by Russell Gold
This bite of the Barnett Shale wasn’t enough for McClendon. Within a few months, he spent another $250 million to buy more of Hallwood’s Barnett assets. If Devon was conservative, McClendon was aggressive. He wanted more of these shale assets, and that meant he needed a lot of money to finance his plans. Chesapeake ended 2004 with $3.1 billion in debt. A year later, Chesapeake’s debt rose to $5.5 billion. Then it hit $7.4 billion and $11 billion in subsequent years. As 2008 drew to a close, the company had borrowed $13.2 billion.
While Chesapeake was playing catch-up in the Barnett, other companies were testing just how unique the Barnett really was. Southwestern Energy announced that it had discovered the Fayetteville Shale in Arkansas. Its stock jumped 11 percent. Chesapeake decided to rush into this new shale as well. “Once we saw success there, we understood that the world had changed in our industry and would likely never be the same again,” said McClendon.
McClendon sensed that shale gas was a disruptive technology long before Nichols. Devon bought Mitchell, its collection of Barnett acreage, and engineers who had firsthand knowledge of modern fracking techniques, but the company failed to grasp that the shale gas had changed the US energy landscape. Only slowly did Nichols change Devon to adapt to the new world. He had taken over as chairman and chief executive of his father’s company in 2000 and didn’t want to destroy it on a gamble. McClendon had no such institutional baggage. He had built Chesapeake from scratch. Back in the early 2000s, Chesapeake was a small company with few assets that got little love from Wall Street. He was much quicker to tear down the company and rebuild it to focus on shale exploitation. He had less to lose. There wasn’t much to tear down.
Oklahoma City is in many ways a small town with outsized ambitions. Both Nichols and McClendon embody this character. For all their outward similarities, they are very different men. Nichols always seemed to be one step above McClendon. He attended the best private high school in the city; McClendon attended the second best. They both headed east for college. McClendon went to Duke, the Ivy League of the South; Nichols to the actual Ivy League. But these two prominent business leaders have had relatively few business dealings or social interactions with each other. This distance almost collapsed in 2006, when McClendon put together a group of friends and business associates to purchase the Seattle SuperSonics, later moving them to Oklahoma City. McClendon sounded out Nichols as possible partner. Tom Ward, a longtime McClendon business partner at Chesapeake, made the approach. Nichols turned them down.
I met with Nichols in April 2012 and asked if he hadn’t been too conservative and missed an opportunity to dominate shale exploration in the United States. “In hindsight, was it a mistake at the time? No, I don’t think so,” he said. He explained that no matter how good shale gas looked, he was wary of putting too large a bet on it. His vision for Devon was a balanced company, with some gas and some oil, some shale and some conventional. “There’s a simple reason,” he explained. “I’ve never met the person smart enough to know when oil and gas are going to go up and down.” The contrast with his Chesapeake counterpart couldn’t be starker. McClendon placed billion-dollar bets on the direction of natural gas prices.
For a while, both Devon’s conservative approach and Chesapeake’s more aggressive approach to the business created success. Both companies grew large and prosperous. On the north side of Oklahoma City, McClendon built a sprawling corporate campus that resembled an elite East Coast college. Downtown, Devon moved out of its boxy nineteen-story 1980s-era building. It built a new fifty-two-story metal-and-glass skyscraper that dominated the Oklahoma City skyline and filled it with Devon workers. It was the tallest building between Dallas and Chicago. The main entrance to the tower is a soaring light-filled atrium with a small brass plaque embedded in the floor in the middle. It reads “Integrity.”
On the day I met with Nichols, the differences between the companies was obvious. A couple of days earlier, serious questions about McClendon and the company he had created had surfaced. At the root was the question of whether there were any checks and balances at Chesapeake, or was McClendon allowed to push it as fast as he wanted and enrich himself along the way. McClendon had taken up to $1.4 billion in personal loans from a private equity firm—at the same time as he was negotiating with the firm to sell it Chesapeake assets. It was difficult to figure out how McClendon could be looking out for himself and for his shareholders simultaneously. Moreover, the Chesapeake board of directors said that it knew nothing about the loans. Confidence in McClendon and Chesapeake began to evaporate. The stock price plunged.
