The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (41 page)

Souki didn’t dwell on the fact that his existing investors still were nursing losses and had had it up to here with him. He also didn’t worry that Bechtel had only given an initial estimate and made it clear that the final might end up 30 percent higher.

In April 2010, Souki went to his board to pitch his new idea. “I have a big advantage here,” he told the board confidently. “We already have the terminal, the storage tanks . . . everything but a liquefaction facility. . . . I think I can get the contracts and the permit.” He said the company eventually could export as much as two billion cubic feet a day, or about 3 percent of U.S. domestic gas production. He looked around the room, waiting for a response.

For all the acrimony in the previous months, Souki’s plan didn’t elicit much reaction. Some board members already had a sense that this was going to be his new strategy. It wasn’t like he had many other options. Others were so tired of Souki’s maneuvering, and the roller coaster the company had been on, that they were too exhausted to give much input or put up a fight.

Cheniere had billions of dollars of debt coming due, so most investors and board members figured this was their best chance to salvage a bad situation. “The board’s attitude was that it was a Hail Mary pass, fourth and twenty-five on our own five-yard line. . . . They were fatigued,” says a former board member. “It was a small company trying to beat the Exxons and Chevrons to the export market, and those companies had better connections to Washington regulators.”

In June 2010, Cheniere made a public announcement of its intention to begin exporting gas. Investors let out a collective yawn. Many had written off the company, so the stock didn’t move very much.

When Souki called John Paulson to tell him about the idea, the hedge fund manager was friendly and wished him luck. Paulson wasn’t particularly enthused, though. If he somehow could get his firm’s original investment in Cheniere back, without incurring a loss, “you will have performed a miracle,” Paulson recalls telling Souki.

Industry members made fun of the export idea, teasing executives such as Davis Thames, the marketing specialist in charge of selling the idea to customers. One told Thames that his company looked “desperate” by floating the export strategy.

In early 2011, Cheniere shares traded for less than seven dollars and the company’s Louisiana terminal still stood idle much of the time. But the Energy Department had granted Cheniere a permit to export gas to the nation’s free trade partners, and the company was close to getting a permit to export to other countries, including China. It helped that Souki had enlisted a group of former politicians and others who were well connected in Washington power circles to lobby for his plan.

Meanwhile, natural gas prices in Europe and Asia were twice as high as the $4.35 per thousand cubic feet rate in the United States, creating an opportunity to export cheaper gas from the United States. At that point, Cheniere had the market to itself—as long as it actually could revamp its facility for exports. Only one American terminal, built in Alaska thirty years earlier, could cool gas into liquid for shipment on giant cargo ships for sale abroad.

Souki was confident Cheniere could begin exporting gas as early as 2015. Already, Cheniere had a commitment from Aubrey McClendon and Chesapeake Energy to send large amounts of gas to the Louisiana facility for export.

“If you keep digging, digging, digging, you find something,” an upbeat Souki said in late January 2011.

There was one big problem, though. Cheniere had to raise between $10 and $12 billion to convert the new facility and pay the cost of financing and other expenses related to the new terminal. Banks had curbed their lending in the aftermath of the global financial crisis and many investors were still hurting. It wasn’t clear where Souki was going to get the money.

“This is somebody who basically enjoys being on a roller coaster,” Fadel Gheit, a senior oil analyst at Oppenheimer & Company, told the
New York Times
that month. “It is more likely to see snow in New York in July than to see exports of gas from LNG terminals in the United States.”
⁹

Cheniere ended the year under nine dollars, as many investors remained dubious about Souki and his latest stroke of genius.

A
ubrey McClendon stepped up his buying once again.

Throughout 2010, McClendon led Chesapeake Energy on a new land grab. There was acreage in the Niobrara Shale in Colorado and Wyoming. There also were the Woodford Shale and Granite Wash formations in Oklahoma and Texas.

It all looked too tempting. McClendon and Chesapeake didn’t
have
to own it, of course. He just wanted it.

