Everybody knows the oil and gas business is a roller-coaster ride. I know of no other industry which has such highs and lows, of boom or bust. And perhaps no one single company over the past 35 years has had more ups and downs that Chesapeake. They have ridden Space Mountain so often they should have a free lifetime pass. They’ve been given up for dead more times than I can count and yet….

The company was founded in 1989 by Aubrey McClendon and Tom L. Ward with an initial investment of just $50,000. The company was always dominated by McClendon, until his untimely death in 2016. Mr. Ward, long satisfied to play second fiddle to McClendon, finally left in 2006 to establish his own legacy with Sandridge Energy. Later these two would do business together again, under intense scrutiny from the FTC.

McClendon has alternately been called a “hero”, a “visionary leader”, a “pioneer” and “America’s most reckless billionaire”. Forbes named him a member of their exclusive 20-20 club, comprised of the eight CEO’s of public companies who had delivered annualized returns of more than 20% over a 20-year period. Yeah, when it came to Audrey, opinions definitely varied, but by 2008 he had already received a compensation package totaling $112 M annually, making him, at that time, America’s highest paid executive for a publicly traded company. He also had some incredible insider perks, which led to much discussion and indeed litigation in the coming years.

Chesapeake moved hard and fast. After going public, their stock value skyrocketed by 274% in only three years, making them among if not the most successful E&P companies in America at that time. By 2005, Chesapeake became the nation’s second largest producer of natural gas behind only Exxon/Mobil.

The Early Years…..
McClendon and Ward made the most of their meager investment. Aubrey served as Chairman and CEO while Tom was named as President and CFO. The company began drilling its first two wells in Garvin County, OK less than three years later. Chesapeake focused on drilling wells into unconventional reservoirs and was an early advocate of hydraulic fracturing. He also was one of the few executives with interest in methane production. More on that later…

They took the company pubic in 1993 via an initial public offering valuing Chesapeake at $25 million. They quickly built a substantial position in the Golden Trend and Sholem Alechem fields of south-central Oklahoma and in the Giddens field of Southeast Texas. In the mid-1990’s, they struggled to extend the Austin Chalk play into western and central Louisiana. This, along with low commodity prices at the time, prompted CHK to implement a turnaround plan, writing down the value of their assets by over $200 M.

By 2006, Chesapeake was on its way back up. By the early 2000’s, after a rise in natural gas prices, CHK has begun to assemble a portfolio, centered-around horizontal drilling and fracking, in the Barnett Shale, the Fayetteville Shale and the Marcellus Formation in Appalachia. This enabled them to be added to the S&P 500. Yep, the roller-coaster was nearing the top again and a sudden plummet forthcoming was not difficult to predict. CHK was removed from their registry in 2018.

From 2009 to 2013, in just four short years, Chesapeake gas production growth went from 5M to 2.5B cu. ft./day. They almost single-handedly helped lower natural gas prices for US consumers. Plaudits for Mr. McClendon flowed fast and free, with the then-current Secretary of Energy proclaiming him “at the forefront of those heroes” of the US natural gas industry over the first decade of the 21st century.

The Cracks Begin to Appear…..
By 2012, cracks in Chesapeake’s infrastructure began to appear. Whispers turned to screams as details began to emerge about agreements Aubrey had negotiated between CHK board members and himself. Rumors that Aubrey ran a hedge fund from within his office at CHK were confirmed upon disclosure of the Founder’s Well Participation Program. This allowed him to invest personally in any well CHK drilled, a sweet perk considering all of the insider information he had on each and every one. Even following his dismissal in 2014 McClendon continued the investments through 2015, possible even up until his untimely death in a suspicious automobile accident, one which occurred just a day after he had been indicted by a federal grand jury for antitrust law violations.

