The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (43 page)

“Dinakar, Aubrey is a friend of mine,” Ward told Singh and his team. “But we do things very differently.”

The answer was just what Singh wanted to hear. But after Ward left, he directed his team to dig into SandRidge’s operations. What they reported back was information that largely had been publicly available to investors. But the more documents they placed on Singh’s desk, the more outraged he became.

Yes, Ward didn’t own interests in SandRidge’s wells, like McClendon, just as Ward had said. But that was only because Ward had sold the interests back to his company for $67 million during the panic of 2008. The deal had been vetted by an outside party, which said the purchase had been at a discount to the value of the wells, but the transaction still seemed to Singh like a misuse of SandRidge’s precious cash.

Singh also viewed SandRidge’s annual overhead of $250 million as huge for such a small company. They even spent a million dollars for someone to do accounting for Ward’s personal accounts, according to the information gathered by Singh’s team.

“He’s incredibly greedy,” he told a colleague.

By November 2012, Singh’s firm owned 4.5 percent of SandRidge’s shares. Singh decided that Ward and SandRidge had accumulated some impressive assets, but the only way the stock could go higher was if Ward was axed. And the only way that would happen was if Singh went public with his grievances.

Singh wrote a letter to SandRidge’s board of directors calling for Ward and certain of the company’s board members to be replaced. “Tom Ward’s credibility is too damaged to continue in his role,” Singh wrote. “SandRidge’s stock performance has been nothing short of disastrous.”

On November 14, Ward made a return visit to Singh’s office to discuss the hedge fund’s grievances. Singh and his staff appreciated that he was willing to come back, and they were struck by how courteous and gentlemanly he was in the meeting. But the tension quickly intensified. Sitting in a large conference room with a full view of Central Park’s Great Lawn, Singh rattled off a litany of complaints. Sitting directly across from Ward, he went on for about forty-five minutes. SandRidge shares had performed terribly for years. The company’s strategy made little sense and it had too much debt. And Ward was overpaid, Singh said.

“Tom, the facts are pretty horrible,” Singh said, his voice rising, according to people at the meeting.

Ward sat quietly as Singh lectured him on all the reasons he should be fired. Just a few years earlier, Ward had been viewed as an energy visionary. He and McClendon had been lionized in Oklahoma City and elsewhere for anticipating new demand for natural gas and for opening up new gas fields in the country, helping the United States develop enough gas to last generations and laying the groundwork for the nation’s energy revival. Now the fifty-three-year-old was being told by a hedge fund manager with no energy background that he was the biggest reason SandRidge was faring so poorly, and that he needed to leave the company he had founded.

When Singh finished, Ward hardly showed any emotion, according to people in the room. He spoke a bit about how the company was going to slow its expenses, but that was about it.

Ward seemed largely unmoved by the criticism. A stock analyst on a conference call said, “You look like you’re following McClendon over at Chesapeake, which seems to be personally very greedy. . . . Wouldn’t the company be much better off if you were more modest in your take personally?”

“Do I have other options . . . that I could get paid as much or more?” Ward responded. “I would think so. So I’m here at the discretion of the board and shareholders.”

In an e-mail message to a reporter, Ward wrote: “If I chose I could make more money doing something else as very few people have done what I have done in this industry.”

Soon more details emerged about SandRidge’s dealings. The company had paid nearly $28 million to Ward, or to firms linked to him and his family, according to securities filings. For example, SandRidge had leased land from a company controlled by Ward’s son Trent. A Ward-linked entity also purchased mineral rights in Kansas months before SandRidge leased adjacent plots, according to land records.

The payments had been fully disclosed, and Ward argued that his family had helped the company gain a quick foothold in the Mississippian formation, which proved a big winner. The questionable leases represented less than 1 percent of the acreage leased by SandRidge, Ward said, and the company’s board had decided on the moves. And it made sense that his family entity bought in similar locations as SandRidge since Ward was a big believer in the area.
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“The reason I was paid royalties had nothing to do with” SandRidge, Ward says. “They just happened to drill where I had bought land years before.”