There was a limit to how much debt Chesapeake could pile up to pay for the deals. But McClendon told Ralph Eads, the senior Houston investment banker at the firm Jefferies & Co., that he had an idea where to get the billions he needed.

“If we’re going to look for new money, let’s go to Asia,” McClendon told his old college friend, well aware of the growing coffers of companies and sovereign wealth funds on that continent. “They have the money and they’re short on energy.”

McClendon and Eads began traveling to Asia to sell stakes in new American fields suddenly churning out oil and gas. With remarkable speed, Chesapeake established a 600,000-net-acre position in the Eagle Ford in 2010 for $1.2 billion and then sold a one-third interest to the China National Offshore Oil Corporation for $2.2 billion.

Most of the land Chesapeake and its rivals were leasing carried “held by production” clauses. These terms required the companies to drill wells within three to five years, while also paying potential royalties to landowners, or face the loss of the leases, even after sometimes paying leaseholders bonuses of up to $20,000 per acre as part of the leasing transaction.
¹
Once production began, the landowners also received a royalty on the producing wells that typically amounted to 15 to 20 percent of the wells’ revenues.

So a 320-acre drilling unit could cost Chesapeake a bonus payment of $6.4 million—a fee that simply gained the company the right to drill a well or two on that unit. After paying that kind of up-front cash, there was no way the company wanted to lose that lease by not drilling the wells in short order, explaining why drilling kept apace despite weak gas prices.

On a May 2010 conference call with analysts, Chesapeake chief financial officer Marc Rowland said, “At least half and probably two-thirds or three-quarters of our gas drilling is what I would call involuntary. It’s being incentivized by something other than the gas price.” Chesapeake’s drilling added to the nation’s growing glut of natural gas, helping to push gas prices lower.

When McClendon decided to boost Chesapeake’s spending on the Mississippian Lime, an oil-rich limestone formation in northern Oklahoma and southern Kansas, some members of the company’s board of directors became a bit nervous. McClendon promised the board that this was going to be Chesapeake’s last big push. He said that he, too, was concerned that the company’s debt was more than 50 percent of its equity, or the value of the company.

“We said if it’s half as good as he says, we really have to think about it,” says Charles Maxwell, a board member. “It’s like seeing a golden apple, you grab it because you don’t know if you’re going to find one again. . . . And Aubrey sounded sincere” about its being the company’s last expensive grab.

In October 2010, Jeffrey Bronchick, the investor who a year earlier had called the Chesapeake proxy statement “shameful,” traveled to Oklahoma City to attend an “analyst day” at Chesapeake’s campus, where McClendon and other executives outlined their strategy to two hundred investors, stock analysts, and others.

After Bronchick got a look at Chesapeake’s gorgeous campus, featuring a huge health club and pool, catered food, and an elaborate child-care center, he was horrified. All the money the company was spending seemed like a monumental waste. “I wish I went to college here,” Bronchick joked to a colleague from their Los Angeles investment firm, Reed, Conner & Birdwell. Spotting antique maps on the walls, he said, “That’s my money being spent,” a reference to Chesapeake’s earlier purchase of McClendon’s antique map collection.

But as Bronchick listened to McClendon detail how he was going to reduce spending and begin “harvesting” Chesapeake’s prime acreage, his skepticism slowly melted away. McClendon seemed to have learned his lesson and was turning over a new leaf, Bronchick decided. “Why is this stock at twenty-one?!” an excited Bronchick asked his colleague as they walked out of the meeting. “I just heard a great stock and a great story.”

McClendon began to feel confident once again. He even involved his company in one of his passions: rowing. He had financed the transformation of a dry and weed-choked riverbed in Oklahoma City into an Olympic-class rowing venue. Now McClendon told colleagues the city could become the rowing capital of the Southwest and that it had unique advantages over rowing sites on the East Coast used by teams from Harvard and Princeton; there would be fewer days in Oklahoma City where inclement weather prevented teams from practicing, he said.

