Aubrey McClendon: Behind the Music, Part II

Tuesday’s improved signs of the health of America’s financial sector were certainly felt in the spacious living room of one Aubrey McClendon.

After seeing his investment in Chesapeake Energy drop more than one hundred million dollars on Monday, the co-owner of the Oklahoma City Thunder recouped his losses on Tuesday as CHK shares went up more than three points, earning McClendon an estimated $110 million within 24 hours.

But, as Lyndon Johnson famously drawled to a colleague more than 40 years ago, chicken salad can turn into chicken shit awful fast.

And it’s that propensity for precariousness that has some investors more than a little concerned about the overall health of Chesapeake.

Within the past month, McClendon’s company has:

- Reported a second-quarter loss of $1.65 billion, down from a profit of $492 million the previous year
- Announced a cut in natural gas production, including cutting rig counts
- Seen a drop in natural gas prices of close to 40%
- Announced that the shale deposits Chesapeake so zealously drilled in Barnett are “ramping down”

For many, it’s no cause for concern, and Chesapeake’s stock is still considered a strong buy for many investors. But for others, it is a little alarming. As a commenter at theoildrum.com noted: “If [Chesapeake] is pulling the plug on [its drilling operations] they better have something in the wings to replace their rapidly declining reserve base. Otherwise they've just announced to the world that their stock is worthless except for its breakup value.”

Many suspect that McClendon’s reasoning for curtailing production comes in the wake of the widespread credit crunch facing North America, but Business Week magazine weighed in with another possibility: that the trading methods practiced by large producers such as Chesapeake undermined the profits those companies made from drilling natural gas.

Essentially, because Chesapeake, and other companies like them, trades oil based on future prices, the constant hedging can often be disastrous, even when gas prices are soaring. As industry analyst Stephen Schork told the magazine after natural gas prices changed this summer, “A lot of people got creamed.”

Further, the magazine noted, there is the anxiety that Chesapeake wasn’t merely trading futures – hedging, if you will – for protection, but for profit. That’s great so long as prices fall in the future, but if that’s not the case, Chesapeake will be forced to pump out more gas to make up the difference, something that isn’t always as possible as it would like.

As the now bankrupt leaders of SemGroup can say with certainty, shorting energy prices isn’t always the wisest move for a company to take.

Simultaneously, a severe drop in natural gas prices can obviously be painful as well. And while natural gas was an attractive alternative fuel when oil was trading at $150 a barrel, it doesn’t look like such a great option when oil drops to less than $100.

With oil falling and natural gas increasing, the natural gas energy would seemingly be in desperate straights. What would be needed to strengthen the price of natural gas then, and, consequently, Chesapeake Energy? Well, how about a plan to get the government to subsidize the wholesale conversion of U.S. automobiles away from petroleum to natural gas? Heard anything about that idea? I thought you may have.

Nonsense ideas about “liberating” America from Middle Eastern oil aside, Chesapeake still faces tough situations stateside. It appears Chesapeake is hoping that its sizable (though dwindling) cash reserves will enable it to withstand any short-term reductions in revenue, unlike the smaller drillers out there who will be unable to hold out for long. Inevitably, the plan goes, the smaller concerns will prostrate themselves at McClendon’s altar, and Chesapeake will buy them up.

All of these financial shenanigans keep Aubrey McClendon a busy man – but not too busy.

When he’s not manipulating the Fort Worth city government into allowing him to put more oil wells within the city limits, hoodwinking the Sierra Club into thinking that his Clean Skies Foundation is anything but a front for drilling for more natural gas, or attempting to pass an “alternative fuels” initiative in California that would cost taxpayers upwards of 10 billion dollars – money that would flow directly to McClendon and Pickens, McClendon is making grandiose promises about future drilling sites, promises intended to buck up his stock’s plummeting value.

“Recent large discoveries using new technologies in natural gas shale basins such as the Barnett, Haynesville, Fayetteville, Woodford and Marcellus have provided new evidence that our country has ample natural gas supplies to power America’s economy for more than a century,” McClendon wrote earlier this year, neglecting to mention that he himself stated that the Barnett reserve has already reached its “high-water” mark.

It’s certainly possible that Chesapeake and McClendon will weather the storm surrounding energy prices and the credit markets, and that the company will snap up enough independent producers of natural gas to maintain an equilibrium. But it is also possible that McClendon’s wheeling and dealing may come back to bite him.

It’s that possibility we’ll look at Friday when we explore why all of this energy mumbo-jumbo matters to readers of a Sonics blog.

Aubrey McClendon: Behind the Music

You may recall a few months ago when your friendly neighborhood Sonic blog ran a quick story about the divergent paths of Starbucks and Chesapeake Energy, the companies belonging to the Ghost of Sonics Past (Howard Schultz) and Future (Aubrey McClendon).

At the time, ol' Chesapeake was ridin' high (to use the vernacular of the locals), while Starbucks was lower than the broken axle of a prairie schooner in September (I'm just winging it now).

Since then, though, the money in Mr. McClendon's pocketbook has found a bit more room with which to roam around. The chart below traces Chesapeake’s value for the past three months.

As you can see, the partial owner of the Thunder has seen his shares plummet in value from $70 in July to $32 in September. Considering McClendon personally owns close to 34,000,000 shares, that’s a decrease in his net worth of more than one billion dollars.

Ah, you say, but surely McClendon acquired his shares back in the halcyon days of Chesapeake, and while the value has sunk recently, it is still far above what he paid for it way back when.