There were plenty of other issues with Aubrey prior to his demise. 2012 seemed to be the year it wouldn’t quit raining on him. Reuters claimed that he had used CHK employees, including accounting and engineering personnel, to perform about $3M worth of personal work to expand and remodel his home during a 2010 renovation. The claim was also made that Aubrey routinely used corporate jets for personal use including lavish vacations for family and friends. These reflected poorly on Aubrey from a conflict-of-interest perspective and on Chesapeake for its lack of business ethics. By May of that same year, McClendon recapitulated and repaid $250,000 to CHK for its employee services. However, with regard to use of the company jet, McClendon maintained his use as legal and approved by the Board, an agreement that lasted even after his departure from CHK and his creation of American Energy Partners, a company formed with some incredibly generous terms for Aubrey.

That same year, Federal Regulators contended that he, along with his old buddy Tom Ward at Sandridge Energy (and others) had colluded to fix prices on natural gas leases by rigging the bids. They would, allegedly, take turns being high bidder, but would then cut the others in on each deal by means of JOA’s, royalty overrides, farm-outs, and the like. The US Justice Department claimed that the investigation had exposed the first case of federal antitrust laws violated in the industry for bid rigging and price fixing. CHK, after McClendon’s death, agreed to pay a $25M judgement, which was distributed among stockholders. To this dying breath, Aubrey fervently denied the allegations.

Aubrey’s Demise – Literally and Figuratively
In June of 2012, Chesapeake stockholders voted to remove two board members but refused to fire McClendon. Instead, it was announced that he would step down as Chairman but continue in his role as company CEO. A Dow Jones report issued that same year concluded that no improper conduct or improper benefits to Aubrey occurred, and that there had been no monetary damage to shareholders. Regardless, this storm of unending accusations led to his resignation as Chesapeake’s CEO in 2013.

Aubrey founded a private oil and natural gas exploration company in 2013 named American Energy Partners. They concentrated largely on Ohio’s Utica Shale, a discovery largely attributed to Chesapeake during the previous decade. However, trouble was just around the corner. In February of 2015, CHK sued McClendon claimed he illegally used company records about lands available for lease. They also took issue with his access to geological and other proprietary information that they considered to be exclusively the property of Chesapeake. Aubrey, of course, denied any wrongdoing, saying that all company records in his possession were fair game, as per his negotiated agreement to leave CHK.

In April of 2015, via a subsidiary of AEP, McClendon settled the lawsuit with Chesapeake giving them $25M and 6,000 acres of land under lease or held by production. Aubrey remained in an arbitration process with Chesapeake up until his 2016 death. Despite these settlements, there were still unfounded accusations regarding Chesapeake and the looming anti-trust suit. McClendon never got his day in court as he died the day following FTC charges in a single-vehicle crash. Rumors that he had committed suicide were unconfirmed, and the cause of death made no mention of such. Folks will always have their opinions though.

The Legacy of Both Aubrey McClendon and Chesapeake….
During his lifetime, it is impossible to separate Aubrey McClendon from Chesapeake, or vice versa. His many bold moves brought both fame and infamy to the firm. Aubrey was the first and boldest advocate for Natural Gas. He was instrumental in founding America’s Natural Gas Alliance (ANGA) which lobbied for independent natural gas producers and for expanded use of natural gas in the US. He successfully promoted the use of natural gas to replace coal, funding a 2007 campaign to oppose the building of 11 new coal-fired plants in TX. In addition, he was a major contributor to the Sierra Club, helping fund their “Beyond Coal” campaign. Ultimately, the campaign prevented more than 150 new coal plants throughout the US.

Besides advocating for natural gas, Aubrey also promoted and defended fracking and shale drilling. In 2010, he appeared on 60 Minutes, promoting natural gas as a clean and affordable energy source manufactured right here in America. He defended the nation’s oil and gas industry, claiming that “We have found something that can liberate us from the influence of OPEC, which can put several million Americans back to work, liberate us from four-dollar gasoline”.

