WV Executive

Aubrey McClendon may be Oklahoman, but substitute the word ‘coal’ for ‘oil and gas’ and his story bears strong similarities to that of many West Virginians. He was born and raised in a quintessential oil and gas town—Oklahoma City. His dad and many of his friends’ parents spent their entire careers working for oil and gas companies and a large number of the functions they attended were sponsored by oil and gas companies.

With such a background, it seemed natural that he would go into the oil and gas business. “When I started college in 1977 oil prices were $8 a barrel,” says McClendon. “When I graduated in 1981 they were $40 a barrel and Oklahoma and Texas were where the jobs were. Once I got into it I came to love it.”

But the love wasn’t automatic. It took him a while to realize happiness was in his own backyard. At Duke University, he was a history major but also studied accounting as well. He enjoyed the precision of numbers and so accepted a job as an accountant with Arthur Andersen in Dallas. But a month before he was supposed to start, his uncle Aubrey Kerr offered him another job with his small oil and gas company in Oklahoma City. “He said ‘You can always go into accounting later. I’m looking for good young people, why don’t you give it a go?’” remembers McClendon.

As someone who loves a good challenge, McClendon took him up on the offer. About six months later he found his niche. It was then that he transferred to the land department and realized his calling. “The land business in the oil and gas industry combines the precision of accounting with the history of land transactions” says McClendon. “In Oklahoma, our land titles go back to 1890 and West Virginia’s go back to almost the beginning of America. To me land was the perfect combination of everything I loved in school.”

He soon realized he wanted to be the guy who makes the deals. “Geologists can have a good idea, engineers can have a good idea, but they have no value unless the land guy has assembled the acreage. It suited me well.”

Sealed with a Handshake

In April 1983, McClendon and Tom Ward, both 23, made a handshake deal and went into business as partners in natural gas exploration. Both had recently begun their careers as independent petroleum landmen. The business focused on finding oil and gas prospects and participating as non-operators in the drilling of other operator’s wells. Six years later, the partners decided to expand their business and incorporated Chesapeake with an initial $50,000 investment.

“We say $50,000, but the truth is we probably lost that the first week we were in business,” laughs McClendon. “I think by having very little money, no traditional background in the business and no family experience on the exploration side of the business, we were always more receptive to new ideas.”

The young entrepreneurs took their inspiration from the Oklahoma state motto ‘Labor omnia vincit’ or labor conquers all things. Determined to come in earlier and stay later, they felt the key to their success was to outwork their competition. With that work ethic and a little luck they persevered. “We never thought of ourselves as the smartest guys in the oil and gas industry,” says McClendon. “We just embraced some different ways to go about business that weren’t fully appreciated by people who had more experience in the business. So we didn’t know how to do anything except follow our instincts and that created a set of opportunities that over time we were able to build on.”

The company’s first drilling efforts focused on fields in southern Oklahoma and southeast Texas. Early financial supporters included industry and financial partners from what is now a part of BP, as well as Amerada Hess Corporation, Belco Oil and Gas Corporation and the Trust Company of the West. In 1993 Chesapeake completed its IPO at a split-adjusted price of $1.33 per share that valued the company at $70 million. The move reduced McClendon and Ward’s common stock ownership to just under 60 percent from 100 percent.

McClendon and Ward were always willing to do things a little differently and tried to be more creative on lease negotiations. They were able to compete effectively against larger companies because most competitors could not respond quickly enough or creatively enough. Today, one of the challenges Chesapeake faces is that they are competing against some of those same kinds of young people looking for new and innovative ways to do a better job. Therefore the company is constantly looking for similarly creative ways to meet those new challenges.

Another distinction that set them apart from their competition was their willingness to embrace new technology, specifically horizontal drilling (see Horizontal Drilling sidebar for details). “Back in the late 80s and early 90s, this was a pretty revolutionary idea—not well accepted by the industry,” says McClendon. “We felt like we could use it to produce profitably from oil and gas what we call today unconventional reservoirs—where generally there is only limited geological risk. We know they have oil and gas in them. It is just not clear if you can extract that oil and gas profitably.”

The Rollercoaster

To early shareholders’ disappointment, Chesapeake’s stock fell 70 percent that first year. Fortunately, the decline was short lived. Their luck quickly changed a year later when the company made a significant horizontally-drilled gas discovery in Texas. Over the following two years Chesapeake and its industry partners developed almost 2 trillion cubic feet (tcf) of new gas reserves using horizontal drilling technology. The company’s stock rose from $0.44 per share to $34.44 per share, which made Chesapeake the #1 performing stock in the US during the three-year period 1994-1996.