I asked Nichols about his relationship with McClendon. For the first time in a lengthy interview, he declined to answer my question. I asked whether, if Chesapeake’s stock fell any further, would he consider making a bid for the company, snapping up the assets of his rival? “I want to touch that, but I am not going to,” he said, before laughing heartily. Then he couldn’t resist a small dig. “They are a complicated company,” he added. “Hugely complicated.”
8
THE RISE OF AUBREY McCLENDON
Americans like our abundant energy, but not the men who provide it.
When all is said and done, Aubrey McClendon is apt to be regarded as a visionary, the chief apostle of an energy revolution that left America richer, cleaner, and freer to pursue a new course in the world. With this in mind, a couple weeks after visiting with Larry Nichols, I returned to Oklahoma City to witness a very American spectacle. I came to see a public rebuke of McClendon.
His journey, which is intertwined with the growth of Chesapeake Energy and fracking, is one of the most fascinating recent stories in the annals of American business. It is replete with opportunism, insight, risk, and breathtaking materialism. Understanding how the energy boom unfolded requires understanding the person whose personality most influenced it.
My destination on a beautiful June day in 2012 was Chesapeake’s headquarters, which doesn’t look like any other oil company I’ve ever seen. There is no glass-sheathed skyscraper atop underground parking. Instead, when I arrived at the campus, there was a muscular instructor leading an aerobics class in the midst of a campus of low-slung buildings with tree-lined pathways and a creek. A group of young employees on a grassy field played kickball within sight of Aubrey McClendon’s office. It is easy to feel like you’ve taken a wrong turn and ended up at the Silicon Valley headquarters of a high-tech firm.
I was there for the company’s annual shareholders’ meeting. A year earlier, the two reporters who attended the meeting were allowed to sit with shareholders and talk to McClendon afterward about his vision for energy and Chesapeake. This year, however, there would be no audience with McClendon. Reporters who attended were held in quarantine, allowed to watch the proceedings on a closed-circuit television feed. After I parked my car, a Chesapeake employee escorted me into an underground conference room. The unending blue sky was visible, barely, from windows that looked out onto shafts cut into the earth.
Before they took us to the subterranean bunker, a smiling Chesapeake official asked me to sign a form that said I would be removed from the property if I attempted to wander about and interview shareholders or employees. I would not be allowed to grab lunch at one of the company’s three on-site restaurants, which a video screen advertised were serving pan-seared Pacific red snapper in a blood-orange beurre blanc sauce with roasted Japanese eggplant.
McClendon was under siege, his leadership and personal finances attacked by activist shareholders. They believed that the assets he had built, leases to drill on millions of acres above US shales and trillions of cubic feet of natural gas, were worth more in the hands of someone else. He had relentlessly—and, some argued, recklessly—created the preeminent shale energy company in the world. Now his hold on the corner suite was tenuous.
Shortly after the meeting began at ten o’clock, McClendon took the stage to applause. He wore a black suit, a white shirt, and a pink tie. He stood at a podium, on a green carpet, dwarfed
by a neon green screen. He didn’t acknowledge the applause in the room.
In the world of American capitalism, the previous few weeks had resembled an “Oklahoma Spring”: a populist revolt against a man with absolute control over a major energy company. In theory, he answered to a board of directors, but in practice, he often operated outside the view of these men and women. McClendon had cofounded the company and was its guiding spirit. He exercised a remarkable level of control, weighing in on small land deals and even writing quotes to be put in the mouths of senior executives. One of the items on the meeting agenda was the vote to reelect two members of this board. Shareholders from near and far could give voice to their displeasure with McClendon’s stewardship by voting against the corporate overseers.