Life After Aubrey…..
Immediately after Aubrey’s departure, Chesapeake began to hemorrhage assets. In 2013, Chesapeake sold 55,000 net acres in the Northern Eagle Ford Shale and 9,600 net acres in the Haynesvillle shale to EXCO for aggregate proceeds of $1B. In December of the next year, CHK sold a large portion of its Marcellus and Utica assets to Southwestern Energy. This would not be the last business venture between the two former natural gas rivals. This $5B transaction included over 400,000 net acres and 1500 wells in northern West Virginia and southern Pennsylvania. Net production of the sold assets was 57K bbls/oil and over a half a billion dollars in midstream infrastructure. This was all just prior to Aubrey’s death.
In June 2020, CHK filed for bankruptcy with $7B in debt. When it emerged from bankruptcy protection in February 2021, Chesapeake had a new CEO in Mike Wichterich, who also served as Chairman of the Board of Directors. In November of that same year, CHK announced the acquisition of Vine Energy, active with a substantial position in the Haynesville Shale. Barely three months later, the company also acquired Chief Oil and Gas.

Chesapeake also began looking to acquire other former rivals for natural gas production. Most recently, they have focused on Southwestern Energy, a target that makes sense for numerous reasons. SW, like CHK, is a heavily leveraged to the natural gas and LNG market. They have considerable assets adjacent to or intermingled with CHK’s existing reserves, being a substantial position in the Haynesville Shale and the Marcellus Shale in Appalachia. Asset familiarity is the industry word for it. Fact is, many of Southwestern’s assets were once leased or owned by Chesapeake. The combination of new thinking along with the experience gained managing such assets should prove to be a powerful tool. Future cost -efficiency metrics will surely shine.

As of January, 2022, Chesapeake owned interest in approximately 8,200 gross productive wells, including 6,500 wells with working interest and 1.700 wells with an overriding royalty interest. Estimated reserves were purported to be in excess of 660M/bbls. of oil equivalent. Dell Osso, a CHK representative highlighted that their current gas production is about 3B cu. ft/day. However, this is expected to more than double to over 7B cu. ft./day before years end. How will this be accomplished?

A New Natural Gas Giant Emerges – Expand Energy
OK. I fudged a little. It’s no longer Chesapeake Energy stepping forward to pass EQT as America’s largest natural gas producer. Instead, in an all-stock deal valued at almost $7.5B, they have acquired Southwestern Energy to claim the title. The new company, named Expand Energy, will provide Pro forma production of 7.3 Bcf/day amounting to a full 7% of US output, based upon latest figures.

Assets exist in the Haynesville Shale, with a post-merger holding of 650,000 net acres, and in Appalachia, where they can boast of a 1.18M net acre position in both the Marcellus and Utica shales. Although the company is weighted heavily as to natural gas, the Utica and Marcellus positions hold potential for plenty of liquids, whether they be LNG’s, condensate or crude.

Can Natural Gas Finally Be Profitable?
Aubrey McClendon leaves a mixed legacy in more than one respect. He has been called a “Saint Patrick” by Art Berman, a geologist and energy-industry analyst. “He could charm snakes and convince them to perish in the ocean…He could convince anybody to give him money”. McClendon’s enthusiasm and appetite for risk helped created what Berman called “kind-of a gold-rush mentality”. Companies, led by CHK, began drilling at breakneck speed. Eventually the industry overtook itself. Gas became so plentiful that it was often just burned off of wells producing other hydrocarbons. “You could say they got too good at what they were doing” offered Roy Williams, CEO of the OKC Chamber of Commerce.

So why the upside for natural gas now? LNG. Simple as that. LNG (Liquified Natural Gas) is basically just natural gas (methane) that has been processed for shipment, typically via large-volume double-hulled ships. This is done by cooling the gas (as vapor) to a temperature of about -260 degrees Fahrenheit, at which time it becomes liquid. This is important for two reasons. First, it shrinks the volume being transported by almost 600 times, allowing shipment to make sense economically. Natural gas is typically transported in its liquid state via pipelines. However, liquefying natural gas allows shipment to areas not accessible via pipelines, including overseas markets. Once delivered, most of the LNG is returned to its gaseous state, at which point it can be delivered to distribution companies, power plants, and industrial consumers via pipeline. A smaller portion is retained in liquid form and used as a fuel source for various transportation vehicles.

Why it’s Suddenly a Big Deal….

