The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (35 page)

“Some were in areas where the acreage values dropped between agreeing to a deal and closing, some were condemned due to poor drilling results, and some we just ran out of money and needed to delay,” Rowland recalls.

Charles Maxwell, the board member who had been convinced that McClendon’s spending was prudent, seemed to change his mind now that the stock was tumbling. “I didn’t think it would come to this, Maxwell told the
Wall Street Journal
. Though he still supported McClendon, Maxwell said Chesapeake had suffered from “an excess of enthusiasm.”

Chesapeake wasn’t in danger of going under, but it seemed clear the company no longer would be able to borrow and grow like it had in the past. Analysts began to question how the company could find the money to drill all its land before the leases expired. Chesapeake was forced to halt almost all of its activity in the Haynesville Shale in Louisiana, as well as in the Marcellus region in Pennsylvania.
⁸

Aubrey McClendon appeared out of sorts. To some, it looked as though he’d suffered a knockout blow.

The funk lasted only a few days, though. In late October 2008, McClendon snapped out of it, as if billions of dollars of wealth hadn’t really evaporated from his accounts, no matter what his brokerage statements told him. When he dealt with bankers, including those who knew details of his painful margin call, they were shocked by how calm and upbeat he was. Around the office, he regained his composure and positive outlook.

It was as if he had a secret plan for a comeback, for both himself and his company.

•   •   •

E
very time Tom Ward checked on the market, gas prices were falling, almost without a letup. By the end of August, gas had fallen 40 percent in just two months.

Ward and his wife, Sch’ree, got on a plane to fly to Santa Fe, New Mexico, to attend the wedding of a child of a good friend, Rob Braver. Braver was a grade school classmate of Aubrey McClendon’s, but over the years he had become closer with Ward. Their friendship was cemented nearly a decade earlier on a golf trip to Cabo San Lucas, Mexico, when Braver, who was Jewish, asked Ward if he believed that Jesus was the messiah. Ward said he did and that he was willing to take the time to explain his view to Braver. They ended up spending several months discussing theology. Eventually, Ward invited Braver’s friends to join their weekly conversations at Ward’s office at Chesapeake. Over time, Braver became inspired and converted to Christianity.

The Braver wedding was joyous, but some guests noticed that Ward didn’t look himself. There was music and dancing around him, but he didn’t seem to be having a good time. He was strained and didn’t seem well, some recall.

Back in Oklahoma City, Ward shared a confession with a friend: He had lost a billion dollars in his trading account over the previous month, due to the tumble in natural gas futures prices. It was a staggering sum, even for an executive who had become one of the nation’s wealthiest men. Ward’s losses soon became a topic of conversation in local energy circles.

In his wildest dreams, Tom Ward never expected natural gas to fall so dramatically. For a decade, demand had been growing, just as Ward had anticipated. The economy was using more energy and the population was still expanding. It all suggested to Ward that consumption and prices would keep rising.

Now gas prices were plunging, as investors buckled up for a bumpy ride for the economy, and it was costing Ward. “I missed the enormity of the change,” he says.

SandRidge shares, which hit nearly sixty-eight dollars at the beginning of July, finished August at thirty-five dollars, a drop of nearly 50 percent. At the company’s Oklahoma City headquarters, employees were shell-shocked. Many owned SandRidge stock and literally couldn’t take their eyes off the falling shares—the price flashed on each employee’s computer screen when it was turned on each morning, a cruel daily update on how much of their wealth was evaporating.

As the staff watched SandRidge shares fall below eighteen dollars by the end of September, a gloom settled in around the office. Ward seemed tense and anxious, reflecting the mood of his staff.

By October, Ward realized he had bills piling up but not enough ready cash, even though he still had a great deal of paper wealth. He moved to sell working interests he owned in SandRidge’s gas wells to the company for $67 million, a deal that later would raise the ire of investors.

The price was less than what the well interests were worth, in the view of a fairness opinion offered by an outside party, so Ward viewed the deal as fair for SandRidge shareholders. But $67 million was a huge chunk of change for a company that would end the year with less than $1 million on hand, another reason the deal later would irk shareholders.