The criticisms piled up, though, from both TPG-Axon and Mount Kellett, but also from California pension fund CalSTRS. TPG-Axon launched a campaign to replace SandRidge’s board of directors, and shareholders began deliberating over a March 15 proxy vote on the matter. SandRidge’s stock closed just above six dollars at the end of 2012, which didn’t help Ward’s chances for survival.

At a company meeting to address the situation, Ward was defiant but also fatalistic. “If I don’t get the vote, then I don’t deserve it,” he told eight hundred employees. “I’m doing my job. . . . I think I’ll still be here next year.”

•   •   •

T
he investor outcry wasn’t really about Ward’s pay or his dealings. Ward wasn’t the first oil executive to be richly compensated; Singh himself made much more money running his hedge fund. The real problem was Ward couldn’t get his stock to rebound after the 2008 collapse, a failure that made his hefty salary and other activities glaring targets for investors.

Like McClendon, Ward had bet his career that an abundance of oil and natural gas could be found in the United States. By 2012, more energy was pumping than anyone ever expected, making both McClendon and Ward look prescient. For years, Wall Street investors had lent their support for the push by the wildcatters into U.S. oil and gas fields, enabling them to borrow big money to scoop up acreage at record clips. During the early stages of the nation’s energy revolution, it was enough to accumulate attractive fields and add to reserves, no matter the cost.

But by 2012, it was clear that the push into new fields by McClendon, Ward, and other pioneers of the era was turning out less immediately lucrative than expected. Investors deserved a payoff for all the money they were investing, but McClendon and Ward were still building a path to profits. Just as early Internet companies saw their shares soar based on innovative ideas and strategies for future earnings, and then tumble when earnings took too long to materialize, innovators in the oil patch suffered as Wall Street changed its tune and demanded quicker results.

Had natural gas prices stayed above five or six dollars per thousand cubic feet, McClendon might have looked like a genius for grabbing so much prime shale acreage. Then again, a big reason prices fell as far as they did was due to all the production from Chesapeake and other pioneers, production that McClendon didn’t seem to see coming.

McClendon wasn’t the only energy mogul to miss the impact of all the drilling in the country. In 2012, Rex Tillerson, ExxonMobil’s chief, said, “We’re all losing our shirts today,” due to tumbling natural gas prices. “We know we’re making no money.”

But McClendon had planted the seeds for the growth of the nation’s gas supplies, not Tillerson. And ExxonMobil had a fortress balance sheet, while Chesapeake’s was weighed down by all the debt accumulated from McClendon’s moves, making the company less capable of dealing with a downturn in gas prices and the resulting falloff in revenues.

McClendon seemed unprepared for the growing glut of gas. It was as if Johnny Appleseed, after spreading seeds around the country, was shocked when apples actually grew beneath his feet.

•   •   •

L
iz Irish was just as surprised as Aubrey McClendon at how the shale revolution was turning out.

After moving to Williston, North Dakota, in 2010, Liz’s husband, Matt, began working as a trucker, hauling water for the fracking operations of various wells in the state. Liz looked for her own job, eager for a new start.

But housing emerged as an early problem for the family. Prices had skyrocketed throughout the region because there wasn’t enough supply to handle the raging demand. By the time the Irish family arrived in Williston, three-bedroom homes were renting for nearly $3,600 a month. Prices climbed so fast that a priest in Sydney, Montana, a city about an hour’s drive from Williston and near some oil drilling, gave a Sunday sermon urging neighbors not to gouge each other on rents.

Some moving to the area receive housing from their employers, or enjoy a subsidy from their job enabling them to afford reasonable housing. Others settle into “man camps,” military-style complexes with communal showers and bathrooms. The rooms are clean, private, and efficient, usually featuring a bed, a small desk and refrigerator, and a flat-screen television. Some man camps even have elaborate cafeterias, gyms, laundries, and video-game rooms.

The camps aren’t especially rowdy places. Most field hands are too exhausted after working twelve straight hours to do much carousing, and management forbids alcohol—though violence sometimes results from having so many cooped-up men in the same facility.

