Aubrey McClendon Was the Original American Entrepreneur

This article was published by The McAlvany Intelligence Advisor on Friday, March 4, 2016:  

News of Aubrey McClendon’s death in a fiery car crash on Tuesday morning in Oklahoma City staggered those who knew him. Chesapeake Energy, founded by McClendon and a partner in 1989, said “Chesapeake is deeply saddened by the news that we have heard today, and our thoughts and prayers are with the McClendon family during this difficult time.” His new company, American Energy Partners, founded the day after he was fired from Chesapeake in 2013, offered this: “It is with deep sadness that AELP confirms that earlier today [Tuesday], its founder, Aubrey K. McClendon, died in a car accident on Midwest Boulevard in Oklahoma City. We will deeply mourn his loss, and please join us in expressing our condolences to his family.”

McClendon’s close friend of 25 years, T. Boone Pickens, said it best:

He was a major player in leading the stunning energy renaissance in America. He was charismatic and a true American entrepreneur.

No individual is without flaws, but his impact on American energy will be long-lasting.

Little was said about that impact by the national media, expressing instead its anti-capitalist, anti-entrepreneurial bias by implying that McClendon’s death had something to do with the indictment issued against him by the Department of Justice the day before.

The indictment charged McClendon with conspiring to rig lease bids while he was CEO of Chesapeake and then sharing those successful bids with the competition he had colluded with. When the indictment came down, McClendon issued a strongly-worded statement of denial:

The charge that has been filed against me today is wrong and unprecedented. All my life I have worked to create jobs in Oklahoma, grow its economy, and to provide abundant and affordable energy to all Americans.

I am proud of my track record in this industry and I will fight to prove my innocence and to clear my name.

At age 29, McClendon and a friend, Tom Ward, invested their life savings in a company in 1983 that caught the fracking wave and rode it to the top. In 1989 they incorporated as Chesapeake Energy Corporation; they drilled their first two wells in May 1989. Seeing the potential of fracking and horizontal drilling, McClendon and Ward drove the company forward. In the next three years CHK stock was the most successful in the country, increasing in price by 274 percent from 1994 to 1997.

In 2011 Forbes named McClendon to its 20-20 Club comprised of eight CEOs of publicly-traded companies who had delivered annualized returns of more than 20 percent a year over a 20-year period. Between 2009 and 2013 McClendon grew natural gas production from 5 million cubic feet per day to 2.5 billion thanks to his aggressive leasing of properties over massive deposits of oil and natural gas. At its peak, Chesapeake was the second largest producer of natural gas in the country.

McClendon took enormous risks with his own and others’ money, borrowing to seize the opportunity he saw before him, just waiting. The combination of hydraulic fracking, which was just getting started, and horizontal drilling into layers of shale that released heretofore unreachable and now almost unmeasurable quantities of oil and gas beckoned to McClendon and held him in its grip until his death.

By the time Forbes sent Chris Helman to investigate the phenomenon in 2011, Chesapeake was employing 12,000 people (not counting the 4,500 land scouts he had who were poring over public records of deeds of trust on top of massive shale deposits to offer lease agreements to) and had a market cap of $17 billion. McClendon’s personal net worth had skyrocketed along with his company’s, topping $1 billion at the time.

McClendon’s success frightened Helman more than a little, especially his risk tolerance. Helman called him “the most admired – and feared – man in the U.S. oil patch.” But, added Helman, “He’s also the most reckless, the alpha wildcatter with an off-the-charts risk tolerance.”

With oil at $147 a barrel and natural gas at $14 per thousand cubic feet, McClendon found his calling: capture as many of those leases as fast as he possibly could before the competition got there, and worry about developing them later. He outran his company’s cash flow and he didn’t care. Said Jeff Mobley, McClendon’s investor relations spokesman: “If we lived within [our] cash flow, we’d miss the opportunity!”

It cost McClendon his paper fortune when, in 2008, Goldman Sachs, one of his lenders, issued a margin call. McClendon had to sell nearly all of his stock in his company to meet it. But he rebounded when his board of directors issued him a new pay package of a salary of $100 million and $20 million in stock. And the board also approved the purchase of McClendon’s collection of antique maps of the American southwest for another $12 million.

With this new infusion of cash McClendon began again, taking advantage of an unusual opportunity the board gave him: he could invest his personal wealth in every well the company was drilling, taking a 2.5% interest in each one. McClendon told Helman: “You could say I’m the only CEO in America who truly participates alongside his company in the day-to-day business activity on the same basis as the company.”

McClendon also got lucky. In 2010 Chesapeake spent $1.7 billion it didn’t have to acquire 700,000 acres on top of the Eagle Ford Shale play in south Texas, but was bailed out when he struck a deal with a Chinese energy developer who paid him $1.1 billion for a one-third interest plus pledging another $1.1 billion to help develop the field. As Helman explained: “Presto! Chesapeake got back nearly all its initial investment, hitched a ride on drilling costs, yet still managed to hang on to two-thirds of the play.”

At the end of his stay, Helman heard McClendon exclaim: “We have found something that can liberate us from the influence of OPEC, that can put several million Americans back to work [and] liberate us from $4 gasoline!”

With natural gas now setting record lows ($1.67 as of March 3), gasoline fetching less than $2 a gallon at the pump, and OPEC in tatters, who can argue the man’s prescience?

Carl Icahn found out that McClendon was borrowing money from the same lenders who were financing Chesapeake, and persuaded the board that this represented an unacceptable conflict of interest. On April 1, 2013, McClendon stepped down to start his new company, American Energy Partners. By the end of 2014 McClendon’s new venture had 600 employees and $15 billion in working capital from investors and lenders.

To imply, as the media did during its reporting of his death, that he was trying to escape the indictment because he was, like all capitalists, corrupt and selfish and greedy, is a travesty of truth.   Buried in the report from the Oklahoma City police department was this: the investigation into his death won’t be complete for at least two weeks, at which time any health issues that McClendon might have been suffering from will be fully explored and examined as a potential cause of his death. After all, the man was just 56, he had a wife and two grown children, and a brand new company. He was just getting started on the next chapter of his life.

What can safely be concluded, at the moment, is that McClendon died as he lived: recklessly. The police report said he wasn’t wearing his seatbelt.

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Sources:

The Wall Street Journal: Indicted Ex-Chesapeake Energy CEO Aubrey McClendon Dies in Car Crash

The Wall Street Journal: Ex-Chesapeake Energy CEO Aubrey McClendon Indicted on Antitrust Charges

The Wall Street Journal: Aubrey McClendon: Pioneer of the U.S. Shale Boom

Bio on Aubrey McClendon

Forbes: The Two Sides Of Aubrey McClendon, America’s Most Reckless Billionaire

Background on Chesapeake Energy