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Chesapeake's Aubrey McClendon aims to cement legacy with sprawling campus


Grant Slater August 6th, 2009

Two pages into Chapter 4, Grandpa Joe tells a wide-eyed Charlie how a work-obsessed Willy Wonka shuttered his candy factory for fear of spies. He chained the gates and told thousands of workers ...

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Two pages into Chapter 4, Grandpa Joe tells a wide-eyed Charlie how a work-obsessed Willy Wonka shuttered his candy factory for fear of spies. He chained the gates and told thousands of workers to go home.

One day, months later, a wisp of vapor wafted from the smokestack, Grandpa Joe recalled. The whirring of machines drew the townspeople to the gates where they stood outside, looking in and pondering the machinations of the secretive Wonka.

GOING HORIZONTAL
PAY ME LATER
THE BIG BOOM
SELLING OFF
THE CAMPUS
'AN AMERICAN WITH AN IDEA'

What was going on inside? "Nobody knows, Charlie."

There is no gate to chain at 6100 N. Western, but the townspeople are watching as an heir apparent to Kerr-McGee, Chesapeake Energy Corp., builds its Oklahoma City legacy and sprawls its way through boom and bust in this, one of the most tumultuous of its 20 years.

There is a pervasive sense that Chesapeake is a company apart from others, that it sprints along with a wildcatter's mentality and a tycoon's bankroll, that it buys high, sells higher and sometimes is laid low in the process.

Although not as eccentric as Wonka, Aubrey McClendon is a workhorse, a man of diverse interest and singular vision. But that vision " a zig when others think it should be a zag " along with a penchant for control through ownership, has defined Chesapeake as an outlier, albeit a successful one.

"If anything defines my career, to the outside looking in, it at oftentimes looks like there's great risk in making the decisions we made," McClendon said. "Oftentimes, in our opinion, there was greater risk in not making those decisions."

Last fall, he lost the majority of his fortune tied to Chesapeake " more than $600 million " in a vicious margin call as the company's stock plummeted, before being granted one of the largest compensation packages for an executive at year's end. (The package spawned five lawsuits against the company seeking records of the board's deliberations.)

"It was a tsunami. It was a prairie fire. It was whatever," McClendon said.

Pick your analogy for the nosedive of natural gas prices and the low tide of a recession, but Chesapeake has soldiered on like an Everlasting Gobstopper, changing flavors over time. Now it's refocused with what McClendon calls a new business model " the third in his company's lifetime, he said.

Like the variegated chambers of Wonka's Chocolate Factory, the Chesapeake campus fosters a sense of curiosity as one wanders through its collegiate milieu.

There are no Fizzy Lifting Drinks, but there are rooms full of whirring gadgets, an auditorium packed full of interns in 3-D goggles staring at projections of the earth's crust, a fluorescent-lit restaurant with $3 spaghetti and meatballs, a marble-encased conference room and a massive motorcycle that looks pregnant with its natural-gas fuel tank.

GOING HORIZONTAL
McClendon's maternal grandfather, Aubrey M. Kerr, was the only one of four Kerr brothers who elected not to take his place in the family business at Kerr-McGee, said Ralph Eads, McClendon's fraternity brother at Duke University and a friend to this day.

Although the CEO's father put in 35 years for the Oklahoma company founded by Robert S. Kerr, Aubrey McClendon chose to take a job at Jaytex Oil & Gas, Inc. with his uncle, Aubrey M. Kerr Jr., as an accountant after getting his degree in history from Duke.

Eads said the divergence of McClendon's branch of the family from the confines of the tower downtown probably helped fuel McClendon's desire to strike out on his own when Jaytex fell victim to the oil bust of the early '80s. McClendon went into business for himself at age 23.

"There's some sense that Aubrey sees himself as an heir to the Kerr family legacy. I think maybe it's his grandfather's DNA," Eads said.

Among his friends, McClendon earned the nickname "head Charger," said Rob Braver, a friend of McClendon's dating back to seventh grade at Heritage Hall School. Several college and childhood friends said McClendon worked harder than anyone they knew and pursued social connections with an astonishing doggedness.

For a time after striking out on his own, he competed fiercely on leasing contracts with Tom Ward, another young entrant into the field. The two eventually decided to team up and began aggressively packaging land leases for resale.

Jim Gipson, director of media relations at Chesapeake, said he worked for another oil company at the time McClendon and Ward were making their early moves. The company occasionally cursed the pair's names as they came in and promised up to twice the production on the same lease in wooing contracts.

The first smoke rose from Chesapeake's smokestacks in the form of aggressive land buys coupled with a technique known as horizontal drilling. This was the first phase of Chesapeake's growth after incorporation in 1989.

To "get horizontal" in sites in Texas meant to drill sideways through the earth's crust in search of gas and oil. At the time, McClendon told The Oklahoman that he was "bearish on gas" and wanted to mitigate risk by spreading the company's fortunes across dozens of sites instead of a handful.