That month, the financial system tottered. For several days, SandRidge couldn’t get the short-term funding it relied on to keep its doors open, causing fear within the company’s boardroom.

The panic lifted a bit by the end of 2008, as the government took steps to support financial firms and markets. But energy prices remained weak and SandRidge fell to $6.15 a share, down a sickening 91 percent from July of that year. Tom Ward’s stock was worth over $200 million and he had at least that much in assets outside the company. That still was a lot of money, of course. But his shares had been worth over two and a half billion dollars just six months earlier.

More troublesome for Ward was that he had borrowed hundreds of millions from various lenders, just like McClendon. Ward’s collateral held up better than his former partner’s, so he didn’t face margin calls from lenders. He came under pressure, nonetheless, because he owed millions of dollars in taxes and other obligations but didn’t have the cash to pay for it all, even after selling his well interests to his company.

“Banks and liquidity were drying up and I had a short-term liquidity crunch,” Ward says.

Ward didn’t want to sell his company’s shares on the open market, figuring such a sale would crush SandRidge’s shares, just as McClendon’s forced selling had pressured Chesapeake. Ward needed a different answer.

Looking for help, he reached out to Tulsa billionaire George Kaiser, the chairman of Bank of Oklahoma. On Christmas Eve, they worked out a complex deal for Ward to sell Kaiser 23 percent of his SandRidge stock, or nearly nine million shares, for $50 million. It was enough money to help Ward to pay his debts and other obligations. Kaiser also received a warrant to buy more shares in the future, though this deal also would turn into a point of controversy, partly because Bank of Oklahoma did some lending to SandRidge.

Ward told SandRidge investors that he was disappointed to have to sell his shares, but relieved he didn’t have to dump them on the open market, something investors had fretted about. He tried to keep employees focused on their work and not on SandRidge’s tumbling shares.

Ward had a vague understanding of trouble brewing in his company’s boardroom. He had much less awareness of what was going on in his own home, however.

•   •   •

E
very day at 3:30 p.m., Harold Hamm received a note from his marketing department updating him on what oil prices had done that day. Throughout the fall and early winter of 2008, the news got worse each day.

By the beginning of December, crude prices had tumbled to fifty-four dollars a barrel, down over 60 percent in five months. A week later, Continental shares fell all the way back to thirteen and a half dollars a share,
below
the level where they had debuted a year earlier, an embarrassing round trip.

Unlike Aubrey McClendon and Tom Ward, Harold Hamm’s personal finances were fine. He owned so many shares of his company, and had made so much money over the years from trucking and other businesses, that he remained a billionaire. It also helped that he hadn’t borrowed millions to trade in markets and buy stock, like McClendon and Ward.

The price collapse still had a huge impact on Hamm—it dashed his hopes of discovering huge amounts of oil in the Bakken. Between the staged fracking and horizontal drilling, costs in the region were so high that it didn’t pay to do any drilling unless crude prices were at fifty or sixty dollars a barrel.

Some competitors in the Bakken pulled out, figuring it no longer was worth focusing on the region. In North Dakota, locals figured the inevitable bust they had long feared had begun.

“It was frustrating,” Hamm says.

Stress grew within Continental’s offices as it became clear that the company’s executives had blown it. They had become so overconfident that they hadn’t hedged any of their oil production. In other words, they hadn’t sold oil in the futures markets, as many companies do, to lock in gains. Instead, Continental was “running naked,” figuring oil prices would keep rising.

“The market had been moving up and we had been enjoying the rise,” says Jeff Hume, Hamm’s key lieutenant.

Now that prices had crumbled, Continental’s revenues fell sharply. Hamm convened a meeting of his exploration group and made a tough decision: Continental would shut down almost all its drilling in the Bakken.

It was a huge risk—it wasn’t clear the dismantled crews would be around if Continental ever wanted to restart work in the area. Not only that, but by not drilling wells, the company risked losing all the leases it had purchased. Hume calculated that if they remained inactive for about eighteen months they would lose their acreage in the Bakken and be back to zero.

There wasn’t much they could do, though. Continental wasn’t making a penny from the Bakken. It was forced to slash its projected spending for 2009 for the entire company by 31 percent.

