American trailblazer felled by excess leverage, lawlessness
By Dan Dicker, Oil & Energy Insider:
There is, of course, a terrible tragedy in the death of Aubrey McClendon on Wednesday, but there also is something larger. Inside the life and business that McClendon built is the ultimate personification of the U.S. shale oil and gas boom and current bust. In retelling some of the highlights of McClendon’s career we see not only the great American spirit of entrepreneurship and progress, but also the enormous excesses and lawless behavior that has characterized independent U.S. oil and gas in the last decade and a half that has contributed to the current decimation we’re seeing today.
Aubrey was a pioneer in harnessing the fracking technology invented by George Mitchell and building Chesapeake Energy (CHK) from the ground up with partner Tom Ward (later of Sandridge Energy (SD), and first tasted the power of the capital markets with the public offering of Chesapeake shares in 1993.
McClendon was fast in harnessing the leverage that was becoming more plentiful towards start-up energy companies to continue to buy up acreage and grow Chesapeake at a reckless and alarming rate – but with natural gas prices soaring in the late 1990’s and early 2000’s, it seemed to be only smart to continue to increase production (and Chesapeake share price) as rapidly as the capital markets would allow it. But McClendon was not satisfied to merely grow the company through leverage – he was the true personification of the cowboy wildcatter, taking personal stakes in every well that the company drilled, through a very unique structure then called the “founders well participation program” (FWPP). With self-appointed board members approving huge salaries and bonuses, McClendon further leveraged outside loans to reinvest in Chesapeake wells, using his own shares as collateral.
The fall of natural gas prices and Chesapeake stock in 2008 forced huge margin calls on the CEO – forcing a distressed sale of most of his 31.5 million share stake in the company.
But instead of being humbled by this setback, McClendon only resolved to double down on natural gas and Chesapeake, using the company as a personal bank. Personal items including art (and a famous globe) were sold to the company at huge premiums, extra bonuses were awarded and private personal loans from already invested Chesapeake capital firms were disclosed. Ultimately, all of these excesses were too much for the company to bear, and he was forced from the company.
None of this seemed capable of slowing McClendon down. He was one of those larger than life oil characters, with his 20 percent stake in the OKC Thunder, a penchant for $3000 bottles of wine to accompany business lunches and photo ops with his niece Kate Upton.
After leaving the company, he confirmed the confidence of his swagger by being able to almost immediately raise $15b in his new oil and gas enterprise, American Energy Partners in 2013. But since that time, everything came off the rails for McClendon. Investments by AEP are estimated to be down more than 50%. While no one has direct information, it would be in keeping with McClendon’s character that a large personal leveraged investment was in that company as well. He saw Chesapeake shares trade as low as $1.50 after leading the shares to a high of over $60 in 2008. Several of his finance partners had balked at recent further loans. Finally, there was the indictment for bid rigging in Oklahoma – and almost certain jail time.
No one can know what was in McClendon’s mind on Wednesday, but it seems clear that the pressure of all of these things was personally insurmountable.
Much of the praise for the widespread use of fracking to increase supply and drop prices in both oil and gas should be given to this great American entrepreneur. But also much of the excess use of leverage and debt that has sunk the industry to the verge of bankruptcy is McClendon’s legacy to bear as well.
It’s as if the entire independent U.S. oil and gas industry has been headed for a concrete embankment at 80 miles per hour for a long time now. Aubrey McClendon, maybe the greatest wildcatter we’ve ever seen, was merely the one to hit the wall first. By Dan Dicker, Oil & Energy Insider
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