticism of major oil companies and industry experts.

McClendon and Ward set out to find huge quantities of natural gas, but Hamm was fixated on a different energy source: oil. Hamm wanted to discover enough crude to leave a mark on the nation and even the world. He had his exploration team scour various U.S. locations for the nation’s next big oil field. He even told friends the United States had a chance to achieve energy independence.

“There’s oil everywhere, man,” Hamm told Roger Clement, his chief financial officer, referring to an overlooked rock formation in the North Dakota region. “There’s oil everywhere.”

If there happened to be loads of untapped oil in the country, few gave Harold Hamm much of a chance to find it. Hamm’s company, Continental Resources, was based in Enid, a small, second-rate city about a hundred miles from Oklahoma City.

At one point in 1999, Continental was losing so much money that it had to fire exploration pros and slash the pay of all of the remaining employees. Things got so bad that year that Hamm tried to persuade the government to impose tariffs on oil imports from OPEC member nations, arguing that they were improperly keeping a lid on prices. The effort drew bemusement and some ridicule from industry giants.

Smaller oil and gas producers in Oklahoma looked up to Hamm, and he was an advocate for his fellow “independent” producers within the industry. But the top brass at energy powers in Houston, Dallas, and Oklahoma City hardly gave a thought to Hamm and his dreams of huge oil discoveries.

“Harold wasn’t exactly lighting the world on fire,” says Roy Oliver, an oil industry veteran in Oklahoma. “He was just another good, hardworking guy who was grinding it out and making money. No one accused him of genius. . . . The smart money would have bet against him, not on him.”

Hamm’s vision of better times for his company and his country was dismissed as unrealistic, if not half-baked. If someone was going to become a new oil titan, it surely wasn’t going to be Harold Hamm. Meeting Hamm sometimes reinforced the doubts. He had a humble upbringing, didn’t hold a college degree, and spoke in a slow country drawl. Earlier in his career, he had raised eyebrows by struggling with his speech.

“He talked like a hick,” says Allan DeVore, Hamm’s attorney and a longtime friend. “People thought he was a dumb country bumpkin.”

Hamm knew he was more than just another poor small-town boy with an unrealistic vision, no matter what the skeptics believed. His genial personality masked an outsized ambition and fierce competitiveness that only friends and colleagues fully appreciated.

“He
was
a country bumpkin,” Devore says. “But he was far from dumb.”

By 2000, Hamm already had accomplished more than most expected. The achievements helped explain why he was confident that he could find more oil in the United States than his acclaimed rivals and perhaps even make an indelible mark on the country.

•   •   •

H
arold Hamm’s father, Leland Albert Hamm, was a descendant of British colonist Thomas Buckland Hamm, who fought for America in the Revolutionary War. Leland enjoyed few victories in his own life, however. He lost his father at the age of three. After two short marriages, he married his third wife, Jane Elizabeth Sparks. The couple rented a farm in a small Oklahoma town called Agra, where they raised cattle and horses. One year, several of the cows died when their feed was inadvertently filled with splinters, according to Harold Hamm’s older sister Fannie. Leland couldn’t make much of a living with his remaining cattle and eventually sold them.

The family moved to a small farmhouse five miles north of the tiny, one-stoplight town of Lexington, Oklahoma, where Harold was born in December 1945, the youngest of thirteen children. Leland and his wife worked as sharecroppers on farms in the region, eking out a meager living and relying on federal food aid.

The first recollection of many boys is a summer ice cream outing or perhaps an early ball game. One of Harold’s first memories was helping his parents pick tomatoes in a nearby field in the middle of the summer and feeling intense heat emanating from the ground through his flimsy shoes. As a five-year-old, Harold stood and watched his family’s home burn down in an electrical fire. There was a silver lining in the accident: Neighbors pitched in to help the family rebuild, donating Harold’s first new pair of shoes.

“It was kind of exciting” to wear new shoes for the first time, Hamm later told a colleague.