The company’s value grew from $35 million in 1994 to $2.7 billion in 1996, and Chesapeake moved from the NASDAQ to the NYSE. But success was elusive again as the industry took a turn for the worse and a significant investment in a disappointing extension of the Austin Chalk trend from Texas into central Louisiana did not develop as planned. Writedowns of company reserves and assets resulted due to higher drilling costs, geological and engineering challenges and declines in oil and gas prices. (See Chesapeake stock calculator.)

Returning to Roots

McClendon, Ward and the rest of the company’s management went to work revamping the company’s strategy and decided to return to their roots as Mid-continent US natural gas producers. They began consolidating other producer’s under-exploited assets and using their deep drilling and natural gas exploration expertise with great success.

Over the years, Chesapeake has followed a ‘growth through the drill bit’ philosophy—a euphemism for organic growth in the industry. Today, the company continues its exploration focus with over 80 active onshore drilling rigs, the most active program in the country. As the nation’s most active operator for the past five years, Chesapeake is always focused on creating value organically from internally generated drilling prospects. Therefore McClendon always encourages his energy explorers to identify new prospect ideas and bring them back to Chesapeake. “It’s always more profitable to find your own resources than to buy someone else’s, so while we actively focus on acquisitions, our preference is to find gas through the drill bit because that’s where we create the most value for our shareholders.”

However, McClendon says Chesapeake has consistently added value by making acquisitions of other companies’ existing assets. “Companies such as ours have a comparative advantage in this arena. We have greater access to capital and have greater economies of scale than many other companies. We view that there is a long conveyor belt of value creation that occurs along the natural gas chain from discovery to production and we want to own the top level of that value creation conveyor belt.” Since it re-focused its strategy in 1998, Chesapeake has grown to become the second largest independent producer of US natural gas and has enjoyed an exceptional stock price performance that has outperformed the DJIA, S&P 500 and NASDAQ by more than 600 percent.

Appalachia, a New Fontier

In spite of making $7 billion worth of acquisitions of other companies’ assets, prior to its November 2005 $3 billion acquisition of Charleston-based Columbia Natural Resources, the company had never before made an Appalachian-focused acquisition. “Natural gas exploration and drilling opportunities in West Virginia and across the Appalachian Basin can be an important source of economic growth,” says McClendon. “Is Appalachia becoming an important basin for the oil and gas industry again? Absolutely. And Chesapeake is bringing to the basin a new energy level, a new mindset, a new commitment to technology; a new commitment to highly trained energy professionals that will give us a chance to demonstrate that this is not a dead area for hydrocarbons.” He feels there is much more to be done. “This is an area which is tremendously under-exploited. In fact, less than 1 percent of all Appalachian wells have penetrated below 7,500 feet and only 11 have penetrated below 15,000 feet, a depth we commonly drill to in other parts of the country.”

While coal has been king in West Virginia throughout the 20th century, McClendon believes natural gas will grow as an economic locomotive in West Virginia in the 21st century. His talk isn’t just wishful thinking; he has numerous reasons for believing in the dream. “Today’s advanced technology natural gas exploration will not leave a permanent footprint on the surface and natural gas drilling operations don’t need much land to drill on, frequently less than one acre. Properly executed, ours is a very environmentally friendly exploration process. I think people are going to be very impressed with our commitment to protecting the environment. We’re also excited to see that some recent studies have shown that there is more undiscovered natural gas in West Virginia than there is remaining coal,” says McClendon. “This projection has great economic implications for the state and its people.”

Energy Crisis?

During the most recent industry downturn period which lasted from 1986 to 2000, the oil and gas industry suffered greatly while consumers enjoyed a period of very low prices. But the US and most of the world’s excess supply capacity is now exhausted, meaning consumers are likely to pay more for energy in the years ahead. McClendon says the good news is that most independent producers are going to be more profitable which will allow them to reinvest their cash flows and hopefully increase the supply of oil and natural gas and avoid even higher energy prices. “If there is indeed an “energy crisis”, it’s simply that we’ve had extraordinarily low energy prices for almost two decades, chasing capital away from this industry. Going forward, the US is going to have to share the world’s energy capacity with more people than we have in the past and that will naturally lead to an increase in pricing if we are not more successful finding supplies at home. We need the safe domestic natural gas reserves hidden away in the Appalachian Basin.,” says McClendon.