Chesapeake had built a $3 million boathouse, of which he contributed $1.5 million. He also financed a nearby glass-sheathed, $7 million Chesapeake Finish Line Tower. He even put ten Olympic hopefuls on Chesapeake’s payroll, paying them about $35,000 a year plus benefits and assigning them to the finance and community relations departments. One Sunday in December 2010, McClendon and his son flew to San Diego with five of the rowers; he reimbursed Chesapeake for the $34,000 cost of the trip.
²

•   •   •

M
cClendon continued to take an aggressive stance toward health concerns about fracking, as if he wasn’t aware—or very concerned—that the public had turned against the activity, even as most knew very little about it. “We frack all the time. What’s the big deal?” he asked
Rolling Stone
magazine in March 2012. “Where is the mushroom cloud? . . . Where are the dogs with one leg?”

McClendon might have been trying to suggest that there was nothing inherently dangerous about the fracking process, as long as it was done properly. Sometimes it wasn’t being done properly, however. A year earlier, the
New York Times
had reported that wastewater containing high levels of radioactivity was sometimes being brought to Pennsylvania sewage plants not designed to treat it and then discharged into rivers supplying drinking water. The paper also said a study written by a consultant to the Environmental Protection Agency concluded that some sewage treatment plants weren’t capable of removing certain drilling waste contaminants.

(After the
Times
piece, the acting secretary of Pennsylvania’s Department of Environmental Protection said that studies conducted in seven of the state’s rivers showed “normal” or below-average levels of radiation.
³
)

Scrutiny on fracking would grow, thanks to an unlikely new interest group. In May 2012, about fifty residents of the village of Sidney, New York, met in a cramped local library to discuss how to stop a pipeline slated to run through the area carrying natural gas from the Marcellus Shale formation in nearby Pennsylvania.

The group was concerned that the pipeline might burst, causing damage. Their even bigger fear was that if a pipeline was built, gas drilling would come next. And that would mean hydraulic fracturing right in their backyards.

Sidney residents wanted no part of it. The guest speaker that evening was Vera Scroggins, the rabble-rousing former schoolteacher in nearby Pennsylvania who had once faced off against local stone cutters and now was getting media from all over the world to publicize various mishaps in Dimock and elsewhere. That evening, she brought a new ally, Craig Stevens, an intense, muscle-bound middle-aged man with close-cropped hair who wore an air purifier on his neck.

There was a lot of gray hair in the room that day; most of the attendees were men who were middle-aged or older. They were articulate, thoughtful, and well informed. Most looked like they once had taught grade school on the Upper West Side of Manhattan and probably followed the Grateful Dead on a tour or two.

At the end of an evening in which Scroggins and Stevens shared tips with the Sidney residents about how to organize resistance and court the media to stop the pipeline, a hirsute man with a ponytail and large-framed glasses approached the front of the room. Few had noticed the man quietly sitting in the last row throughout the evening, slowly stroking his beard, but all eyes were fixed on him as he began speaking to the crowd.

“I can’t believe what I’m hearing,” he said, according to Scroggins and Stevens. The unfamiliar man spoke about how his family had grown to love the area, and how he wanted to help publicize the antifracking cause.

After the meeting, the group found out that the man was Sean Lennon, the son of late Beatle John Lennon. Soon he and his mother, Yoko Ono, were joining other celebrities, such as the actors Mark Ruffalo and Susan Sarandon, to prevent natural gas drilling in New York.

The stars clearly were committed to the cause. But their activism also gave their careers new life, notes Scroggins, who soon began taking busloads of celebrities, media from around the world, and others on tours of the area to point out places she said had experienced environmental damage. “It’s helped increase interest in Sean’s music,” Scroggins says. “Mark Ruffalo got an Academy Award nomination and was in the
Avengers
movie after” becoming involved in the antifracking movement.

Either way, the publicity helped pressure New York State officials to maintain the moratorium on fracking in the state and it helped focus national attention on the drilling, dealing a public relations blow to those in the business.