"We developed the insight that if we could apply horizontal drilling to these previously uneconomic fields and crack the economic code, then we could go out and buy thousands and thousands of acres," he said.

PAY ME LATER
While drilling unconventionally in known producing fields lessened the traditional risk associated with the oil industry (the drilling of a dry or nonproducing well), it provided a new kind of risk that has remained a central part of Chesapeake's business model.

That is, it buys and buys and buys. This can make the company cumbersome and keeps cash on hand very low during boom periods.

"You buy so much land it weighs you down, and then you don't have enough money to drill," McClendon said.

That is exactly what happened in the late '90s as Chesapeake ran smack into $10-a-barrel oil and anemic natural gas prices after a period of unbridled growth. At the time, one could buy a share of Chesapeake for 75 cents. The company was valued at $40 million with nearly $1 billion in debt. Talks loomed of an impending merger or sale.

But this is where another phase of Chesapeake's business model kicked in, and it has supported a major portion of the company's growth over the last 15 years.

Chesapeake had bought and bought and bought, but it financed those splurges with a form of high-yield debt that would not mature for seven, eight or a dozen years. McClendon cited Michael Milken as the pioneer of this type of debt based on junk bonds. (Milken, an American financier and philanthropist known for popularizing the use of high-yield debt, pleaded guilty to securities and reporting violations and served two years in jail.)

McClendon and Chesapeake clawed their way back by reassessing the way the organization did business. Chesapeake shed the vast majority of its oil investments and went "long natural gas," McClendon said. It was banking that a new generation of power plants and electricity demands would never allow the price of natural gas to remain at its abysmal level.

Because there were no banks knocking on the door looking for repayment, Chesapeake could hunker down and wait for the weather to change, McClendon said. When the banks did come calling, the organization was able to refinance on the back of huge growth from 2000 to 2005.

THE BIG BOOM Chesapeake's switch to natural gas paid off. It went from hundreds of employees in a small complex to thousands of employees on a sprawling campus that continues to grow.

During the boom, other energy companies paid down debt incurred during the lean years " the expected order of business for the industry. Chesapeake zagged.

"Most companies spend a lot of money in the top and then completely shut down in the down cycles," McClendon said. "I like to hedge our production so that we are somewhat cash-constrained in the peaks, because it's not a very good time to have a lot of money."

The refinancing pushed its debts back, and it had huge cash flows from a series of acquisitions. One in particular, a small position in Texas' Barnett Shale, proved to be "an eye-opener," he said.

The company moved aggressively into four shales, large swaths of sedimentary rock with microscopic pockets of natural gas throughout. All the talk walking around Chesapeake now is of the Haynesville Shale largely in northwestern Louisiana and the company's extensive mapping and drilling operations there.

The company also found it could have much more success by going horizontal again in these shales, like in the earliest days of the company.

"It was back to the future," McClendon said.

Revenues were high, and the company hummed along. With other pillars of the industry, like Devon Energy, Chesapeake buffered Oklahoma from the fallout of an impending recession.

SELLING OFF Last fall, the company hit a wall, the combination of a depressed economy and low natural gas prices eerily similar to a decade before.

Chesapeake still had the ability to keep its creditors at bay, but McClendon himself was not leveraged so far into the future. He was forced to sell almost all his stock in the company, and he owned more than 31 million shares. He had purchased liberally even as the recession raged.

On Dec. 31, McClendon inked a new, five-year contract only one year into his old contract that bestowed upon him a pay package worth more than $100 million. That included a $75 million bonus directed toward allowing him small stakes in the profits of all the company's wells.

Amid the furor over bonuses for executives at AIG and other companies bailed out by the government, McClendon admitted the public relations timing of his generous compensation package was "not optimal."

Between March and June, five lawsuits were filed on behalf of Chesapeake shareholders in Oklahoma and at the federal level. The language of the court filings mimics the rhetoric seen on Capitol Hill this year.

"It is simply a personal financial bailout of one of the company's executive officers, and destructive of Company value and opportunity," read one suit filed by the New Orleans Employees' Retirement System.

For his part, McClendon said the board voted on his package and deemed his performance worthy of the bonus.

"I got lumped in with a bunch of people that were perceived to be overpaid with the public's money and so my situation is completely different," he said.

He did manage to secure three huge partnerships that would drastically reduce the company's cost for drilling in its prized shales. The deals with BP, StatoilHydro and Plains Exploration & Production secured more than $10 billion for his struggling company.

Phil Weiss, a gas analyst at the independent Argus Research firm, said that those were good deals, but that a lot of Chesapeake's pain during the recession was self-inflicted.

"In the time I've covered Chesapeake, it seemed to me that the company has been too focused on growth," Weiss said.

He said he worries about the company's habit of continuing to leverage itself during boom periods. It is a multi-billion dollar company, and it should act like it, he said.