Ah, but you would be wrong, because your man Aubrey has purchased close to 2 million shares in the past three months, most of them at a price of between $55 and $60 a pop. Even those limited shares, less than 10% of his holdings and only purchased in the time it took to move the Sonics from Seattle to Oklahoma City, have cost McClendon $45 million in losses.

(And isn’t it amusing how McClendon so readily spares $120 million to purchase shares of his energy company, but was incapable of contributing a single dime to the renovation of KeyArena? Reminds one of the CCR song, Fortunate Son: “Some folks are born with silver spoons in hand/Lord, don’t they help themselves/But when the tax man comes to the door/Lord, the house looks like a rummage sale.”)

It also doesn’t help matters when CHK announces plans to cut drilling by 17% in the coming year, or when the price of natural gas drops by 50% since the Sonics relocated to Oklahoma City, delivering a lethal blow to the future health of the company. As you will see, though, losing $45 million in stock value would be the least of McClendon’s troubles in the past few years.

UNION DUES & BLUES

This past August, the United Steelworkers union held a rally at a West Virginia business park. Their target? Chesapeake and Aubrey McClendon. Among other complaints, the union accused the company of shirking its duties and short-changing long-term employees of their pensions and benefits, charges Chesapeake denies.

“Chesapeake is in the best financial condition of all these [natural gas] companies to take care of their employees. They just don't want to do it," a representative of the union charged. "Any money Chesapeake doesn't pay out in royalties or severance tax and employee wages and benefits is sucked right out of [the employees’ savings] and right into Aubrey McClendon's pocket.”

The straw that stirred the drink for the union workers, though, was another broken promise from Chesapeake.

In 2006, the company held a ground-breaking ceremony for a regional headquarters building, a massive project which would utilize numerous steelworkers. A project so important, West Virginia’s governor touted the gloriousness of it – and of Chesapeake – on his official website.

Since that groundbreaking, though, the atmosphere changed dramatically, especially when a jury found that Chesapeake and its subsidiaries (the tentacles of CHK are straight out of an Upton Sinclair wet dream) and another natural gas company had cheated the county out of unpaid gas royalties.

Essentially, a gas producer later bought by Chesapeake extracted natural gas from property owner’s land, but failed to inform them of the “true value of gas being extracted.” In other words, they told Joe Mountaineer that the gas they were taking out of his backyard was worth $20, when in reality it was worth double or triple that.

You can imagine how the jury reacted to the case. When they finally got finished adding in the total for punitive damages, McClendon’s company was looking at a fine of more than $400 million. Naturally, McClendon balked at the exorbitant sum of money, and Chesapeake appealed the ruling to the Supreme Court of West Virginia, to no avail.

Taking a line from the Clay Bennett Handbook, Chesapeake reneged on its promise to build the magnificent facility it had promised only a year before and scratched the whole regional headquarters, leaving the state, hundreds of employees, and their families twisting in the wind.

SAND MAN
When he’s not busy breaking promises in Appalachia, McClendon keeps busy on other fronts. In the past few months, his battle with the residents of the Northern Michigan town of Saugutuck over his proposed redevelopment of one of the last remaining pristine portions of the Michigan shoreline has garnered even more attention.

Two years ago, the residents had raised $40 million to buy a large piece of land from a local resident, hoping to stave off McClendon’s plans to put McMansions all over it.
[As an aside, in one of the first stories most of us read about McClendon, in the Journal Record by way of Henry Abbott’s TrueHoop, we see how he loves taking trips on his jet ski. It was from that jet ski that McClendon first spied Saugutuck in 1989, planting the seed in his mind to eventually redevelop the huge chunk of land.]

But back to our story. Our boy Aubrey, no fool he, plunked down $43 million, lobbied the state government to relax the state law limiting development on sand dunes which would hinder his development plans, and – when he’s not calling the residents of the area “completely dysfunctional” – now plans to go ahead with his project.

There is another, more salacious bit to this story as well. While to the many Saugatuck is merely a beautiful, pristine part of the Western Michigan landscape, to another group of society, it is much more. An “unofficial gay beach,” McClendon’s planned redevelopment would obliterate a popular destination for gay tourists. Considering that McClendon is an avid supporter of the “Americans United to Preserve Marriage,” is that merely a coincidence?
Difficult to say, but certainly an eerie coincidence.

Of course, given the state of the housing market in the U.S. these days, perhaps the best alternative is for McClendon to spend five years developing the site, only to find the folks willing to buy into his paradise will resemble the number of free agents willing to relocate to Oklahoma City.


WEDNESDAY
How McClendon’s manipulation of his company’s stock price is beginning to worry investors.

Kemp Says Ciao

As you no doubt have read by now, Shawn Kemp's return to professional basketball ended before it began, as the Sonic legend was waived by Premiata Montegranaro this weekend.

Kemp's letter to the club is on the team's website, but it's not too illuminating as to what caused the breakup. His written reason is "personal problems" back home in Houston, but the smart money is more on the physical conditioning of the Reignman more than anything else.

But if you think about it, in a year where the Sonics were ripped from this city with the delicacy of a frontal lobotomy, is it any surprise that one of our heroes falls short as well? What's next, a story revealing that Jack Sikma curled his hair in the lockerroom before games? That Slick Watts was never really "slick" at all? That Gus Williams was not really a wizard, but merely a sorceror's apprentice?