Twenty minutes after the meeting started, corporate secretary Jennifer Grigsby came to the podium to announced the preliminary results of voting on the two board members who had stood for reelection. One was Richard Davidson, a former chairman and CEO of Union Pacific railroad. He had served on the board for six years. The other was V. Burns Hargis, a lawyer, bank executive, and president of Oklahoma State University. He had been a director since 2008. Both sat on the audit committee, charged with overseeing Chesapeake’s finances. The Sarbanes-Oxley Act of 2002 required a strong, independent audit committee, one of the law’s key provisions. If anyone should have been keeping an eye on McClendon’s complex web of loans and finances, it was Hargis and Davidson.
Grigsby read the tallies without a trace of emotion. Davidson had received support from only 27 percent of votes cast. Hargis had done slightly worse: 26 percent. The vote of no confidence was historic. A group that tracks corporate governance said that Hargis’s 26 percent was the lowest level of support for a board member of any of the five hundred largest public American companies in at least five years—and probably longer. Under the topsy-turvy rules of corporate democracy, it was enough to be reelected. But both men turned in their resignations anyway.
McClendon took the stage again and launched into a defense of his accomplishments. The shale revolution had begat nothing less than “a reinvention of the US, and, someday, the world’s energy business . . . it will be one of the most important developments in the world as we move away from an economy that has been under the stranglehold of OPEC.” He promised a new Chesapeake, a pledge he had made before but never quite fulfilled. The new Chesapeake, he went on, would be “simpler . . . we have what we own, and we are happy with what we own.”
At the end of his short remarks, he mentioned the public drubbing his handpicked board members had just received, saying, “We will be studying the results of the vote today and see what else needs to be done.” After he spoke, Vincent Intrieri took the microphone. He worked for Carl Icahn, a well-known activist investor with a reputation for acquiring shares in a company and forcing change. Icahn had been buying Chesapeake shares for several weeks. Intrieri was in his midfifties. He wore an expensive suit and eyeglasses, the uniform of a powerful capitalist. “We believe Aubrey that you are a great oil and gas man,” he said, “but even great leaders need oversight.” The new board of directors, he said, should keep an open mind and consider a potential sale of the entire company.
After barely an hour, the meeting wrapped, and the video feed into the reporter’s bunker was cut. I prepared to file to my Wall Street Journal editors an early version of my account of the vote and McClendon’s public rebuke. The speakers, which had piped in the sound of the meeting, began to play music. It was the unmistakable voice of Billie Holiday, singing in her melancholy voice about the brutality and fickleness of love.
I shook my head and chuckled at the bizarre coincidence. The song, “Fine and Mellow,” provided a strange commentary on how shareholders had fallen out of love with McClendon’s and Chesapeake’s story. But were shareholders the mistreated lover in Holiday’s song? Or was it McClendon himself, loved and then discarded by the shareholders?
As I sat there listening to the song, I wondered how we had arrived at this point. In the decade since Devon had purchased Mitchell Energy, McClendon and his pursuit of American oil and gas had changed the energy world. President after president, from Nixon onward, had pledged to do all they could to set the United States on a path toward energy independence. All had failed. McClendon and Chesapeake had done as much toward that goal as all of them put together, but there was no invitation forthcoming to a White House ceremony honoring his accomplishments. Indeed, if you define energy independence as reaching the point at which the US economy and foreign policy could no longer be manipulated by countries that sell us energy, we were rapidly approaching that long-sought goal.
But there was little reason to celebrate on Chesapeake’s campus. The company was selling off assets to pay its debt and faced a cash shortage. Investor confidence was shaken. Its bonds, already listed in junk status, had been lowered even further. To staunch the financial bleeding, Chesapeake had taken an emergency $3 billion loan at a steep interest rate. The loan had come from Wall Street giant Goldman Sachs and Jefferies Group, an investment bank with deep ties with Chesapeake. Jefferies was not only Chesapeake’s go-to banker and fund-raiser for the better part of a decade, but one of its stars was Ralph Eads III, McClendon’s longtime friend and godfather to one of his children.