•   •   •

I
n late 2010, billionaire investor Carl Icahn disclosed that he had purchased nearly 6 percent of Chesapeake’s shares. Icahn is a so-called activist investor, or someone who buys big chunks of a company and then levies pressure on its management to enact changes aimed at getting shares higher.

Weeks later, Icahn reached out to McClendon to let him know the company had piled on too much debt. McClendon got the message. Chesapeake quickly announced plans to sell $5 billion in assets, including a deal to sell a one-third interest in its acreage in Wyoming to China National Offshore Oil Corporation, China’s largest offshore oil producer, helping Chesapeake reduce its debt.

Chesapeake shares hit $35.61 in February 2011, their highest level since before the 2008 crisis. The company announced a plan to sell its Arkansas natural gas field to Australia’s BHP Billiton for $4.75 billion, just as investors wanted.

Icahn soon exited the stock, however, pocketing about $500 million in profits. On the way out, he placed a call to McClendon to thank him for the enormous windfall. It soon became clear that McClendon didn’t have his heart in the debt-trimming strategy, raising concerns on the board of directors.

“You’re making an assumption that natural gas prices will be strong and the company will be able to handle its debt,” Louis Simpson, a new board member who once ran insurance company Geico’s investment portfolio, told McClendon during one meeting in 2011. “We could have problems if it doesn’t turn out the way you’re saying.”

“We’ve done our homework, we should be okay,” McClendon responded.

Simpson wasn’t reassured. Later, he told other board members that he was getting fed up with McClendon’s leadership of the company.

“I think we need to get rid of Aubrey,” Simpson said at one meeting. “The culture of the company has to change.”

At one point, Simpson tried to get under McClendon’s skin, asking him why shares of EOG and Continental were doing so much better than Chesapeake’s.

“They got lucky in the Bakken,” McClendon told Simpson.

Other board members lent McClendon support, despite Simpson’s qualms. “We were dealing with a guy who took us from nineteenth to second” place in natural gas production, says one. “No one had done anything like that!”

Within months, McClendon grew more excited about the Utica Shale and was directing purchases of acreage in Pennsylvania, Ohio, and West Virginia that seemed to have both oil and gas. By then, Chesapeake had spent $2 billion to lock up 1.25 million acres in the area.

This one really was going to be a doozy, McClendon promised. In an October 2011 appearance in Columbus, Ohio, McClendon told a crowd that the Utica formation could be worth $500 billion. “I prefer to call it half a trillion, it sounds bigger,” McClendon said, adding that the Utica would be the “biggest thing economically to hit Ohio, since maybe the plow.”
⁴

Chesapeake was the second biggest natural gas producer in the country, after ExxonMobil, and was drilling even more wells than the huge oil company. Aubrey McClendon was back on top. In the fall of 2011, he entertained a reporter in Oklahoma City’s Deep Fork Grill. Over steak, fries, and $10,000 worth of wine from McClendon’s collection, he expounded on the greatness of natural gas and of Chesapeake Energy.

“We have found something that can liberate us from the influence of OPEC, that can put several million Americans back to work, liberate us from four-dollar gasoline,” McClendon said. “Is it too good to be true? Sometimes it seems that way.”

Chesapeake was pumping three billion cubic feet a day from the 13.7 million acres it controlled, close to the size of West Virginia. Harold Hamm at Continental had barely five hundred employees, but Chesapeake counted twelve thousand people on its staff, as well as forty-five hundred land scouts searching the country for the next big play.

McClendon’s company, which had paid out $9 billion in lease bonuses to landowners in the five previous years, was on track to score $2 billion of profit that year.
Forbes
estimated that McClendon’s personal fortune was above $1.2 billion, more than enough for him to agree, after three years of court battles with shareholders, to repurchase the antique maps he had sold to his company.

“He is without a doubt the most admired—and feared—man in the oil patch,”
Forbes
intoned, while also calling McClendon “reckless.”
⁵

•   •   •