McClendon believes a real energy crisis may come as a result of many people blindly assuming that technology, somebody or something will fix the energy problem and the country will go back to the days of $30 per barrel oil and $3 per mcf natural gas. “The reality is we’re working with physics, we’re working with geology and we’re working with a rapidly industrializing world, especially in Asia. Just to give your readers a couple of fun facts: India and China alone have eight times the people of the US. We are consuming approximately 25 barrels of oil per year per American, while every person in China consumes only two barrels annually and the average person in India only consumes one barrel annually. The reality is if China goes from two barrels of oil per year per person to five, they will consume as much oil as the US now consumes.” In order to meet the needs of growing economies around the world, current world oil production would have to grow by more than 50 percent. “To me what needs to happen is people need to do the math and realize that we are going to need to find another 40 million barrels of oil a day to satisfy the world’s consumption in 20 years,” says McClendon. “If we can’t figure out how to do that then we’re going to have to figure out what sacrifice we’re willing make instead. Conservation will certainly be an important answer as higher energy prices will serve as a bridge for an economy which will someday not be based on hydrocarbons, but in all likelihood fueled by something else. But to get there we have to have higher prices to serve as the bridge.”

What's the Answer?

McClendon believes the answer to inevitable higher energy prices in the years ahead is a combination of finding new energy sources along with price-encouraged conservation. While some wish coal could be left behind for environmental reasons, McClendon says to do so would be naïve. “Coal produces 50 percent of this nation’s electricity—we’re not leaving it behind anytime soon.” He also cites nuclear energy which supplies 20 percent of the nation’s energy as a possibility for future growth. However, he acknowledges it will be about 10 years until any new nuclear plants could be built. “So everywhere you go you could say, I’d like to be as green as possible and I’d like to burn no fossil fuels but in reality that can’t happen without destroying the US economy and causing the destruction of many important manufacturing jobs. So we live with the hand we’re dealt, we try to clean up coal, find as much clean natural gas as possible and start building nuclear plants again. As prices rise, they will lead us to conservation—which is likely to be the greatest single supply source for cheaper energy.”

He says he’s not pessimistic about energy in the long run because the earth receives more energy in one minute of sunlight than we consume in energy in one year. It’s just a matter of harnessing that energy for today’s energy use.

In an effort to find the truth behind global warming, Chesapeake hired Citibank’s weather department three years ago. “We’re clearly in a time of warmer winters and warmer summers; America’s just had the warmest January in 133 years. That’s not to say it’s evidence of global warming. The earth is a living breathing organism and at various times it has been colder or warmer than it is today,” says MeClendon. While it does make sense to him that making more energy puts more heat into the environment, he compares it to an ant hill and wonders how much of an impact we can really have. “Regardless of that I don’t really have to have an opinion, what is important to recognize is that the world needs energy and it needs more clean burning energy, whether you believe in global warming or not.”

Stimulating Work Environment

In Oklahoma, Chesapeake is also known for the positive way it treats its employees and the attractive, campus-like work environment. “I’m always amazed at how boring some places look on the outside,” says McClendon. “I can’t imagine why you would want to work at a place with no character.” His goal is to keep things fresh for both his shareholders and employees. He believes that happy, appropriately compensated people take greater interest in their work product. (See Sweet Life sidebar.) “We want to stay organic, fresh and innovative and then we want to compensate people in accordance with their value creation. This is an industry that is fortunate that its biggest costs are not people costs so I have always felt it best to create an environment where people really want to be here by compensating them fairly. We provide an opportunity for people to grow, for their contribution to grow, and their compensation to grow along with their commitment to the achievement of the company’s goals.”

He says much of his employee-oriented attitude comes from the six months he spent working in a cubical—something he would never wish on anyone. So, he’s developed a company attitude through leading by example and treating people the way he’d like to be treated. “I think most executives would say they do—but it often just doesn’t work out that way,” reflects the entrepreneur.

Once a month, McClendon meets with all new employees in Oklahoma City. Typically it’s 35 to 40 people, they come from all walks of life, all income levels. Generally he has never met any of them. But that time commitment is one of his favorite parts of the job because he gets to meet people who have all made a career bet on Chesapeake and in many ways on him. “Without being too dramatic about it, it’s a pretty inspiring situation for me that these people have come to work for us. It’s a challenge I take to heart. Often I don’t meet people until they have been here a month or two and I love to hear the stories about ‘this is the best place they’ve ever worked’. Those things are very reaffirming and make all the travel, early mornings and late nights worth it.”

When those new employees or those interested in pursuing an oil and gas career ask McClendon for advice, he says it’s simple. “Come to work early, work hard, pay attention, be a little patient and in 10-15 years, you will be running the world’s most important industry, because as we all retire, the future of the US economy will be in the hands of those joining the energy industry today. Then it will be smooth sailing for the next 20 or 30 years of their careers.” Then he reminds these new employees to tell their families and friends that the whole future of the industry depends on the next 15 years of hiring.