Russia has long dominated the Eastern European market for gas and surely wants to continue doing so. They have invested heavily in a system of at least eleven different pipelines, supplying product to thirteen different countries, some of which are extremely reliant on Russian gas. The market mentioned most prominently is Germany, which receives almost one-third of its natural gas via these pipeline systems. However, at least twelve other Eastern European/Western Asian countries also rely greatly on Russia to supply their natural gas needs. It is considered to be the least carbon-intensive fossil fuel and has multiple important uses. Once warmed, it reverts back to natural gas (methane) for heating, cooking, generation of electricity, and other industrial uses. Or, as stated earlier, it can be used in its liquid form to serve as a viable transportation fuel alternative.

Today In Energy expects the natural gas trade to continue to grow in 2024-2025 with the start up of at least three new US LNG export projects. Exports for this year are expected to be 6% higher than in 2023 averaging 12.2B cu.ft./day and growing another 20% in 2025 to about 14.5 cu. ft./day. And what can an exporter expect to gain for each shipment in terms of profits? A single shipment can profit from between $133-$200 million, depending on the size of the vessel and the amount being transported. The Russian incursion into Ukraine has increased demand, and US shipments have more than doubled in one short year.

Currently we have 8 functioning LNG export terminals (counting Freeport, who always seems to have a maintenance issue), 3 more under construction and more than 15 more planned but not yet under construction. The industry is ready to break wide open. Until….

Ever noticed how many problems rather than solutions are provided by the US Government? We finally have an opportunity for an economic boom, being the largest natural gas producer in the world, a world filled with demand for our products. In January, the Biden administration, under pressure from environmentalists, paused approvals for pending and future LNG export facilities, a move referred to as “one more disastrous self-inflicted wound that will further undermine America’s economic and national security”. Fact is, many of our European allies depend upon America for their natural gas needs, having only Russian-supplied gas as an alternative. Additionally, a plethora of Asian nations depend upon us to supply their natural gas, as they seek to move away from coal-fired energy sources. I thought this was one of the biggest goals of environmentalists. Seems some of them are a little confused when reading their energy playbook.

The Department of Energy (DOE) has completed no less than 5 studies to examine the effects of US LNG exports. They unanimously demonstrate LNG to be good for the environment. Not only is it a heck of a lot better than coal, US natural gas is 41% cleaner than that provided by Russia. Further, American LNG exports have helped reduce the cost of natural gas by an incredible 83% in less than two short years. Isn’t the lowering of domestic energy prices, both home and abroad, a part of the playbook too? Do we really want to needlessly create uncertainty and discourage investments that would create jobs as well as increase the domestic national product? How about providing a sense of security for our allies, who have only one clear alternative for their needs. Russia is not a good choice.

Thankfully, this summer a court tossed out Biden’s LNG “pause”, with a preliminary injunction dated July 1 by the US District Court for the Western District of Louisiana. The DOE is reluctantly complying, having recently issued a construction permit over Labor Day Weekend. Who know what will happen after the election. We can be fairly certain should Trump win. What shenanigans the possible Harris administration would pull are more uncertain. Remember, this is the candidate who once said she would ban fracking “no question”. It would be foolish to believe her to be a friend to the industry.

So where does that leave the new Expand Energy? Poised as the world’s leader in natural gas exploration and production. Even if the LNG market is curtailed to some degree, the product is still readily available, cheap and in great demand. “The world is short energy,” said Nick Dell’Osso, CHK’s President and CEO. “With a premium scaled position across leading natural gas basins in the US, a peer-leading returns program and a resilient financial foundation, Expand Energy is uniquely positioned to complete on an international scale to expand America’s energy reach and deliver opportunity for the world’s energy customers.” The opportunity to profit off our greatest national resources has finally arrived, and Expand Energy is in a better position to profit than any of its competitors, be they domestic or foreign. If the government will just keep the heck out of the way, the potential for both the company and America is looking mighty good.

Remember to vote on November 5, whether your opinions coincide with mine or not. You owe it to yourself and your country.