The Hamms’ new home was more of a glorified shack; it had two bedrooms, no electricity, and no running water. The parcel of land became even more cramped when Leland donated about half of it for the construction of a small church, the General Assembly and Church of the Firstborn.

Neighbors remember Leland and Jane Hamm as a quiet, religious couple who didn’t associate very much with townsfolk other than members of their church, which had a strict doctrine and believed in faith healing rather than relying on doctors.

Leland Hamm didn’t have free time for hobbies, but he did seem to have a fondness for children. He had a son from one of his previous two marriages, in addition to the thirteen children with Jane. Years later, after Jane died and Leland married for a fourth time, he would have one more child. (In all, Leland had fifteen children of his own and was stepfather to at least nine others. At his death, he had seventy grandchildren and forty-two great-grandchildren, according to a local obituary.)

In their home, Leland was a calm and easygoing presence who discussed values and religion with his kids and sometimes served as a volunteer preacher at the church next door. “My father was very active, honest, and smart, but he didn’t have much get-up-and-go,” says Fannie.

Jane Hamm was more demanding. She taught the Hamm kids to make their beds each day, sweep and wash the floors, and do other chores to keep the household running smoothly. Jane also tended to the family garden and made sure her children were clean and well fed, even when there was little money.

“My mother was easier to get upset, she expected more from us,” Fannie recalls. “She’s the one who raised the family. . . . Because of her we managed, she taught us hard work.”

Hamm, a respectful, clean-cut boy, didn’t spend much time dwelling on his family’s plight or the fact that he had to go to a neighbor’s home to watch television, partly because few others in the area were much wealthier. Leland regularly gave away what little extra the family had to even poorer neighbors. Often, one or two worse-off neighbors lived in the Hamm home. Indeed, Lexington was a rural, hardscrabble town of about two thousand residents, and many locals were in more or less the same straits as the Hamms. More prosperous Oklahoma City was just forty minutes or so by car, but it felt a world away.

“I didn’t know I was poor, it was a happy childhood,” Hamm says. “I was like a lot of others, I thought, supporting my parents and working.”

Hamm had his quirks as a child. Early on, he acquired the nickname of “Buzz” because he seemed to enjoy making an odd buzzing sound while playing with neighbors, an old friend says.

But some who grew up in the area remember Hamm as a quiet loner who could be insecure and withdrawn. He did have some unusual pets to keep him company, though. He helped raise coyotes in the family’s backyard, brought a black calf to 4-H competitions, and doted on a pet crow. He kept the crow in the house, his sister remembers, and even managed to teach it to speak a bit. One day, he took the bird outside to get some fresh air. When the pet seemed to become hot in the Oklahoma sun, Hamm brought it inside and put a cold washcloth over it, accidentally suffocating the bird.

There wasn’t much time for playing, though. Hamm’s parents worked for local landowners, raising crops and livestock for them, and the Hamm children understood that they needed to help the family make ends meet. In the fall, the Hamms frequently grabbed belongings and followed the cotton-picking trail, traveling as far as the cities of Blair and Altus, nearly 150 miles away, and even into Texas. From a young age, Harold pulled, chopped, and hoed cotton, gathered watermelons, and took on other difficult labor. “I’d pull the cotton, put it in the middle of the road, dad would scoop it up, then we’d repeat again,” Hamm says.
¹

As they traveled and worked, Harold and his family lived in tiny homes owned by various landowners near the fields. “Money was tight for everyone, we all had to work,” Charlie McCown, a neighborhood friend, says. “But Buzz had a remarkable work ethic, he’d jump in and be energetic and never complain.”

Hamm and his siblings usually couldn’t begin their school year until the work slowed, typically after the first freeze or around Christmastime. Hamm wasn’t the only child of a sharecropper who got a late start each year, but that didn’t make it easier for him. “It was hard to catch up,” he says.

In his sophomore year of high school, Hamm was a top-flight pitcher on the town’s baseball team, thanks in part to a baffling curveball, a pitch one of his older brothers taught him. In a tournament one year, he pitched back-to-back games with a throbbing shoulder without telling his coach of the pain. “I was very competitive,” he acknowledges.