Moutaineer Excitment

Above all McClendon wants West Virginians to know that Chesapeake is moving to the state with good intentions. While some companies have irresponsibly developed West Virginia’s natural resources in the past, Chesapeake intends to do just the opposite. “We will be net capital providers and quality investors. We plan not just to create wealth through development of natural resources, but also through quality job creation and good corporate citizenship.”

One way McClendon plans to do that is by building Chesapeake’s own Eastern Division headquarters building. “You mention Chesapeake to someone in Oklahoma City and they may not say ‘I know they drill more gas wells than anyone else in the country, but they will certainly say they know and admire our campus and that we look like a company that cares. In Charleston we want to establish a similar identity as well.”

To help establish that new identity, Chesapeake has chosen several faces familiar to many West Virginians. Three of those are: Mike John, a WVU alumnus, who has been named vice president of operations in the Appalachian Basin; Steve Warnick, another WVU alum and vice president of Gas Marketing and Scott Rotruck, formerly the president and CEO of the Morgantown Chamber of Commerce, who has recently been named the director of Corporate Development, Eastern Division.

McClendon continued, “The success of the company has created an excitement level that seems to make people want to work for Chesapeake. The company has a very interesting age dynamic due to what is commonly referred to as the oil bust. When the energy industry bottomed out in the late 80s and early 90s, companies around the country laid-off a million oil and gas employees. Few young people chose related fields of study in school. The result is that the oil and gas industry is missing a generation of workers in their thirties, instead relying on forty-somethings and employees in their twenties. So there’s a very interesting dynamic in having two generations like this and having people from all over the country working with us on our Oklahoma City campus. We’ve created a work environment that seems to attract high performers. We hope to create the same in West Virginia.”

From the Heart

Philanthropy in the community is also very important at Chesapeake, in part because McClendon was a recipient of others’ kindness in his early years, so giving back to the community is very important to him. “I give personally because it’s the right thing to do, it’s the repayment to people who made sacrifices so that my life would be better,” he says. “We do the same with the company, sponsoring events in the city, because I want this to be a place where we can attract anybody in the country to come work here. Our objective in West Virginia will be to find those areas where we can make a positive contribution in those communities where we are active as well and where West Virginians are investing in themselves.”

Personal Thoughts

A bittersweet moment came earlier this year, when Tom Ward, Chesapeake’s COO, resigned so that he could pursue other interests. McClendon says he will miss his friend and partner of 23 years, but says they were very successful together, doing what he considers his other favorite part of the job—creating value. “Whether it’s building an actual building or building a company, I like leaving things better than I found them.”

The recent coal mining tragedies in West Virginia have made Chesapeake’s CEO reflective on other matters as well. McClendon says he and Chesapeake employees can relate to West Virginia on another level. “Many may remember that Oklahoma City suffered a tremendous tragedy of its own in 1995, when the Alfred P. Murrah Federal Building was bombed, claiming 168 lives. To this day this senseless act of domestic terrorism stands as a reminder to Oklahomans that life is fragile and fleeting. It also reminded us that out of tragedy, the human spirit can really soar, the sadness and loss that comes from such a tragedy can unite a community and really become a rallying cry for its citizens. Despite the personal loss, it gave Oklahomans great resolve to take stock of ourselves and realize what we can do when we all come together.” He sees many similarities between the Oklahoma City tragedy and this winter’s mining tragedies. “I can see randomness, fragility and communities coming together. Yet, there’s a goodness of people that transcends evil acts whether by fate or the environment. I fully acknowledge West Virginia’s great loss, but I suspect that you will look back on this as West Virginians in 5 or 10 years and see many good things have come from this in terms of safety improvements and increased state cohesiveness.”

McClendon believes Chesapeake’s mandate is to do what it does well, because whether it’s five years from now or 20, the world is going to need a great deal of natural gas. As for the future of the company McClendon feels it should concentrate on where its skill set is and what it’s good at. “That’s what investors expect when they buy our stock. When you buy BP stock, you will find that they have told investors that BP now stands for “Beyond Petroleum”. I’m counting on the large integrated companies such as ExxonMobil and BP to find new sources of alternative energy over the next 20, 30, 40 years because they’ve got the scale and historical experience to do that. We don’t have that ability so our niche will remain very focused—being the lowest cost finder of clean-burning natural gas, right here in the US.”

He jokingly says there were years he hoped the history books would simply say ‘He and Chesapeake didn’t go broke.’ Upon more serious reflection, he considers the question again. “I hope they would say, ‘He had great parents, a great wife and family, a great management team and a lot of other great people who helped him along the way. And that the company did a lot of good in the world, acting honestly and ethically with all its stakeholders ’” Then he smiles, “It should say, ‘It was the real American dream come true. It came true for me and a lot of other fortunate people around here. It’s amazing how lucky one can be when they love what they do and are willing to outwork their competition.”