“Yes, it’s a crisis,” wrote Jon Wolff, an energy analyst who had followed Chesapeake for years, in a note to his clients. A couple days after the meeting, a photograph of the second game of the 2012 NBA finals between the Miami Heat and Oklahoma City Thunder, began making the rounds of Wall Street. Sitting courtside in a Smurf blue “Team Is Family” Thunder T-shirt, was Fu Chengyu, the acquisitive chairman of Chinese oil company Sinopec Corp. Energy gossip circles lit up. What was he doing in Oklahoma City? The seat was courtesy of McClendon, a Thunder co-owner, everyone assumed. Was McClendon, the leader of the shale revolution, about to sell out to the Chinese?
How had McClendon, the most influential energy visionary in a generation, reached this point of disgrace and doubt? The seeds of this downfall were planted years earlier when Chesapeake struggled in its first years as a public company. Looking back, one could see McClendon’s ambition, arrogance, and hubris, traits that would ultimately stain his career.
What is also visible in the story of his rise to prominence and his fall from favor is a larger truth about the energy boom. Once engineers demonstrated that shale rocks could be fracked and exploited, a race among energy companies began. It would be led by executives with a talent for promoting their companies and raising enormous sums to keep drilling. In this, McClendon was without peer. To understand the rise of fracking, it is necessary to understand how McClendon, a financial engineer, came to dominate an industry once led by petroleum engineers.
Aubrey Kerr McClendon was born in Oklahoma City in 1959. His middle name marked his family ties to the oil business and to politics. His grandfather’s brother, Robert Kerr, helped found Kerr-McGee, the pioneering oil and gas company that drilled the first offshore well in the Gulf of Mexico. Kerr used his business success to launch a political career, serving as Oklahoma governor and later in the US Senate. A campaign slogan from a few years before McClendon was born mixed populism with braggadocio: “I’m just like you, only I struck oil.”
Aubrey’s father, Joe C. McClendon, worked for decades at Kerr-McGee. A major employer in Oklahoma City, its portfolio ranged beyond drilling to include mining uranium and manufacturing plutonium pellets for nuclear power plants. A young woman named Karen Silkwood, subject of the 1983 movie for which Meryl Streep was nominated for an Academy Award about her whistle-blowing and mysterious death, worked at a Kerr-McGee subsidiary in the early 1970s. Joe McClendon, however, wasn’t involved in either cutting-edge fossil-fuel exploration or the dangerous world of atom splitting. He sold gasoline and other petroleum products to gas stations. When the younger McClendon spent time with his father on the job, there was no romance of the oil rig. “I spent time looking at dirty bathrooms in ga
s stations,” he remembered years later.
He attended Heritage Hall, a relatively new private high school that offered a less rigid social environment than Oklahoma City’s other elite prep schools. Aubrey excelled both socially and academically. He was elected senior class president and was covaledictorian. Graduating in 1977, he went off to Duke University. His years in Durham, North Carolina, revolved around schoolwork, the hard-partying Sigma Alpha Epsilon fraternity, and the school’s basketball team. One of his best friends was Ralph Eads, a fellow fraternity member. Eads hailed from Houston, and his father, like McClendon’s, worked in the oil industry. They lived across the hall from each other. Eads was known as Ringo. People close to McClendon called him Aubs. Ringo and Aubs.
During their senior year, McClendon was wrapping up a degree in history, but he had also taken a number of courses in economics and finance. Eads studied economics with an eye toward a job on Wall Street. For the final home basketball game of their four years in college, Eads and McClendon must have arrived early at Cameron Indoor Stadium on the morning of Saturday, February 28, 1981. When the doors opened, they grabbed seats practically on the court, almost immediately behind the players’ bench. It was as close to the action as possible.
The game was one last chance to see their beloved Blue Devils as students. The opponent was the school’s archrival, the University of North Carolina Tar Heels. The Blue Devils had sputtered that year under first-year coach Mike Krzyzewski, including two losses at the hands of the Tar Heels. Under legendary coach Dean Smith, UNC was ranked eleventh in the nation. It was the establishment behemoth. Duke was at risk of faded glory, a once-proud basketball program that had fallen into disrepair.