The program that allows McClendon " and McClendon alone " a stake in the company's wells is an admirable arrangement for a small start-up, because it provides a performance incentive, but it is unparalleled in the industry for a company of Chesapeake's size, he said.

"To me, Chesapeake is undervalued relative to its assets. In some part, I tend to think that (things like the pay package) do cause some negative perceptions that bring down shareholder value," Weiss said.

Chesapeake also paid McClendon more than $12 million for a collection of antique maps that adorn the walls of the Chesapeake campus. Some depict early renderings of Oklahoma as a territory and Texas in the days before the Louisiana Purchase.

In March, McClendon " an avid wine enthusiast " auctioned off about 2 percent of his collection through Sotheby's for $2.2 million, according to a McClendon spokesperson.

THE CAMPUS The White House Loom Shoppe has been on the corner of N.W. 63rd and Western for decades. The staff takes pride in the fact that it has the only cleaning system for high-quality rugs in the state and maybe in the entire Southwest.

White House Loom Shoppe has sold fancy and high-priced rugs to the scions of Oklahoma City business for decades. A rug of its making that depicts the state seal is on the floor in the state Capitol.

In November 2007, the shop was sold to Chesapeake Land Company, one of dozens upon dozens of acquisitions Chesapeake has made in the immediate area surrounding its campus since 2005. The holding company owns nearly all of the land adjacent to it, and McClendon has his sights set on a massive redevelopment of the area.

For Shawn Stevens, the third-generation head of the carpet company, the sale and subsequent move represent the end of an era in his life, but the beginning of a new period for his native Nichols Hills.

"Nobody really knows what the total vision is. I know about Aubrey: He's a long-term visionary," Stevens said. "But I think if it fails, it's going to be detrimental. It's going to destroy this part of town."

Chesapeake Land Company bought the store for nearly 13 times its current market value as assessed by Oklahoma County in October.

Most of the properties across the area have gone at a premium. In total, the holding company has paid an estimated $135.4 million for a collection of properties valued by the Oklahoma County assessor at roughly $61.8 million in the area depicted in the map at the beginning of this article. Although its real estate holdings extend far beyond that.

McClendon said he expected the typical "Chesapeake premium" to be around 20 percent.

Ford Price of Price Edwards & Company got an e-mail from McClendon in 2005 that said, "Call me." No subject line. Since then, Price has been running a significant share of the buying spree in northwest Oklahoma City, starting with the historic Nichols Hills Plaza.

Word spread quickly that Chesapeake was making its move and asking prices from owners shot up.

"I don't think anybody was under the illusion that there was going to be any steals in terms of these assets," Price said. "Some people came with prices that were so high and frankly absurd that there was no way to make a deal."

McClendon often declines to give specifics on his plans for the Nichols Hills redevelopment, but the goal is clear.

"I want to turn 63rd and Western into the second major focal point of this community. Downtown will always be the first. I want this to be the second center of the universe in Oklahoma City," he said.

McClendon said that if not for the economic recession, the redevelopment, which could take decades, would already be under way. But it's coming soon.

'AN AMERICAN WITH AN IDEA'
Obituaries to Robert S. Kerr called him "The Uncrowned King of the Senate," and he was a major force in Democratic politics for decades.

But by the '70s, most of his progeny had crossed the aisle, along with other oil industry types, to join the Republicans. That included Aubrey McClendon's parents, and that was a deciding factor for his affiliation as he grew his business over the years.

Nor was McClendon a silent supporter when it came to donations. He gave millions to vocal Republican causes like Swift Boat Veterans for Truth during Democrat John Kerry's 2004 presidential campaign and a campaign to ban gay marriage in 2007.

"I've taken a lot of heat from the liberal press for those," McClendon said. But two years ago, McClendon went from Republican to being an independent. "At the same time, a lot of Republicans think I've sold out."

McClendon has only one goal, he said, promoting natural gas.

"I really don't want to be labeled a Democrat or a Republican," he said. "I'm just an American with an idea about how natural gas can change our country for the better by reducing our reliance on coal, by reducing our reliance on foreign oil."

In 2008, McClendon said he voted for President Barack Obama. He said that while John McCain has lived an inspirational life, the country needed an inspirational leader to pull it back from "the edge of the abyss." He expressed frustration with years of Bush-era decisions.

"Last fall, everybody was scared to death we were going to have systemic, structural financial collapse, and everyone was going to get wiped out," McClendon said. "Clearly, that is off the table today. Clearly, a depression is off the table today."

McClendon expressed displeasure with Obama's health care reform plan because it lacked any incentives for personal responsibility. He said he strongly opposes a cap and trade policy across the whole energy sector.

However, he said Obama had done well in shoring up the economy. Now, he said, Obama's greatest challenge will be figuring out a way to walk it back and reduce government's influence in business. "Grant Slater

Chesapeake's campus
 
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