Hamm insisted that some leasing continue, however. Continental had managed to horizontally drill a successful well in the Three Forks formation, the zone just below the Bakken. It encouraged him, despite the gloom in the markets.

Mike Armstrong, Hamm’s old friend in Dickinson, North Dakota, thought Hamm was crazy to buy leases with oil crashing and the financial world in flames. Hamm also spent more than $600,000 of his personal cash to buy more shares of his company.

“Are you fucking nuts?” Armstrong asked Hamm.

“Oil’s going to come back, Mike,” Hamm responded.

In late December, though, oil prices fell below thirty-four dollars a barrel, making Bakken drilling appear even more foolish. Hamm’s dream of finding huge amounts of oil seemed over.

•   •   •

M
ark Papa and his fellow executives at EOG Resources were becoming more enthused about their holdings in the Eagle Ford formation in South Texas. They focused on a section that was about sixty-five hundred square miles that they thought might have the most oil. The shale seemed to have a thickness almost triple that of the Bakken’s best sections, another reason they thought they might have something special.

As an added bonus, there were pipelines in the Eagle Ford area, which figured to make it easier for EOG to transport any oil it found. There also seemed to be a lot of natural gas stored in the rock.

In many ways it was déjà vu for that part of the state. A decade or so earlier, Chesapeake and others had drilled in nearby acreage when they targeted the Austin Chalk rock layers. But by 2008 the area had become better known for cattle than crude. Now EOG and a few competitors were back to focus on a new rock layer and they were just as enthused as the original wildcatters who made quick money drilling in the Austin Chalk.

The collapse of oil and gas prices in the fall of 2008 threw a wrench into EOG’s plans, however. Papa was relieved that he and his right-hand man, Bill Thomas, had pushed the company to shift away from natural gas, which was tumbling in price. But Papa and his staff hadn’t expected oil prices to fall at least as much as gas. Now EOG’s revenues were weakening and the company couldn’t justify leasing any more land in the Eagle Ford area.

“We would have liked to have captured more, but we simply didn’t have the cash flows,” Papa says.

Papa and his team were determined to grab more land, but they’d have to wait for the world to calm down. And EOG still hadn’t drilled any wells in its newly leased acreage, so Papa and his staff didn’t even know if their big bet would pan out.

•   •   •

C
harif Souki had experienced a pounding at the hands of financial markets in early 2008, well before the drubbing that McClendon, Ward, Hamm, and Papa now were dealing with. By the summer of that year, he was just trying to keep his company from collapsing.

In August, Souki managed to raise the $250 million of financing that Cheniere Energy needed to build its LNG terminal in Louisiana. He got the money from GSO Capital Partners, a hedge fund that’s part of the huge investment firm Blackstone Group, a sign that at least someone believed in what he was trying to do.

Not only that, but hedge fund manager John Paulson’s New York firm, Paulson & Co., bought Cheniere’s debt. Paulson, who had anticipated the housing meltdown and pulled off the greatest trade in financial history in 2007 and 2008, a haul of $20 billion for himself and his clients, took time to personally visit the Sabine Pass facility in the fall of 2008. Paulson and his lieutenant, Sheru Chowdhry, agreed with Souki’s strategy. The hedge fund bought more Cheniere shares late in the year, establishing an approximately 15 percent stake in the company’s stock.

That was the good news for Souki.

The bad news: Terms of the financing that Cheniere had received from GSO were hard to swallow. Souki’s company was in such a bad position that it couldn’t sell shares, as he originally had wanted. Cheniere also couldn’t borrow money at interest rates of about 7 percent, as it had in the past.

Instead, the company had turned to GSO for a “rescue loan” secured by the cash still coming to Cheniere from Total and Chevron. To gain the financing, Cheniere agreed to pay GSO an annual interest rate of 12 percent and to give the hedge fund a security that would convert into Cheniere shares if the company somehow rebounded.

Two GSO executives, Dwight Scott and Jason New, were placed on Cheniere’s board of directors, as if they were Souki’s new chaperones, keeping an eye on him.