Unable to afford a home of their own, Liz and her family moved into a twenty-four-foot trailer originally used by the Federal Emergency Management Agency, or FEMA, to house displaced residents from the New Orleans area after the devastation from Hurricane Katrina in 2005. The trailer was lent by Matt’s employer, but it wasn’t a long-term solution.

In October 2010, the Irish family moved into a single wide mobile home parked in the Buffalo Trails campground, a particularly ugly spot where the bathrooms are shut from 9 p.m. to 9 a.m. each day and most of the residents are long-term oil workers. The monthly rent was $1,500, and the landlord liked to walk in on them at all hours, but they considered themselves fortunate to have found a home. Work seemed more promising. Matt Irish, who had been making about $20,000 a year before the move to Williston, now was making between $7,000 and $15,000 a
month
. Liz didn’t really need a job, but she was bored in the trailer park. She had more trouble finding a position that suited her skill levels, though, and had to settle for a cashier job at an Albertsons supermarket.

“I was a girl and I wasn’t one of them,” she says, to explain her inability to find a better position.

Back in Oregon, the family had only seen a dusting of snow, so they got a kick out of their first winter in Williston, where it snowed more than 140 inches and one day registered a windchill effect of minus sixty-five degrees.

“I’m a horrible optimist and my attitude was we were going to stay there forever,” Irish says.

Life got tougher as winter wore on, however. A blizzard took out the electricity for four days. Driving home one day, all Liz could see was white in front of her, and she plowed her Ford pickup into a snowdrift.

“You drive where you think the driveway is,” she says.

Matt was making great money, but the work was hard. He was driving a semi truck over frozen roads that were in terrible shape, fighting through blizzards and using a blowtorch to unfreeze the water he was carrying.

Soon the family’s rent was hiked to $1,700 a month, even as Matt’s work hours shrank, amid growing competition from new trucking companies. Matt was still making more than $90,000 a year, but the family’s expenses were higher than they had assumed. A gallon of milk cost $5.60 and they had to buy expensive, heavy coats for the girls, along with generators and snowblowers.

In the spring, Irish noticed that trucks kicked up so much dust, their trailer, car, and truck were always filthy. “Two hours after you clean, it looks the same again,” she says.

Liz found a better job, making twenty-three dollars an hour as the personal assistant to an oil executive, and she tried to keep a positive attitude. But it bothered Liz and Matt that oil workers regularly propositioned their young daughters; the cursing the girls heard around town also was getting to them.

There were other troubling experiences. One day, a man wearing a black-and-white-striped suit and orange Crocs raced past her. The man seemed to be escaping from a local jail. Liz called 911 and the disinterested operator said, “He’s not one of ours.” Eventually, the man was found hiding behind some bushes.

“It was like a cartoon,” Liz says.

In 2012, Matt lost his job, as drilling became more efficient and more frack jobs were completed reducing the need for drivers. He ended up hauling fuel for an annual salary of about $60,000.

The final straw for the family was when their landlord gave notice that a man camp would be built on their lot and that they needed to vacate the trailer. Before the Irish family even finished packing up, two Russian oil workers moved in and began doing shots of liquor on their kitchen table.

There were no homes available so the family paid $2,100 a month to rent a cramped apartment in Williston. The high rent made it almost impossible to save any money. Finally, Liz and Matt decided to bolt the Bakken and move the family back to Oregon. Back home, Liz rejoined her mortgage company. She and her husband managed to pay down some bills during their time in Williston, suggesting that their experience wasn’t a total loss. They don’t make as much as they did during the heyday for housing, and Matt can’t find a job paying the same wages as in the Bakken, but they’re thrilled to be in Oregon once again.

By 2013, there were signs that the quality of life in Williston was improving. The city routed trucks around town to reduce traffic. Investment firms such as KKR & Co. were busy building new housing, and a $70 million municipal recreational center was being constructed, featuring a water park, tennis and basketball courts, fitness areas, and more.

Liz has few regrets about her decision to leave, however. “Locals who own land or run a business are making money hand over fist,” she says. “And if you’re young and not attached, it’s a great place to make some money . . . but you’re cold and alone and you work your butt off. You can’t do that forever.”