Hamm learned to persevere without complaining, a lesson he took from Jim Hunter, a shop teacher in junior high school. “Jim had a lot of scars, no hair, missing teeth and pains . . . all courtesy of the Nazi guards in a prisoner of war camp during World War II,” Hamm says. “Jim refused to become a negative person and taught me some life lessons that I never forgot.”
²

Halfway through his junior year of high school, Hamm’s family moved to the city of Enid, 130 miles away. Hamm’s arm still ached from the baseball season, so playing ball after school wasn’t especially appealing. He also knew his family could use any cash he could generate, so he decided to seek a proper job.

At the time, Enid was enjoying an early 1960s oil-fueled mini-boom. The city was the headquarters of Champlin Refining Company, started by Herbert Champlin, a local banker. Champlin hadn’t wanted to get into the risky business of searching for oil, but his wife pushed him to invest an initial $25,000 grubstake. The company eventually became the nation’s largest privately held “integrated” energy company, or one that does everything from exploring and producing oil to refining and selling it.

Hamm began working at a big Champlin filling station that was open twenty-four hours a day and had a sizable business servicing trucks. He pumped gas, fixed tires, and washed trucks, making a dollar an hour while earning class credit.

Enid was a hub of activity, and Hamm got a glimpse of oil drilling when he delivered diesel fuel, lube, and other material to fracking crews in nearby Hennessey. At the time, some crews were using river fracks, the progenitor of Nicholas Steinsberger’s slick-water fracks, to improve production results. At that young age, Hamm “learned that you could fracture the rocks” with this new technique, he says.

Hamm met oil industry veterans and was struck by their generosity and outsized personalities, so different from the humble men in his hometown. On one of his first days at work, Charles Potter, who ran the Champlin distributorship, opened his billfold and asked the young man if he needed any cash. A few months later, Hamm drove his service truck to fix a flat on the huge tire of a portable rig operated by a squat, gruff man named “Tough” Cunningham, who ran a company called Tough Drilling. Hamm struggled with the tire, and as Cunningham approached, Hamm braced for a round of abuse from his customer.

“Hey, boy,” Cunningham began, as Hamm turned even more nervous. “I’m going to send some help—don’t try to do that yourself.”

Cunningham took a liking to Hamm and began looking out for him. Hamm spent time with other men in the oil fields, listening to their stories and learning how they discovered energy. The veterans enjoyed sharing their perspective with the young man and a few became early mentors.

All around Hamm, men were striking it rich as the local oil industry thrived. They spent their money as quickly as they made it, eager for even larger strikes, exhibiting a cockiness and a true zest for life he had never seen before. Hamm was smitten by the uninhibited, energetic men.

“The oil people there were different,” he says. “They were charismatic and bigger than life, I had never been around people like that.”

He was struck by an encounter with a group of bankers outside a Denny’s restaurant. Standing in the parking lot, he watched the bankers debate who had eaten a piece of pie with lunch, and who was responsible for a larger percentage of the meal’s bill.

“Oil and gas guys would have just grabbed the check,” Hamm says. “They were generous to a fault and were willing to teach me.”

Hamm’s father had cautioned him about the rough men in the oil business, but Hamm warmed to them. “It was a shock to be in that environment, to find out there are good people in the oil field,” he recalls. “I never told my father about their language, though.”

Hamm’s days were grueling. Most days, he’d head to the service station after school and work from 2 p.m. until 11 p.m. Then the young man would go home and do his schoolwork. He would get up early, usually arriving at school dead tired, to start the day again. On Saturdays he’d work twelve straight hours, logging an average of sixty hours of work a week.

One morning, Hamm walked into school half asleep, and was directed to the auditorium, where a school assembly was getting under way. Soon, John Frank of Frankoma Pottery, a pottery company in Sapulpa, Oklahoma, famous for its sculptures and dinnerware, walked in wearing a white smock. Frank sat in front of the stage and began pedaling a potter’s wheel, slapping a lump of clay like it was a baby.